You’ve probably heard the old saying, “a verbal contract isn’t worth the paper it’s written on.” Yet many business owners and executives still enter into handshake deals.
The Basic Elements of a Contract
In order for a contract to be legally binding, it must have three elements: An offer, acceptance and consideration.
Here’s a simplified example. Your company meets with a vendor to buy equipment. The vendor proposes items to purchase (the offer). You agree (the acceptance) and negotiate a price (the consideration).
For example, consider the case of a successful Irish pub with a 10-year lease. The property had a great location with lots of foot traffic and a loyal clientele from the neighborhood. The lease expired but the restaurant owner and the landlord orally agreed to an extension. A short time later, the pub owner received a notice to vacate the premises. The landlord had signed an agreement with another restaurant. The Irish pub owner refused to move arguing: “We shook hands on it.” The new restaurant couldn’t move into the space so it filed a lawsuit against the pub claiming lost profits. Eventually, the pub owner had to relocate and pay the costs associated with the legal dispute and opening up again at another site. It all could have been avoided if he had just gotten the oral agreement in writing.
Here are just a few benefits of getting agreements in writing:
- A contract determines the rights and obligations of the parties.
- The process of signing a contract causes the parties to think through an agreement. Written documents are more thorough than oral agreements.
- Long after an agreement is made, a contract provides concrete evidence of what the parties promised, while an oral agreement relies on the parties remembering the details. In the event of a misunderstanding, you can simply refer back to the written document.
- If one party breaches a written contract, the other party is entitled to seek damages.
- A contract lays out prices, payment terms and how expenses will be reimbursed.
- If there is a dispute and the parties are not in the same geographic area, a contract details which jurisdiction applies, as well as who pays attorneys’ fees and court costs.
- Some contracts must be in writing to be legally enforceable. For example, any agreement with terms that cannot be completed in less than one year cannot generally be entered into verbally without violating the “statute of frauds.”
These are just some of the many reasons why written contracts can help protect your business in its relationships with vendors, customers, employees and others. Further protection is provided by exercising due diligence on the parties you want to enter into agreements with before signing. Find out the answers to questions such as: Is the other business involved in pending litigation or disputes? Who are the principals and who has invested in the company? Is it financially healthy? In other words, look into the individual or organization behind the contract.
When businesses ask their attorneys to review contracts, one of the duties performed is investigating the other party or entity. What they find is sometimes surprising.
In one case, an entrepreneur created a new type of ice cream and wanted to do business with a distribution company. The entrepreneur requested — and the parties agreed to enter into — a confidentiality agreement. The entrepreneur then ran the contract past an attorney. It turned out there was no record of the distribution company operating under the name on the contract. If the entrepreneur signed it and ran into a dispute, the contract could have been ruled invalid.
The best protection for businesses is to enter into well-written, detailed contracts. Often, people get caught up in the excitement of making deals and just want to move forward. Take a breath and consult with your attorney first. In today’s business world, even simple agreements can become complex if there is a dispute.
There’s nothing wrong with ironing out the details of a transaction and shaking hands. But you should then follow it up with a written contract.