Do I need a service contract when selling a service? We asked an expert.
‘You’ll be hearing from my lawyers!’ It’s a fun phrase to hear when you’re watching Law and Order, but in reality getting involved in litigation is the last thing any small business owner wants. Knowing a bit about contract law can protect you no end – should the worst come to the worst. Don’t forget, no one ever regretted reading the fine print before they signed a contract.
We spoke to Michael Pugh, Solicitor and Senior Lecturer in law at London South Bank University about service contracts, the small claims court and his top tips for protecting your business legally. Read on for his expert advice.
- In this article
- Do I need a contract when selling products or services?
- What are the benefits of using a contract for my business?
- What does a contract include?
- What happens if someone refuses to pay me for work I’ve done?
- Will a contract be used if I take a customer to court?
- What happens if I take a customer to a small claims court?
- Where can I find legal advice for small business owners?
Do I need a contract when selling products or services?
Yes! I would advise people to put a contract in place before they sell a product or service. Whenever there’s a legal dispute, written documents provide the best evidence. They are more reliable than human memory, and if you do have to go to court, a signed contract will carry more weight than the ‘I said, and she said’ approach.
Small business owners have so much to think about, it’s impractical to assume they’ll keep every detail of every job in their heads. A written, signed contract provides the best legal coverage, because it means that both parties originally agreed to exactly the same thing. A contract creates enforceable obligations under English law, and a written one leaves a much smaller margin for disagreement.
If, for example, you’re a plumber or builder and you’ve agreed to sell a product or service over the phone (e.g. giving a quote), it’s always worth following up with an email, just so you have the details in writing. As an example, a little while ago I asked an electrician to give me a quote for installing two lights. I assumed the quote would also include the wiring between the lights, but when I received my quote there was no mention of the wiring work. I was about to approve the quote, but then my legal instincts kicked in and I called the electrician to check. He hadn’t included the cost of the wiring in his quote – so I would have been facing an additional, unexpected cost after the light installation if I had approved the original quote. So it’s always best to check you have every aspect of a job in writing before you agree to proceed.
What are the benefits of using a contract for my business?
It’s all about clarity and certainty – if you use a contract, you’ll always know exactly what’s expected of your business, and what you’ll get in return. Your business is your most important asset, and using a contract will help to make sure it stays protected.
It’s so tempting to start work without a contract in place, especially if you’re busy with a few different jobs, but it’ll leave your business exposed because of uncertainty – and it may make it difficult to get paid for the work you’ve done. Using a contract for your business will help your vendors and customers take you more seriously, set expectations for everyone involved and ensure there are solutions in place should something go wrong. It sounds obvious, but using a contract will encourage your clients not to break the contract, so they’re less likely to take their business elsewhere halfway through a project – or pay you late. If a contract is too uncertain, for example, providing that Party A can purchase X on terms to be agreed with Party B, then it almost certainly won’t be enforceable under English law.
What does a contract include?
I tell my law students: when you’re looking at a contract you want to be thinking: who is doing what to whom, when, why, and where? All of these details need to be outlined to ensure that you’ve got everything covered. If you provide services, it is important that your contracts lay out the scope of work you provide in clear detail. Your contracts should include:
- The names of the contracting parties (you and your client)
- The client’s contact information
- The service(s) you will provide
- The fee or remuneration for the service(s)
- A summary of anything not covered in the fee
- An explanation of what situations would incur additional fees.
- Governing law and how you are going to resolve disputes.
- Confidentiality provisions may also be important if you’re dealing with a matter you wish to keep confidential.
By laying everything out very clearly in your contracts, all parties can set their expectations correctly.
What happens if someone refuses to pay me for work I’ve done?
If you and the other person have both signed a written agreement about this work, you now need to enforce their obligation to pay. If you’ve done what you agreed to do, they are legally obliged to honour their obligation to pay you. So how do you do that? Well, you can begin court proceedings so that the court can order the other party to pay you. But you may be able to resolve this without going to court. The most important thing to do is talk to your customer – give them the benefit of the doubt as to why they haven’t paid you yet. So many parties are under pressure in the era of COVID-19, that they might just be having a cash flow issue.
As a small business owner that relationship is valuable to you, especially if they’re a regular customer. It might well be much more efficient to patch things up and work with them again than it is to go out and find replacement business. Try to stay calm, and make sure you establish all the facts before you escalate to legal proceedings.
Will a contract be used if I take a customer to court?
Absolutely. A contract is the legal basis of your relationship. Having a written contract provides much more certain evidence to a court than an oral contract. If you don’t have a signed contract, it gets complicated very quickly. Remember that silence does not constitute acceptance. So if your customer didn’t sign a contract with you, they generally won’t have accepted your terms. Although the nuance here is that if you’ve sent them your terms and they start doing the work anyway, you may be able to argue that they have accepted your terms by conduct, but why take the risk?
If you don’t have a contract, you’ll have to convince a court of what you agreed based on your memory and what you understood at the time. The other party will have the opportunity to do the same. In the absence of a formal written contract, you may find that you have some written evidence, (like notes you’ve written to yourself about the job, phone records, or even emails between you and your customer in which you discussed the job) you can use these as evidence of your agreement in court. But you can avoid all of this by having a written contract.
What happens if I take a customer to a small claims court?
The first thing that you’ll need to do if you want to take a customer to a small claims court is make an application. The other party will have the opportunity to respond to your claim and if it disputes your claim, there will be a hearing.
By bringing your claim to court, you’re showing the customer that you’re serious – and that can compel them to settle. Litigation is a useful tool because a) you can get your money back and b) it’s a matter of public record. That can be embarrassing for the defendant, and therefore encourage them to settle to avoid any further bad publicity.
Whether you are successful in small claims court or not, the most important thing to note is that you will incur additional costs, although you may be able to claim these back if you win. You’ll either need to pay a lawyer to put your legal documents together or do it yourself – but either way, a legal dispute will cost you considerable time. This may not be ideal for a small business owner!
Where can I find legal advice for small business owners?
There are plenty of free or affordable organisations that offer legal advice. There are some great law firms that offer support for start-ups. Lots of universities have legal student advisors who run regular clinics under the supervision of their tutors – there’s one where I teach at London South Bank University. Check with your local council, often they have resources to help support local businesses. There are also lots of professional bodies who provide access to a legal helpline for their members.
Before you get into a legal dispute, take a minute to consider the toll it might take not just on your time and money, but also on your wellbeing. In some situations it may make more sense to go to mediation, or just to talk it through calmly with your counterparty to find a compromise because running your own business should be about moving forward – and win-win!