Why is a contract important in business?

Many will be familiar with contracts in one way or another. However, to some, preparing or reviewing such documentation may seem like a wasteful expense, particularly for a new business as the cost would cut into that all important bottom line. Legally, a contract can be written or spoken and therefore an effective agreement could be formed, or varied, over a simple handshake or through repeated dealings. While cost free and convenient, this relies on trust which cuts both ways.

Consider for instance if you didn’t review a contract properly or forgot what was agreed or there is a later disagreement between the parties. Or what if you are looking to retire and sell your business and need to show the value of your contracts to a buyer. What is your proof? Such uncertainty could be taken advantage of and lead to adverse results e.g. the early termination of a lucrative contract, being stuck in an uncommercial arrangement or commonly, a reduction in payment/asking price, if payment is forthcoming at all. Another key consideration is what happens if something goes wrong in the performance of a contract, what is your potential liability or conversely, your means of recourse? Without a formal contract, this could be potentially unlimited in the former and frustratingly limited in the latter.

To this end, every business is advised to have at least Standard Terms and Conditions as they avoid the time and cost of preparing bespoke terms and enable the introduction of favourable terms in a format that does not encourage negotiation. While this does not eliminate the risk of later disagreement between the parties, it would at least provide a starting point for negotiations, without which a resolution may prove costly and time consuming to achieve. That is because, if ultimately a court is required to provide a ruling, the judge will first determine if a contract was indeed formed but it is the certainty of the contractual terms that will influence their interpretation; any doubt will work against the person who seeks to enforce such ambiguity.

Please contact Sing Li, Solicitor, if you would like to discuss the matters raised in this article or any other aspect of commercial law.