The Importance of Contracts for MSMEs

Created By:
Nicholas Mitchell
October 14, 2020

Contracts aren't just for big companies. The utility and protection of a well-drafted contract is invaluable to micro, small, and medium enterprises (MSME’s). A contract need not be complicated though they can be complex. No matter how simple, or complex there are certain elements which must be included, otherwise, it is either going to be rendered null and void or if challenged in litigation is going to be open to interpretation and subject to persuasive arguments and the decision of a Judge. Needless to say, a well-drafted contract is a necessary expense and while there are many websites out there that can generate a standard form contract it is always best to consult an attorney. 

Contracts can be written, or verbal. It is strongly advised that you engage in written contracts as a “he said, she said” situation is less than ideal, particularly if you stand to lose a lucrative deal. Oral agreements are best kept as “Gentlemen’s agreements” and enforced by way of a duel, though the challenge will them become finding muskets. 

Here’s what you need to make sure your contracts are iron-clad; there are four elements - offer, acceptance, consideration, and an intention to create legal relations. These are elements that are represented in one form or the other across multiple areas of day to day consumer life. When you walk into a grocery store, the price of the item is the offer, your electing to pick it up and put it in your cart is acceptance (otherwise, you’d leave it and move along), the consideration is your payment to the grocers, and the intention to create legal relations is inherent as obviously it is expected that your consumer rights are enforceable. 

Offer and acceptance are the most straightforward elements. The price of your product or cost of your services is the offer, and the consumer accepting that offer is as simple as them saying “Yes." For example, if you use an auction, the offer is made by the Auctioneer and the acceptance is indicated when the bidder raises the paddle. 

Consideration can sometimes be a little less straightforward. Consideration at law means there must be a benefit to one party and a detriment to the other. If you sell tennis balls, the benefit to you will be the income received from the consumer. The detriment to the consumer will be that they have had to spend some money. There must be something given, for something received otherwise you end up with a total failure of consideration and the contract becomes a nullity. In my view, this is the most important element of contractual relations. There is rarely if ever a situation where a contract is valid in the absence of consideration. 

The intention to create legal relations is a common law doctrine that recognizes that parties to a contract intend that the obligations under a contract are enforceable. This is a highly fact-sensitive element of contract law. As CEO, you if you invite an employee out for cocktails, and then after the 4th Negroni he says “I’ll give you $5,000 if our share price goes above $10 per share”. The informal nature of the meeting, the absurdity of the promise, a lack of ability to affect the share price, as well as the obvious fact of being intoxicated, would militate against there being an intention to create legal relations. 

A well-written contract will include, but not be limited to a few of the following elements: 

  1. Details of the parties to the contract, any sub-contracting arrangements
  2. Duration of the contract 
  3. definitions sections highlighting key terms
  4. A description of the goods and/or services that you will be providing
  5. Payment details, dates, interest payments and any penalties i.e. - late payments
  6. Termination conditions 
  7. Dispute resolution provisions i.e. - jurisdiction, arbitration clauses etc. 

No matter the nature of your business you will likely enter at least one contract during your day to day commercial activity. It is important to protect your commercial relationships, particularly as MSMEs to avoid being taken advantage of and maintain the formality of your business arrangements. 

If you would like advice or assistance with commercial contracts, I am happy to advise and assist. 

contracts   legal   msmes-contracts

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