There are many types of business contracts, from Shareholders Agreements to Employment Contracts, NDAs to Customer and Supplier Agreements, but why are these important and why do these need to be in writing when an oral contract is legally binding?
Why you should use written contracts
Oral contracts are entirely legal provided that you can prove that such a contract exists, or that specific terms of the contract exist. Oral contracts are therefore legally dangerous, because there is no concrete record of their existence, it is not uncommon to forget to mention things that seem to be obvious at the time but which you cannot then rely on later. People’s memories tend to fade and your understanding of a particular point may not be the same as someone else’s. If the parties to an oral contract have a dispute about the terms, they can take their case to court, just as you would under a written agreement, however, unless either party can prove that the contract terms existed, by providing a witness for example or other evidence, there is no practical way to enforce them. Whilst it is feasible for the parties to an oral contract to remember the details of their agreement if they have only made the one contract, it is not feasible for businesses with multiple contracts across all aspects of their work, coupled with the complexity and variety and volume of business contracts together with accounting procedures, employment regulations, disputes, and subsequent litigation, to do the same. Therefore it is highly advisable for businesses of all sizes to use written agreements.
The use of emails, text messages and phone calls in business today is commonplace and therefore entering into a contract is as easy as sending an email or making a call, all you need is an offer, an acceptance, legal intention and consideration and so this needs to be controlled and governed inside business organisations. It is important that you have clear processes and procedures protecting your business and its employees from entering into contracts unwittingly. One way to do this is to insist that all contracts must be in writing and signed by authorised personnel only.
Agreeing to a written agreement means that a business appears more serious about its actions and goals, including its obligations, payments, warranties, services, earnings, and consequences for non-performance. It has been shown that if you use written contracts, you are far less likely to end up in court – your clients will be much more inclined to work with you to find a solution and work things out.
Many businesses have their own suite of template contracts which can be used as the starting point for any business engagement, however, many small businesses don’t have template contracts. Template terms are often negotiated by both parties to reach a set of agreed terms that they are happy and willing to comply with. This is important as failure to meet the terms of a contract can result in a breach which may lead to termination and/or a claim for damages.
It is advisable to have a set of standard template contracts to use as a starting point for negotiations. I understand that some business owners believe that they can prepare these legal documents themselves, and that some like to use ‘old’ contracts or contracts from other organisations or online legal templates, and whilst all of these are better than relying on an oral contract, you should ideally have a set of template contracts prepared by a contract professional. The reason for this is that whilst there are a number of legal boilerplate terms that go into most contracts, it is important to have terms and conditions that are relevant to your business sector and your product/service offering and that you are capable of meeting the obligations defined in the contract. Investing in drafting a good contract upfront can save you lots of time, money, energy, goodwill and business value in the long run. Although you might never sue on a contract, someone could sue you. A written agreement can be your best defence.
Finally, for many businesses their contracts are their biggest asset, so having written, tangible agreements that are fair and achievable can add significant value to your company.
Business contracts are important for the following reasons:
- Contracts provide a written record of the business transaction agreed to by both parties.
- Contracts are binding and legally enforceable.
- Contracts protect both parties and minimise any future disputes/misunderstandings.
- Contracts detail exactly what has been agreed and the obligations of the parties.
- Contracts detail how and when you get paid and consequences for non-payment.
- Contracts create business value.
You should never feel uncomfortable about insisting on having a written contract, it is a sign of professionalism and should actually inspire confidence, knowing that you take your business seriously.