Contracts Promote Business

Contracts are the fabric of society. Contracts promote business by clarifying parties’ expectations, and facilitating better working relationships. They hold us together, allowing commerce to go forward quickly and securely, and allow the conscientious businessman a remedy when a business partner goes back on his word. But contracts are often frustrating to the business owner precisely because of their importance. When presented with a contract and all its glorious fine print, most people glaze over (seriously, when was the last time you read your iTunes’ user agreement?).

We have a gentlemen’s agreement

One mistake many people make is assuming that a “gentlemen’s agreement” will suffice for their business. “I was raised to honor my word,” I’ve heard many clients say after they were burned by someone who never put their commitment in writing.

The problem with such oral agreements is two-fold. First, as the old joke goes, oral agreements aren’t worth the paper they’re written on. Just because you were raised to honor your commitments doesn’t mean the other guy was. And second, even where both parties are honest, written contracts force both parties to think about scenarios they might not otherwise consider.

For example, let’s say that you are a famous orange-grower, and I am desirous of buying and re-selling your delicious, name-brand oranges. We agree that you will sell me 1,000 oranges at $1 a piece. We shake hands, and we have a deal, right? Well, yes, we do, but do we really know what our deal is? Am I picking up the oranges, or are you paying to have them delivered? Does it matter if this year’s orange crop came in smaller than last year’s? Do I have to pay on delivery or after I re-sell,  and do you care if I pay with a credit card? Most of all, what if you had a bad year and sell me your neighbor’s oranges? I bargained for your name-brand oranges, not some neighbor’s knock-off citrus!

I think you get the point. Sitting down and writing out an agreement does not eliminate the possibility for misunderstanding, but it helps to bring into focus the various things that can go wrong in a business deal, and allows the parties to allocate the risk of various possibilities.

What should a good contract have in it?

Obviously, a contract should be as unique as the deal it governs. It’s always frustrating to see form contracts copied and pasted from one thing to another, as though a business deal is just a cut and paste job. Nonetheless, certain provisions should probably be in your contract.

  1. Allocation of Risk

What happens if the crop you’re buying—or the product you’re depending on the production of—is unavailable because of famine, war or strike? You can laugh, but this happens all the time. What if the other party dies tragically during the term of the contract? Is his estate responsible for completing the contract?

  1. If there is a conflict between the parties, where can suit be filed, and what state’s laws will apply?

This might seem unnecessary in a deal between two local businesses, especially in a place like Berks County. But what if the other party to your contract moves to Montana, and the deal breaks down at some point. Can you sue him in Reading, Pennsylvania? That depends on a number of factors, believe it or not, but if you’ve written that into the contract, the answer will almost certainly be yes.

  1. What are the parties’ remedies if someone breaches?

If you mess up, what happens? Does the contract dissolve? Is there a stated financial penalty? Does it depend on the damage done to the deal? This part of a contract is governed by a fairly complex thicket of Constitutional law and public policy legislated both through our General Assembly and our courts. Understanding how these remedies will be enforced (or whether a court will refuse to enforce the remedy the parties wrote into the contract) is vital to creating a strong document to govern your transaction.

  1. Terms of Payment and Other Logistics

Sounds obvious, right? But how are you getting paid (or making payment)? Does it matter if it’s in cash, or will you take a line of credit? Will you allow a grace period if a payment doesn’t get in on time? If so, what interest rate are you agreeing to? Who’s delivering? To where? If weather interferes, is delayed delivery excused?

Conclusion

A contract is the lifeblood of a good business deal. It is crucial to have a well-draft document that covers the contingencies that can arise. As the old saying goes, “Measure twice; cut once.” A well-written contract can lead to a much more amiable relationship between the parties when unexpected difficulties arise, and can lead to more and better business in the future. Do you need contracts to cover your business? Contact the Cornerstone Law Firm today, and let us see how we can help you.