Yes, you do need written contracts defining the relationships you have in your business with all other individuals and businesses. Here’s why.
First, a contract defines the relationship.
Everyone knows what is expected throughout this relationship, so it is less likely there will be difficulties or misunderstandings.
This is huge.
People think that contracts are just there to make the lawyer happy – but this contract is primarily to make the relationship go smoothly! If everyone knows what they are supposed to do (and what happens if they don’t do it) – then you guys will be able to do business together that much longer, and that much more profitably. Yay!
Second, a contract reduces potential costs from a dispute and/or litigation.
Yes. This is the scary reason.
There are terms you can put in your written contract that will save you difficulties down the road, if your relationship goes sour. Arbitration is a private alternative to a regular court lawsuit, and takes less time and money than a lawsuit in state or federal court. Mediation is a negotiation that is facilitated by a trained mediator and that may result in a settlement (I highly recommend mediation, if both parties are open to it – I’ve even mediated disputes which resulted in the two sides becoming friends again and doing more business together!).
Choices of law and venue clauses give you the opportunity to pick where the potential lawsuit will be filed, and what law will apply.
So, for example, if you are here in Palo Alto, California, usually it is less expensive for you to litigate here than to have to litigate in New York or Missouri. Attorney’s fees clauses state that the loosing party in the lawsuit must pay the other side’s attorneys fees, which not only reduces your costs of defending a lawsuit, but increases the other side’s risk of filing a lawsuit.
Here’s some areas where you need a contract:
- Every relationship should be defined by a written contract, if possible.
- With your partners you should have a partnership agreement, and may have a buy-out agreement, or other written succession plan.
- With your employees and contractors you should have a written contract, or at least a written employee manual.
- Your client and customers should sign written contracts, or be subject to Terms & Conditions as agreed upon when they purchase your products or services.
The exact contents of each contract depends upon its purpose, but generally you want to state the names of the parties, what each side is regulated to do under the contract, the time frame, and the services, products and/or money that will be exchanged.
By the way, written contracts must be executed (signed) to be valid — a draft contract may not be enforceable (useful in a lawsuit to prove your oral agreement), depending upon what the contract is about. But it doesn’t need to be hard – you can have contracts signed online such as through a company such as DocuSign or Right Signature – so no one needs to worry about pens and faxing and keeping the original in a safe deposit box (how 1990s!).
Legal Checkup: Do you have written contracts that govern all of your relationships?