Handshakes are Nice… But Contracts Are Legal
As the old saying goes, “an ounce of prevention is worth a pound of cure”. No matter your line of business, establishing and maintaining written, mutually signed, contracts with your customers, vendors and agents provides an essential measure of protection. Contracts can vary widely in length, complexity and specificity, and this article discusses a few benefits that can be provided by even very simple commercial contracts.
Business Basics.
Is there a particular brand of materials or fixtures that your customer expects to be used? What are your payment terms for your vendors, and when do you agree to reimburse their out-of-pocket expenses? Are there critical deadlines for the project, and are there extenuating circumstances that should excuse a party from meeting those deadlines? Contentious disputes can originate out of misunderstandings between parties to a verbal agreement with respect to simple questions such as the above.
The clearest and perhaps the most important benefit of a written contract is that it provides a place to lay out the essential business terms of a project in specificity and appropriate detail. Taking a brief amount of time to commit the key business terms to writing sets clear expectations for all parties as to what has been promised and what must be delivered.
Don’t Get Stuck in the Middle.
Are you sure that your customers and vendors are on the same page? A second important benefit of maintaining written contracts is the ability to align the commitments that you make to your customers with the commitments that you receive from your vendors. If your vendor disclaims certain warranties with respect to its products, your contract with the customer should clearly state that you disclaim these warranties as well. If your customer has rights to terminate the contract with you in certain circumstances, your vendor contracts can be drafted to allow you the right to terminate those contracts in the same circumstances.
Written contracts can also contain obligations of indemnification to protect you and be made whole in the event that you face liability to a third party based on the negligent or wrongful actions of a customer or vendor. Maintaining written contracts with your vendors and customers provides essential protection against the undesirable scenario of having made promises to your customers that you cannot compel your vendors to fulfill (and vice-versa).
In the Event of a Dispute…
What if something goes wrong and you need to enforce the terms of your agreement? Another important benefit of a written contract is that it provides a place to specify the process for resolution of disputes related to the contract or the project performed under the contract, should a dispute occur. A written contract can require the parties to engage in mediation or provide a “cooling off” period of negotiation for a specified length of time before either party is permitted to bring a lawsuit. Alternatively, a written contract can require binding arbitration to avoid the formal judicial process altogether. Your actual experience may vary, but out of court mediation and arbitration has the potential to provide for a quicker, cheaper way to bring finality to a dispute.
If you prefer the traditional process of filing a lawsuit and going to court, a written contract can specify that any lawsuit must be brought in Des Moines or another particular location. Failing to specify a legal venue can lead to the unwelcome surprise of travel costs if your customer or vendor is able to obtain jurisdiction in an unfamiliar court.
Everything in One Place.
You and the customer have exchanged fifty e-mails and a dozen voicemails and have had at least a hundred oral conversations to discuss the specifics of the project; how do you know what the deal actually is? A final benefit of a written contract is that the contract can specify that the entire agreement of the parties is contained entirely within the text of the contract.
The contract can direct anyone who may need to interpret the contract later (such as an arbitrator or judge) to look only to the contract document itself, to ignore any prior agreements and discussions and to ignore any future agreements unless signed by both parties to the contract. A written contract that contains such language can greatly reduce the likelihood that a discussion or e-mail exchanged during the planning stage will morph into a binding part of the final agreement.
Conclusion
A written contract is not a guarantee that no problems will occur in the course of your relationships with customers and vendors. Even a relatively simple written contract can, however, be a critical ounce of prevention against some common problems that occur when parties operate under an oral agreement. Consult with an attorney with experience in drafting commercial contracts to understand the contractual provisions that are most suitable for your needs.