Why Have Written Contracts?

Posted on: 19/04/2022

Category: For your business

A contract does not have to be a formal document in writing and can be concluded over the phone, face to face, by action or by piecing together several pieces of correspondence. As long as the ingredients are there then the deal will be binding on both parties.

Trading is at the heart of every business and as such, so is the law of contract. Building a successful business is often a balancing act between accepting a level of risk and taking measures to minimise that risk. Much like an insurance policy, the merits of a well-drafted contract to govern important relations with customers and suppliers cannot be over emphasised as part of the risk management. Identifying contract terms is important to ensure that risk is properly understood analysed and measured. Properly drafted contracts can also enhance the worth of a company as they should ring fence liability and risk and encourage continuity of supply at fair prices.

The job of the commercial solicitor is to write the story so that both sides enter into the transaction understanding their respective obligations and comply with the law. A dose of good faith and realistic expectations of each other will be just as important to the success of the contract and should be fairly reflected within the contract terms.

Two distinct advantages of investing time and money into making sure your business has properly drafted contracts are:

• It removes any doubt as to what was agreed and forms a base document to come back to if issues arise. This saves a great deal of time and cost for both parties should things go wrong.
• During the process of reaching agreement, risk is properly analysed and apportioned between the parties. If done well it will ensure the correct party takes on their own responsibility for their part in the deal.

It is also prudent to carry out contract audits from time to time. It is far better to know where a business stands with its customers and suppliers so that it can plan. This is only possible with written contracts and a central database can be invaluable for this. Regular due diligence will help flush out problems before they arise. It is also important that those employees given authority to enter into contracts on behalf of a business understand the process.

At SME, we can help you with your business contracts. We can help you write them, understand and run them and end them. We can also help you prepare a database of key contracts so that the knowledge is contained in one place rather than across several departments or personnel. Investing the time and effort will not be wasted, as it is useful knowledge upon which decisions can be made about the direction of the business and a good stock of properly concluded contract would also add value on any future sale.