When you’re starting a new business, you always want to have a legally binding contract in place with your clients. While contracts are often overlooked until the last minute in favour of more exciting aspects of launching a business such as marketing strategy, website design, and branding, contracts are an important element of maintaining good relationships with clients and ensuring your business is protected if the relationship falls apart. This blog post will highlight 5 elements you need to consider when drafting a business-to-business contract or B-2-C contract in Ontario.
Outside of contract lawyers, few people know what contractual “recitals” are. In essence, recitals are the backdrop of the contract and are included as a preamble at the outset of the agreement to set the stage for the transaction the parties enter into. Recitals are not typically legally binding in Ontario but in the event of a dispute will provide useful background information that will help guide a court’s interpretation of the agreement. Simple recitals in a service agreement in a business-to-business transaction would look something like this:
“WHEREAS Jane’s Flowers is in the business of providing floral design services for weddings.
AND WHEREAS Janes Flowers has agreed to provide such services to Extravagant Wedding Planning Inc. (the “Client”) on the ____ day of ________ 20___ (the “Event Date”) subject to the terms and conditions herein.
NOW THEREFORE the parties agree as follows:”
As you can see, the recitals immediately provide important information about the context of the agreement at a glance. Just by looking at the recitals we can determine who is providing the services, who is the client, what the nature of these services may be, and that the services are intended to be provided on a specific date. Recitals also make your agreement look more professional by sticking to the standard format lawyers and other business owners are familiar with.
2. Legal Business Structure
One very important detail which must be set out in a business-to-business contract that is often overlooked is including the specific legal entity type your business is operating as. This will be very important in the event of a contract dispute because it will ultimately determine who will be liable for a breach of the agreement and who may enforce a contractual right such as a demand for payment. There are several different types of businesses structures in Canada including sole proprietorships, partnerships, joint-ventures, and corporations (under either provincial or federal law). Your contract should be very clear as to who and what type of entity is signing the agreement. If we revisit our recitals, we can add the following details to help make this clear:
“WHEREAS Jane’s Flowers Inc., a corporation duly incorporated under the laws of Ontario with its registered head office located at 123 Bay Street, is in the business of providing floral design services for weddings and other events;
Now it is clear to both parties that Jane’s Flower’s Inc. is an Ontario corporation. There can be no argument that the owner of Jane’s Flower’s Inc. should be liable for a breach of the agreement in their personal capacity. Legal business structure is a small but very important detail that should never be omitted.
3. Effective Date
Many business owners assume that the date their agreement is signed is the date the agreement comes into force. However, the parties may agree to a variety of dates that should be tailored to the specific circumstances of the deal. The parties may choose to make the agreement effective on the date of signing, on a specific past or future date, or on satisfaction of a certain condition. Regardless of the effective date that is chosen, this must be clearly articulated in the agreement so there is no confusion as to when the agreement became legally binding and therefore when the parties assumed their respective contractual obligations.
4. Services to be Provided
One of the biggest mistakes business owners make when drafting a business-to-business service contract is failing to adequately set out (in detail) the specific services they will be providing. This ambiguity is a frequent source of cancelled agreements, allegations of breach of contract, and ultimately strained relationships with clients. It is inadequate to provide a vague description of the services to be provided such as:
“Digital Website Promotion Inc. shall provide digital marketing services on a monthly basis to the Client”.
In this scenario, who is to say what digital marketing includes? Instead, attached the specific services as a schedule to the agreement and set out, in as much detail as possible, the services to be provided. This will commonly look like the following term:
“1. Services. Digital Website Promotion Inc. shall provide to the client, on a monthly basis, the digital marketing services set out in Schedule “A”.
In this example Schedule A would be drafted akin to a checklist of exact items you can mark off. When drafted in this manner, there is no ambiguity as to whether the client received what they bargained for so long as you honour the commitments set out in Schedule “A”.
5. Limitations of Liability
Another common mistake in a business-to-business agreement is failing to properly limit your business’ liability in the event your company is responsible for any legal damages that may occur in the process of providing your services. This is done in part by disclaiming any implied conditions and warranties that may arise under provincial sales of goods legislation such as Ontario’s Sale of Goods Act. Implied conditions and warranties are those that are deemed included in the agreement by law unless the parties in a business-to-business transaction agree in writing that they should not be included in the agreement (this is often referred to in practice as “contracting out”). It should be noted that, in Canada, contracting out of implied warranties must be done “conspicuously” meaning that a reasonable person reviewing the agreement ought to notice them. For this reason, any waiver of implied conditions and warranties should be drafted in bold or capitalized letters or otherwise differentiated in some way from the rest of agreement to call additional attention to them.
There are many different rules and conventions governing contract law in Canada. These rules will differ depending on the parties to a particular deal. Unlike with business-to-consumer agreements, in the context of contracts between businesses, the principal of freedom of contract is largely at play. For this reason, it is always recommended to have a proper contract in place with your clients and to limit liability for your business as much as possible. With Supply Law you can have a custom service contract drafted for your small business by an Ontario contract lawyer and with affordable flat fee billing there wont be any surprises when its time to pay your invoice.