By Ng Boon Gan
Senior Legal Associate
Many business relationships start with a single transaction. Maybe the first transaction goes well, so both sides decide to rinse and repeat. They continue to trade with each other, compiling their invoices, receipts, delivery orders, and so on.
In a dispute, the mountain of documents and correspondence can show that parties intended to and did perform this contract. The problem arises when the mountain appears in a different shape or size to different people. Trying to explain to the judge what the actual relationship is becomes an uphill task because there are multiple possible interpretations.
Here are three frequent objections to using written contracts that I often hear from our SME clients.
“We trust each other, so there is no need to sign a written document.”
This is only true if nothing changes. But everybody knows that change is the only constant.
Will you and the other party always remain in control or management of the business? What happens when there are successors who may not enjoy the same personal relationship as you did?
We know how frequently demand, supply and prices change. What happens when one day they change beyond either party’s expectations?
“Asking for a written contract implies that I don’t trust the other party.”
A written contract is a form of commitment. By putting intention and words on paper, you commit to performing the contract based on the written terms.
Parties can agree to vary the contract later to account for different market conditions, so it’s not as if the contract is set in stone.
Showing the other party that you are willing to commit will help to create even more trust, because you are willing to act according to clear standards (whether or not your written standards are clear can be a different story).
“Getting a lawyer to draft an agreement is expensive!”
Not necessarily! There are a few online tools that will allow you to use template agreements or even modify them for your own purposes, such as our very own VanillaLaw™ Docs.
The real work of the lawyer then becomes advising you on which clauses are important for your objectives, and not just assembling or typing out the document.
Here are three advantages (amongst others) of using written contracts:
1) It forces parties to get together and agree to specific terms. Of course, this is assuming that parties have more-or-less equal bargaining power and it’s not one party signing a standard form that the other party uses for their own advantage.
2) It creates the incentive to look to the future. Parties will have to think about whether they want to vary the contract to account for different market conditions, what procedure they want to adopt for repeated and similar transactions and what type of dispute resolution they prefer.
3) It is easier to assign or novate (replace with a new contract) the contract. Having a written document to contain all the obligations makes it clear which rights and responsibilities are being transferred. This helps when one party wants to exit the business but still wants to preserve goodwill by ensuring minimal disruption to the other party’s business, or wants to restructure their business and have a related legal entity be responsible for carrying on the contract.
Written contracts are definitely the way to go if you intend to do business for the long run.
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