Every business owner says it; “Do I really need a written
contract?” The answer is “YES, YES and YES!” Using a written
contract is like buying insurance for your business deals,
but much better.
What Is A Contract?
Simply put, a contract is an enforceable agreement between
two or more parties. The contract contains the promises made
by the parties to one another, which is legally known as
“consideration.” These promises define the relationship
being undertaken as well as what happens if the business
relationship doesn’t work out. If one party fails to act
according to their promises, then they have “breached” the
contract and can be found liable for damages. The damages
typically equate to what the non-breaching party would have
received if there had been no breach.
Oral Contract v. Written Contract
You go to a party with a friend and meet someone interested
in your product or service. Eventually, you agree to provide
him with 1,000 units of your product in exchange for a
discounted price. You have created what is known as an “oral
contract.” He has promised to order products and you have
promised to provide them at a discounted price. Is the
agreement worth anything? Unfortunately, the answer is
probably no. Why? In most states, oral contracts are not
enforceable if they carry an inherent value in excess of
$500. Since it is so difficult to establish the terms of an
oral contract in a dispute the legal system tries to
discourage them. In fact, this legal restriction is
generally known as the “Statute of Frauds.”
Turning back to our example, what if you thought you were
going to give a 10 percent discount and he thought it was 20
percent? What if you can’t resolve it and he insists you
provide the discounted products? You will end up in court
with the dispute coming down to which party the judge or
jury believes. Are you really willing to take that gamble?
With even a simple written contract, you can create a clause
containing language that states you will give a 10 percent
discount. If the dispute ends up in court, he is asked if
his signature is on the bottom, the clause is read and you
win. The contract should also contain a clause requiring the
“prevailing party” to be reimbursed for their attorneys fees
and costs. In short, he has to pay your legal bills as well.
An additional benefit to using a written contract is the due
diligence element. I realize you will be shocked to learn
that there are unethical businesses. In negotiating a
contract, very specific requirements are put in writing.
What if the other party starts squirming? It may be a sign
they are unable to meet their obligations. Might that give
you pause before you commit to tying up your inventory? You
can save yourself a lot of headaches by discovering this
information in advance.
In summary, even a simple written contract should be a
mandatory bullet in your arsenal. Much like car insurance,
you will be glad you have one if a business transaction
falls apart.
Richard Chapo is the lead attorney for the law firm
– a firm providing
legal advice to California businesses. This article is for
general education purposes and does not address every facet
of the subject matter. Nothing in this article creates an
attorney-client relationship.
