Why Even a Simple Contract can Save Your Bacon
By Scott Tshirhart
You should always use written contracts when conducting business. On a somewhat regular basis client's will ask; "Do I really need a written contract?"
The answer is "YES!" In this article, I discuss why using a written contract is so important.
What Is A Contract?
A contract is an enforceable agreement between two or more parties. The contract contains the promises made by one party to another, which is referred to as "consideration." These promises define the relationship being undertaken as well as what happens if the 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 that is 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 from you 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 the above 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? You should not be.
With a 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 you will run into less than honest people in business. In negotiating a contract, very specific requirements are put in writing. What if the other party starts squirming? It is probably a pretty good sign they may not be able to meet their obligations. Might that give you pause before you commit to supplying a sizable amount of your product and tying up your inventory? By finding out this information before you start doing business, you save yourself a lot of headaches.
In summary, even a simple written contract should be a mandatory bullet in your arsenal. Contracts allow you to clearly layout your business efforts, avoid hucksters and act as insurance for your business dealings.
You should always use written contracts when conducting business. On a somewhat regular basis client's will ask; "Do I really need a written contract?"
The answer is "YES!" In this article, I discuss why using a written contract is so important.
What Is A Contract?
A contract is an enforceable agreement between two or more parties. The contract contains the promises made by one party to another, which is referred to as "consideration." These promises define the relationship being undertaken as well as what happens if the 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 that is 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 from you 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 the above 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? You should not be.
With a 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 you will run into less than honest people in business. In negotiating a contract, very specific requirements are put in writing. What if the other party starts squirming? It is probably a pretty good sign they may not be able to meet their obligations. Might that give you pause before you commit to supplying a sizable amount of your product and tying up your inventory? By finding out this information before you start doing business, you save yourself a lot of headaches.
In summary, even a simple written contract should be a mandatory bullet in your arsenal. Contracts allow you to clearly layout your business efforts, avoid hucksters and act as insurance for your business dealings.
