Why Contracts Matter: Two Practical Reasons

Where Deals Break Down: Common Contract Pitfalls

In my experience, there are two times that a person might read a contract. The first time is when they sign it (maybe). The second time is when there’s a disagreement (maybe). As long as everyone agrees, the contract stays in the file drawer collecting dust.

The problem is that when a disagreement arises, the contract, not your memory, controls what happens next.

Sometimes, a person thinks the contract is just a form that never changes and is signed “as is” because they told the other person what they wanted. They may not read the written contract at all. That person is usually surprised to learn what they actually agreed to do when there’s a dispute. For example, they may assume payment is due upon completion, only to find out later that the contract allows 60 or 90 days to pay.

Other times, the parties have a written agreement that’s not complete. They don’t agree on certain terms and assume they will work it out later. If you can’t agree on a term at the beginning, when both sides want the deal to happen, you’re unlikely to agree on it later when there is a problem.

Many times, you don’t have an agreement when you think you did. A client asked me what they could do when another business hadn’t done its job. The “deal” was not in writing, and the other business said my client hadn’t done its job either. The problem is they were both right. Each side had a different understanding of the deal, and there was no written agreement to resolve the difference.

Two Reasons for Contracts

A contract of any type, oral or written, serves two purposes.

First, it helps you determine whether you actually have an agreement. A contract forces both sides to answer the basic questions that define the deal:

What exactly is being done, and for what price?
When does performance start, and when must it be completed?
When and how does payment occur?
Are there quality standards or specific requirements?
What happens if one party does not perform?
Can either party terminate the agreement early, and under what conditions?
If something goes wrong, who is responsible?
Based on all of this, do you still want to move forward?

Second, the contract is what you present to a judge in the event of a dispute. If the terms are unclear or are not in writing, a judge may have to decide the outcome based on incomplete or conflicting evidence. A clear written agreement also makes it easier for both sides to evaluate their position, which often prevents disputes from escalating in the first place.

It is critical that the agreement be in writing. The other party may remember the deal differently than you do. In many situations, oral agreements are difficult or impossible to enforce under state law. Even when they are enforceable, proving the terms of an oral agreement can be expensive and uncertain.

We at Venn Law Group help businesses put clear, enforceable agreements in place so expectations are defined before problems arise. Contact us today to learn more.

Bottom line: A contract isn’t just paperwork. It’s how you define the deal before there’s a problem.

Gary W. Smith is an attorney at Venn Law Group with more than 20 years’ experience providing legal counsel and innovative solutions to business owners and management teams. His areas of focus include mergers and acquisitions, succession and exit planning, securities and capital structures, business structures, and tax. He excels at navigating the legal complexities of diverse industries ranging from professional services and IT infrastructure to manufacturing and real estate.