Bite-Sized Bits of Knowledge

Why You Want to Have a Good Customer Agreement

Let’s say you sell someone a product or perform a service for them. You think it’s a pretty simple relationship. They pay you and they receive something in return.

But what if something goes wrong with that product or they just want to return it? What if they ask you to do slightly more than you originally agreed upon? What if…? These hypothetical questions could go on forever, and they are the reason that businesses create customer agreements – or at least they create them in theory.

Customer Agreements are super important and frequently underutilized. Where they are utilized, they are usually very poor agreements. They lack important terms that really can hurt business owners.

Think of them as legally documenting the agreement between you and your customers with rights, remedies, and so on. They’re not about one side trying to gain some sort of edge or advantage, but rather clear communication about the relationship, what is being agreed upon, and what can be done if one side has an issue with the other.

What Do You Want in Your Customer Agreement?

[Read Transcript]

Hi, thanks for tuning into another dose of Bite-Sized Bits of Knowledge, where we give you meaningful information in a short amount of time. Today, we’re talking about customer agreements – what they are and why should you care. 

Customer agreements – in our experience – are something that most businesses don’t do, and they don’t do well. In our experience, many business owners don’t have one, and the ones they have are less than desirable. There’s a lot of things to improve in them. And we make those recommendations.

So let’s tell you about what some of those recommendations are that we would want to see in a quality customer agreement. It doesn’t matter if you’re an artist creating logos and websites. Or you’re a software developer. Or you’re a lawyer, plumber, electrician, roof inspector – it doesn’t matter. The concepts are the same. You want to understand who the parties are, who’s contracting who, who has rights to the agreement and the terms of the agreement, what are the obligations that each party is promising. 

Generally in a contract you’ve gotta have offer, acceptance, consideration. If you go back to law school, offer, acceptance, consideration. 

What’s the consideration? The consideration is something of value. It doesn’t necessarily have to be money but it’s something of value. The courts don’t interpret what value is as long as both parties are getting something of value. 

So if you’re performing a service or providing a product, then you’re probably going get money or something in return for that product of similar value. And that needs to be documented so it’s very clear what those things are. If you’re creating a product or performing a service, either way, you should have a timeline of what you’re doing, when’s it gonna be done, when can it be expected to be delivered, how it will be delivered. If it’s intellectual property, for example, is it email, is it a link, what kind of file is it? If it’s a logo, is it a PDF file, AI file – Adobe Illustrator file – there’s a lot of different kinds of files that matter. That will be something to think about when you’re giving deliverables.

I would say it’s really important to limit scope to what you’re doing and what you’re not doing. Identify very clearly what the expectations are. In software development, for example, it’s really easy to say let’s do this, we’re gonna do this, here’s the contract. And then customers say, “Well, can you just change this? And maybe change that?” And then the next week it’s this and that, and before you know it, your scope has really increased and your compensation hasn’t. 

That’s called scope creep. It’s a very common term for where customers – sometimes I would say they don’t do it intentionally, to be mean or take advantage, but sometimes they do do it to take advantage. And in either case you’re welcome to increase your scope without compensation, but I generally would say the customer needs to understand that what you’ve done exceeds scope, and they should appreciate that. And you should be compensated for it. 

Scope creep is a real thing, and you should be careful to document exactly what you’re doing and what you’re not doing. Think about, also, what compensation is being given. When is that compensation being given, how is it being given, is it a wire, is it a check, when is it being given? Is it ⅓ on signing, ⅓ on deliverables, and ⅓ on approval? Is it half up front and half later? Just think about the many things that can go into that. 

I would also add that these contracts need to have relief and remedies for when things go wrong. When things go wrong, what happens? What rights do the parties have? The first thing you’ll notice in a good contract is that there will be something relating to conflict. Sometimes you’ll see things called alternative dispute resolution clauses – ABR clauses. Sometimes you’ll see mediation, arbitration, litigation. 

Mediation is generally non-binding. It’s just an opportunity for the parties to communicate with one another and communicate separately with a neutral person – the mediator – and see if a deal can be worked out amicably. Because as you’ll learn later in the litigation videos, litigation is very expensive and time-consuming, and nobody wins. Mediation’s a great first step if you just can’t resolve things. 

Arbitration, on the other hand, can be binding or non-binding depending on the agreement. Litigators typically don’t like arbitration because it limits access to the court system and rights and remedies. I’ve heard lawyers that love arbitration and litigators that would hate to have an arbitration clause. 

So you just have to understand what they mean and some of the pluses and minuses about them. But at the end of the day, these are vehicles of conflict resolution in a more economical, practical way. 

In arbitration, there’s usually one or more arbitrators, and each party puts on their case. They go through the motions of getting information and facts and then the arbitrator decides like a judge. And what the arbitrator decides is more of a private resolution. And as I said, it could be binding or non-binding. 

Litigation, of course, I’m going to have a whole video dedicated to that. That’s going through the court system with or without lawyers, and it can be very expensive. So that’s usually something you want to see in there. 

In terms of miscellaneous provisions, I think that miscellaneous provisions is one of the most overlooked and undervalued parts of a contract. It gets missed all the time. These things are important. You’ll see things like the ability to amend the contract, restrictions on amendment, restrictions on assignment. Assignment means assigning of rights. It could be delegation of duties. It’s important stuff. You don’t want to get in a contract with somebody who then assigns it to somebody else. And now you’re working with somebody else who you have no idea is qualified. 

Think about attorneys’ fees. As I mentioned, litigation is expensive and primarily because of the attorney’s fees. So if you put in there a fee-shifting provision, that raises the stakes much like in Backgammon when you have a doubling cube. The stakes could be whatever they are – 25, 50, 100,000. Lawyer’s fees will be that much too. 

And that deters the parties – or is intended to deter the parties – from really going to war because someone’s going to be holding the bag of liability as well as the other person’s fees. And so it’s like the doubling cube in Backgammon. It’s a significant deterrent. Jurisdiction, venue, where the case is going to be held, in what county. That matters. If you’re going to fly across the United States to litigate something, that might deter you, as well. These things matter. These things are important. 

Integration clause, that just basically means that the contract is on the paper. On the four corners of the paper is the agreement between the parties. What you told them last week, what they told you last month, what they promised you yesterday, and what they’re going to promise you tomorrow doesn’t matter. What’s in the contract is all that matters. 

That’s very important because if that’s not there, then there’s a “he said, she said” oral contract, verbal contract – and verbal contracts can be valid and binding. Which creates more facts, more conflict, more resolution of issues later. 

Customer agreements really need to be buttoned up tight. They identify the parties, the compensation, scope, deliverables, rights and remedies, miscellaneous terms. If you’re serious about your business, you need to have a customer agreement that’s good and reflects the professionalism that you’re giving people. You don’t want to have a really nice professional brand and then give them Mickey Mouse contracts. That doesn’t look good and that’s not respected. 

So I hope that you found this helpful. Thank you for stopping by. Don’t forget to download our free Business Planning Stress Test. It’s linked below in the description and stay tuned for more.

Customer Agreements vs. Terms and Conditions

You may be wondering about the relationship between customer agreements and terms and conditions. Are these the same thing? If they differ, in what way? Do you need to have both?

There are a number of similarities between a customer agreement and a terms and conditions agreement (T&C). The biggest one is probably that T&C agreements are meant to generalize and apply to all potential customers or users. It details the baseline standards that everyone who interacts with your business in a client/customer/user capacity agrees to abide by. Customer agreements, in contrast, tend to be unique to that particular client or project.

How does this work in practice?

Let’s say you have a website that people can use or products that you sell. Most likely, everyone who visits your site has to follow the same rules. Likewise, the agreement for one person buying your product is the same as it is for the next person. In this situation, a T&C agreement would likely make the most sense, though there are situations where individualized customer agreements might still be necessary.

Now pretend you are a contractor engaging in home renovations or a digital marketing company. While you may have certain general terms and conditions that apply to every project, each job is likely to contain unique elements that will need to be personalized. In these situations, customer agreements are necessary to avoid potential confusion and issues.

Generally speaking, businesses selling a product are more likely to find that a T&C agreement is largely adequate to their needs, while those providing services may require unique customer agreements every single time.

Benefits of Customer Agreements – for Both Sides

As mentioned above, customer agreements should never be about one side getting an advantage over the other. If you structure your agreement in that way, you likely won’t have customers for very long, because they will move on to a competitor willing to treat them better.

With that in mind, what are some of the benefits of having a good customer agreement?

Clarity. There are all kinds of moving pieces in client-business relationships. Good customer agreements spell out a wide variety of potential situations and what the rights and responsibilities of each party are.

Peace of mind. While many people focus on how customer agreements put limits on the relationship, they also do something else: provide guarantees. When one side does X, the other agrees to do Y. It is understood that both sides will follow this, and if they don’t, there is a written plan in place for how disputes will be handled.

Personalization. Quite often, one size does not fit all. Customer agreements enable both businesses and clients to craft a binding document designed to meet the needs of each side. 

Ready to start creating your own customer agreements? Haimo Law can help. Get in touch with us, and we’ll take you through the process.