WHY DO WE HAVE CONTRACTS? WHY TAKE THE TIME TO CREATE A WRITTEN CONTRACT?
Contracts concern relationships and arrangements between people (parties), who may be companies, individuals, partners or trustees of trusts, and create binding legal obligations and responsibilities so that parties can reliably be held to account to perform promises made. Contracts can concern any form of legal subject matter, services, goods, or legal rights, and all the related details like quantities, quality, price, timing, doing or refraining from doing specific action, bearing risks or assigning liabilities or some other obligation.
Contracts can be formed at law in either one or a combination of three ways: (i) by a course of conduct, (ii) by spoken words, or (iii) in writing. In order to have a contract enforceable at law, the subject matter must concern a legal activity and the parties who exchange promises must be legally competent (adult, sane, not bankrupt), and they must be in mutual agreement. It is sometimes said that the parties had a “meeting of minds and are of one mind.”
To be enforceable, the exchange of promises in the contract must be supported by consideration or something of value given in exchange. Usually, money is provided for goods or services, but there is no specific minimum value nor is money needed; even reciprocal promises are sufficient consideration. No matter the form of consideration in support of the contract or bargain, it must be ‘fresh’ and not provided in the past under some earlier contract.
As a historical note, contracts lacking consideration were made under ‘seal,’ but that is another topic and; likewise, without consideration, a ‘gratuitous promise’ may just be a gift, although a court may enforce the promised if it is fair (in equity, under a doctrine of promissory estoppel) but this is costly and uncertain.
The provisions or terms of the parties’ contract must be sufficiently clear and rational on an objective basis, meaning not just the parties, but also the average person in similar circumstances should understand the terms. This is where problems arise. Humans make assumptions and presume what others are thinking and ambiguity results. If the parties’ agreement is too vague, the promises will not be enforceable, and the agreement will stand for nothing, or worse, litigation will result.
Effective contracts avoid unnecessary complexity and ambiguity. The terms or provisions of the contract must be readily understood and unambiguous and avoid the potential for multiple interpretations that, while reasonable, conflict and are incompatible, thus defeating the expectations and intentions of at least one of the parties.
There is one thing business and the stock markets especially do not like, and that is uncertainty. This is predominantly why, when it comes to important matters, businesses tend to take time and effort to put contracts in writing. The negotiations can be distilled to writing, revised, checked and confirmed by a thorough process ending with a clear document that all agree upon, and there is an evidential record that is not subject to hindsight bias and forgetful minds.
Given costs of court litigation, not just in terms of expense which will run from $10,000 to $100,000+, loss of brand and goodwill, time distraction, and unpredictable outcomes, it is crucial to take time to negotiate, draft, refine and finalize your contract as good risk management and huge money and time-saver for most businesses.
From the start of your communications, protecting your business’s recipe for success is critical. Before sharing sensitive Intellectual Property (IP) information with potential business partners or future investors, be sure to have a well-drafted Non-disclosure/Confidentiality Agreement in place.
The starting point is you, the business person, must know what goals you need to achieve and objectives you want to achieve and, in exchange, what compromises are you prepared to accept that benefit the other party to make the deal happen and reach a signed agreement.
As with most human endeavours, starting with face-to-face communication helps build trust and is the most efficient way to discuss complex, wide-ranging matters. Conversely, once you have a foundation of essential terms agreed upon, then email is fine for simple yes/no responses.
When you meet with the other party to discuss the general terms of the relationship and agreement, come organized and prepared with a checklist for your meeting. Again, in person will be most fruitful. You spent years building your business. Why rush negotiations? Be methodical and work to realize your long-term business and personal objective.
As drafts of the contract evolve, you can track changes (or your lawyer will) in the document to work towards the final form for execution and signing that will legally bind the parties.
Once the essential terms have been agreed upon in principle, you can move the practical details, which can be where relationships are made or broken. Note: you must be clear, in writing, that a binding agreement cannot arise until the parties agree as such and subject to final review by each party’s legal counsel, except for confidentiality and non-competition, which needs to be in force and in place from the start.
Many a business person has been surprised by lawsuits where they were in breach of an enforceable contract, having all the essential terms but labelled Memorandum of Understanding or Letter of Intent or deals collapse after sharing trade secrets that no one took time to protect.
Don’t be short-term, penny-wise, but dollar ($) poor in the long-run.