There are thousands of transactions that are carried out every day. From buying foodstuff at the market to complex international business transactions. Some of these transactions are simple and are agreed upon or completed in a matter of minutes with nothing more than a handshake. However, there are some transactions that are complex and require a more formal agreement to be completed. In these situations, a contract will be needed to be drawn up.
What is a Contract?
A contract can simply be defined as a promise or a set of promises made between two parties the law will enforce. It should be noted, however, that not all promises or agreements will be enforced by the law. For example, social and domestic agreements are generally not binding by law.
Some contracts have to be in writing in order for a court to enforce them. If you enter into a long term contract with a distributor, for example, it should be in writing. A contract to buy or sell real estate like land should always be in writing. You should not rely on a mere promise from your landlord that you will be able to buy the building that you’ve been leasing. Contracts to buy or sell merchandise over a certain amount also need to be in writing.
Why Would I Need a Contract?
There are advantages to having a written contract in certain business transactions. Some of these advantages are:
1. Contracts Define The Relationship – With a written contract, each party knows what is expected of them throughout the relationship so it is less likely there will be difficulties or misunderstandings. It helps the relationship to go smoothly.
2. Contracts Reduce Potential Costs of Dispute or Litigation – With a written contract, there are terms you can put in that will save you difficulties down the road. It can be part of the terms of the contract that should there be any dispute or breach, the matter be settled by arbitration or mediation which are private alternatives to a regular court lawsuit and takes less time and money.
3. Contracts Determine Which Law and Which Court Will Be Involved If There is a Breach – Parties to a written contract can also expressly state under which law or which court any breach or dispute arising from the contract will be settled.
4. Legally Binding – The major advantage of having a written contract is that the parties to the contract are bound by law to the contract. Once the contract has been signed and executed, each party is bound to their obligations under it and liable to the consequences of a breach on their part.
5. Provides a Reference and Avoids Confusion of Terms – There is a limit to how much information or details you can keep organized in your head. With a written contract, parties can avoid confusion and potential conflict. There will be no need to argue over details of what you agreed on as the details are written down and can be referred to.
6. It Encourages Consistency – Having a written contract provides a set of procedures for the parties to follow. Each party knows his function and what is expected of him.
7. A Contract is Evidence of Commitment – People are more comfortable committing their time, money and energy to something if they are sure the people they are dealing with are committed. People want to feel protected and assured that the other party or parties won’t bow out suddenly and leave them in a bad spot. A written contract gives that assurance. It also helps weed out uncommitted people. Having to actually sign an agreement creates a moment of truth that can help some people realize if they are ready or willing to take on the responsibilities they will be committing themselves to.
These are just a few advantages to having a written contract. The benefits of a complete, detailed, clear and well written contract apply to all business relationships, including customers, vendors, employees and between partners. Well drafted detailed written contracts will reduce business problems, strengthen business relationships and protect yourself and your business from claims and lawsuits, even if you do not intend to use them in court.