The Importance of Written Contracts
By EDC Guest Columnist William T. McCartan, Attorney with Bradley & Riley PC
Young businesses are often faced with the pressures of payroll, the need to get a product to market, the imperative to build sales and a myriad of other business issues. With these challenges, it is often tempting for entrepreneurs to rely on oral understandings with investors, customers and vendors, rather than fully documenting the terms of these relationships. Based on the natural desire to trust, business people will forego the extra work and sometimes difficult negotiations required to put all of the terms of a business relationship on paper.
Unfortunately though, when an agreement is merely oral, an investor, customer or supplier may have a different view of the arrangements between the parties when a conflict later arises. Sometimes this arises from an integrity issue. Often, however, it can occur through no fault of either party, but simply because the parties either failed to foresee a particular situation or misunderstood one another.
In large companies, with their in-house counsel and notebooks full of proper procedures, written agreements are the norm, while start-up and entrepreneurial companies sometimes fail to fully document their business relationships. This can be the result of strained resources or antipathy to “paperwork.” Yet, for young and growing companies, with their sometimes delicate financial condition, the absence of a clear agreement on the details of a deal can be extremely costly. Indeed, sometimes, when it turns out that the “deal” was not as a company believed it to be, the absence of written documentation can be fatal to a young business.
Business moves quickly, and the time and expense required for a custom legal agreement for every transaction is not practical. But those time and cost pressures should not mean that adequate documentation gets shortchanged. One good and inexpensive technique used by many companies is a standard set of terms and conditions. These general legal terms, developed in collaboration with counsel, can be used with invoices, purchase orders and the other run-of-the-mill arrangements required in ongoing business, to at least cover the basics.
Some matters that might be covered in a standard agreement:
- Performance: What goods or services are being bought or sold? When are the goods or services to be delivered?
- Price: What will be paid?
- Payment: When will payment be due?
- Term: How long will the relationship last?
- Termination: In what circumstances can a party terminate the relationship?
- Indemnification: Does one party have a duty to reimburse the other party for losses incurred as a result of the contract?
- Insurance: Does one party or the other have the obligation to buy insurance to protect both parties against potential risks?
- Confidentiality: Do the parties desire that all or some of their relationship be kept secret? Under what conditions?
- Governing law: For relationships between parties in different states, which party’s “home” law will govern the contract and any disputes?
- Venue: Even more importantly, where the parties are in different locations, where will any litigation between them take place? Do the parties want to require binding arbitration?
Moving beyond routine daily matters, some agreements are nothing short of mission critical. For agreements that go beyond day-to-day business arrangements – the ones that can make or break your business clear written agreements are vital. To develop these documents, a young business needs the help of qualified legal counsel. No business person should attempt a “do-it-yourself” job for key legal agreements.
These agreements include arrangements to borrow money, any agreements for the sale of stock or other equity interests in the business, agreements among owners (e.g. “buy-sell” agreements”), any purchase, sale, license or other agreements relating to the patents, trademarks, copyrights or other intellectual property of the company, documents concerning the purchase, sale or lease of real estate, and any other agreements that might involve payments that could be significant to the financial condition or results of the company.
For a company to succeed, it must get the “little things” right. The “little things” include the terms of the company’s legal agreements. The best way to make sure that each of the parties to these agreements has the same understanding about those important details, and is forced to live by the promises they have made, is to WRITE THEM DOWN.
