Why Do We Need Contracts: Everything You Need to Know
Written contracts can eliminate problems in a business relationship by defining expectations, such as payment and duties.3 min read updated on January 01, 2024
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.
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.
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