Key Takeaways

  • Written contracts provide clear, legally enforceable documentation of agreements and expectations between parties.
  • Putting contracts in writing helps avoid misunderstandings, resolve disputes, and protect all parties' interests.
  • Some contracts are required by law to be in writing to be enforceable (such as real estate, certain sales, or agreements lasting more than a year).
  • Written contracts offer a reliable record of terms, dates, and obligations, serving as valuable evidence if disagreements arise.
  • Informal or verbal agreements can lead to confusion, memory lapses, and increased risk of legal challenges.
  • Utilizing written contracts demonstrates professionalism and can help maintain positive business relationships.

Why do we need contracts? Written contracts can eliminate problems in a business relationship by defining expectations, such as payment and duties. A well-drafted contract makes everyone's responsibilities and obligations clear.

Why Do We Need Contracts?

Written contracts require signatures to be valid. Drafts may not be legally enforceable. You may wonder why you need a contract at all. If you're entering into a business relationship, couldn't a simple handshake do? Isn't trust enough?

Unfortunately, verbal agreements and handshakes often aren't enough. Not having a contract leaves parties open to a variety of potential hassles.

Sometimes, parties may be reluctant to draw up a contract because they're in a hurry to finalize a deal. This is a bad idea. Taking on a job or receiving work with no formal contract in place is a disservice to all involved.

Although writing up a contract may slow down the process of completing a deal or cause some tension in the short term — when negotiating details, for instance — it can help things go smoothly and prevent future problems.

Why Is It Desirable to Put Some Contracts in Writing?

While oral agreements can be legally binding in certain situations, putting contracts in writing offers significant advantages and is sometimes required by law. Written contracts provide a tangible record of each party’s rights, responsibilities, and expectations. This clarity is essential in preventing misunderstandings, especially when memories fade or personnel change over time.

There are several key reasons why it is desirable to put some contracts in writing:

  • Legal Enforceability: Some agreements, such as those involving the sale of real estate, certain types of goods, or contracts that cannot be performed within a year, must be in writing to be legally enforceable under the Statute of Frauds.
  • Clear Evidence: Written contracts serve as concrete evidence in court, helping resolve disputes by showing exactly what was agreed upon and when.
  • Reduces Misunderstandings: Documenting all terms ensures both parties have the same understanding, reducing the likelihood of conflicting interpretations or forgotten obligations.
  • Supports Compliance: Written records make it easier to ensure that all obligations and deadlines are tracked and met, helping avoid accidental breaches.
  • Professionalism: Presenting a written contract signals that you take your business seriously and expect the same from others, fostering a sense of trust and credibility.

Written contracts are especially valuable in complex transactions, long-term relationships, or situations involving substantial sums of money or risk. In these cases, relying on memory or informal communications can result in costly mistakes or lost opportunities.

Benefits of Having a Contract

Having a contract presents a number of benefits and can eliminate a variety of hassles.

  • They detail everyone's responsibilities: Instead of wondering what your or the other party's responsibilities are, a written contract lays everything out, cutting down on confusion and potential disagreements.
  • They bind parties to their obligations: If a party tries to back out of its obligations, it can cause problems in the relationship. A contract cuts down on the likelihood of someone trying to shirk off responsibilities.
  • They establish a time frame: Say you need work done and you need it finished in a certain time frame. A contract obligates the other party to complete it in that time. For instance, consultants may require other parties to provide timely and adequate access to key personnel in order to meet their obligations.
  • They can secure payment: When you contract to do work, you expect to get paid for it, as outlined in the agreement. A written contact is a legal document that establishes an agreement for payment for services rendered. Not only do you want to know much you'll be paid, you also want to know how and when you'll be paid. A contract can specify all of these details.
  • They provide recourse when business relationships falter: If the relationship between the parties goes sour, a contract often contains terms outlining how to dissolve the relationship peacefully.
  • They make jurisdiction clear: When the parties aren't in the same geographic location, what happens when a dispute arises? Where will a legal action be filed? A contract can specify which jurisdiction applies. Usually, one party agrees to submit to the other's jurisdiction. This keeps things simple in the event of legal action.
  • They make provisions for court costs and/or attorney fees: Sometimes, clients may try to default on payments (when they're smaller) because they feel that the other party won't go through the expense of hiring an attorney and filing suit to try and recoup such a small amount of money. If a contract stipulates reasonable attorney fees, this makes it more likely for clients to follow through with their obligations. The other party may find it financially worth the cost to take legal action when it knows legal fees will be covered.

Working without a contract can be risky. If a problem comes up — whether it concerns what was expected or how performance was executed — and no contract exists, the parties have to rely on a court's decision. The judge then has to determine what each party's intentions were by considering what each side said and did. A judge may look at how the parties communicated to make a determination, and the outcome may not be satisfactory to either side.

To avoid these risks and potential problems, it's best to put your agreements in writing whenever possible. Trusting another party has its place, but when money, property, or other assets are involved, you want to protect yourself.Negotiating agreement terms may include some tension, but it's much better to suffer some short-term discomfort than long-term hassles by not having a written contract.

Legal Requirements for Written Contracts

Not all agreements must be in writing, but certain types are required by law to be documented to be enforceable. The Statute of Frauds, a principle found in most U.S. jurisdictions, lists contracts that typically must be in writing, including:

  • Agreements involving the sale or transfer of land or real estate
  • Contracts that cannot be performed within one year
  • Promises to pay another person’s debt (surety agreements)
  • Marriage or prenuptial agreements
  • Sale of goods above a certain value, typically $500 or more, under the Uniform Commercial Code (UCC)

Failing to put these agreements in writing may leave parties without legal recourse if a dispute arises. Even when not strictly required by law, a written contract can provide greater assurance and protection for all parties involved.

Risks of Relying on Oral or Informal Agreements

Relying solely on verbal agreements or informal understandings can expose parties to several risks, including:

  • Memory Lapses: Over time, parties may remember details differently, leading to disagreements.
  • Miscommunication: Without written documentation, terms may be misunderstood or misinterpreted.
  • Difficulty Proving Terms: In a dispute, it can be challenging to prove what was actually agreed to without a written record.
  • Limited Legal Protection: Courts may have difficulty enforcing oral agreements, especially if the law requires the contract to be in writing.
  • Potential for Manipulation: One party may try to exploit vague or unrecorded terms for personal gain.

Written contracts address these risks by providing a clear, consistent, and lasting reference for both parties.

Practical Benefits of Written Contracts in Business Relationships

Putting contracts in writing not only provides legal and evidentiary benefits but also supports healthy and productive business relationships. Written contracts can:

  • Outline the process for handling changes or amendments to the agreement.
  • Specify remedies for breaches or nonperformance.
  • Detail procedures for resolving disputes, such as mediation or arbitration clauses.
  • Provide instructions for termination or renewal of the agreement.

By setting clear expectations and outlining steps for resolving problems, written contracts help build trust, reduce the likelihood of conflict, and ensure all parties can move forward with confidence.

Frequently Asked Questions

1. Why is it desirable to put some contracts in writing?

Putting contracts in writing provides clear evidence of the agreement, helps avoid misunderstandings, and ensures legal enforceability, especially when required by law.

2. Are oral contracts ever enforceable?

Some oral contracts are enforceable, but they can be difficult to prove in court. Certain contracts must be in writing to be valid under the law.

3. What types of contracts are required to be in writing?

Contracts for the sale of real estate, agreements lasting more than one year, surety agreements, marriage contracts, and sales of goods over $500 are typically required to be in writing.

4. What happens if there is no written contract and a dispute arises?

Without a written contract, disputes are harder to resolve, as there is no clear record of the terms. Courts may rely on testimony or circumstantial evidence, which can lead to unfavorable outcomes.

5. Can a written contract protect my business interests better than a handshake agreement?

Yes, a written contract provides clarity, legal protection, and a framework for resolving disputes, which informal agreements cannot guarantee.

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