Why Have Written Contracts?

Posted in Business, Law

Let’s say that you are starting a new business.  Why should you have written agreements when you are providing your services or products?  In order to answer that question, it is important to understand what kinds of services or products you will be providing, the people and businesses you will interact with, the kinds of risks you face, and the applicable laws in your jurisdiction.  Sometimes, a written contract is not worth the trouble, such as when you go to the grocery.  You don’t sign a contract to pick up a carton of milk.  Nonetheless, for more serious transactions involving more money or more risk, it is helpful to have a written contract for your business.  This post covers three key reasons why it helps the business to have a written agreement for its customers.

Written contracts are useful, first, to set the expectations of the business and its customer.  What is the business promising to do?  What does the business want the customer to promise?  Most frequently, the business wants the customer to promise to pay the business.  There may be other customer obligations as well.  By plainly setting out the obligations of the parties, both the business and customer have clear expectations about what is to happen.

Second, a written contract helps the business to enforce its rights.  Sometimes businesses need to sue their customers, for example when customers fail to pay.  Even though the law will enforce oral contracts, a written contract is much easier to enforce.  A written contract helps the business to show that the customer had an obligation, for example to pay a defined amount.  Also, a written contract helps to deflect a customer’s claims that there was, in fact, no agreement, that the agreement was not definite enough to enforce, or that the agreement was not what the business says it was.  Oral agreement disputes often end up becoming “he said, she said” disputes in which the parties disagree about whether there was an agreement or if they acknowledge the agreement, they disagree about what they agreed to do.

Finally, a written contract allows the business to limit its potential liability.  Frequently, written agreements contain statements saying that the business will not be responsible for certain events.  For instance, Internet service agreements often say that they cannot guarantee that the Internet will always be up and available for use.  Also, written agreements often limit the kinds of damages a customer can recover or cap liability at a set amount, for example the amount of revenue the business received from the customer.  Limits of liability manage the business’s risk and help to ensure that for a relatively modest business transaction, the business does not face the prospect of paying the customer a huge damage award in a lawsuit.

It is important to give careful thought to what the business wants to say in its agreements based on what it is willing to promise, what it needs its customers to do, and how it can limit its liability.  Simply copying form agreements from the Internet or another business risks having the agreement not match the transaction, causing confusion, or failing to include key terms.  By thoughtfully developing a written agreement, your business can take an important step to managing its legal risk.

StevenSWu3

Attorney Stephen Wu is a partner in the law firm of Cooke Kobrick & Wu LLP in
downtown Los Altos.  He can be reached at (650) 917-8045 or at swu@ckwlaw.com.