Published December 3, 2007

Importance of Written Business Contracts: Laws & Negotiations

Contracts Help To Avoid Misunderstandings

A business contract states the terms and conditions of any business transaction, including product sales and delivery of services. This helps the parties involved to avoid any type of misunderstanding that may arise in the absence of a written contract.

If you are collaborating with a friend on your new business, then it is all the more important to create a written contract. This will help you avoid any misunderstandings - and consequently will save you from the rifts that might end your friendship.

If you have an oral agreement, you might forget some points that you have agreed on verbally with the passage of time. But with a written agreement, all the terms and conditions are crystal clear at any point in time. And you can always amend the agreement with the consent of both the parties.

Written Contracts can be Enforced More Effectively Than Oral Contracts

Many people are unrealistic when it comes to creating contracts. You should not take it for granted that the threads of your relationship (business, personal or otherwise) are strong enough to face any crisis. The fact is that disagreements can and do arise, especially between friends and family members, and especially when a close personal relationship is intertwined with a business one.

When you get into a verbal contract, you may not mention things that seem to be obvious. It is these issues that usually create trouble in the future when you want to enforce any agreements that have been made. Conversely, when you get into a written contract, you and all the parties involved are cautious enough to include all the details, making disagreements later on far less likely.

Written contracts are also much easier to enforce should you end up in court.

Negotiation and Parts of a Contract

A contract consists of an offer and acceptance - and sometimes, a counteroffer. The offer constitutes a statement that specifies that a person or business is ready to enter into an agreement on some specific terms and conditions. The acceptance comes from the person who accepts the offer on the basis of those terms and conditions.

A person might not agree to the specified terms and might present a 'counteroffer' within the clauses. When the person who made the offer, accepts the counteroffer - only then is the contract is formed. You should also check whether the person who is signing the contract is authorized to do so or not.

Consideration is the exchange of values under the contract. For example, a person gives a part of their apartment to a childcare provider who, in turn, pays a part of their fees to the owner of the space. The consideration that is provided by either of the parties should be of value.

Also, both the parties that are getting into the contract should be mentally competent. In other words none of them should be a minor. The agreement should have a lawful purpose. As in the above example, the lawful purpose of the contract is that a person is paying an amount of money for a certain space.

Contracts and Your Small Business

As a small business owner, it is very important that you get into the habit of always using written contracts, especially when it comes to performing services for clients. This is because you probably don't have deep pockets should you be sued.

If you use written contracts, it is also far less likely that you will end up in court - your clients will be much more inclined to work with you to find a solution and work things out.

Written contracts are for your protection. Use them diligently, and your customers will see that you are serious about doing business the right way.