You’ve been diligently pursuing your marketing plan, and your dream client is finally interested in working with your business. You take some time to hammer out the details, maybe trading multiple emails and phone calls, sometimes even text messages. At some point, the haggling concludes and you get to work providing your service. At this point, one of two things often happen:
If you’ve ever found your business in one of these situations, you’re definitely not alone. These situations illustrate exactly why you need to use written contracts in your business and not just rely on a handshake and a few emails.
Basic Contract Law
At its most basic, a valid, binding contract is formed when the parties “mutually consent” to the agreement and the obligation(s) the agreement represents. In other words, if the parties intended to be bound by an agreement to do something (or refrain from doing something), then you have a binding contract.
Notice that nothing about this fundamental definition requires that the agreement be in writing. Legally, mutual consent can be inferred from the parties' words and actions and the surrounding circumstances.
So why do handshake agreements or a scattering of emails and phone calls create so many problems, especially for small businesses?
1. Moods Change
It’s not fair or right, but human beings can and do change their minds. And when they do, they often attempt to unilaterally change the terms of the agreement. The customer that isn’t responding to your request that they pay their past due invoice? The client demanding more services and more features for the same amount of money? They have both changed their minds about the terms of your agreement.
2. Memories Are Terrible
Human memory is just plain bad sometimes. Even two honest, well-meaning people can have very different recollections about an event. And they’ll both be adamant that their version of events is what really happened. Have you ever had a client who is dragging their feet about paying your invoice swear the agreement was for net-90 instead of net-15? They insist that they would never have agreed to net-15 because they never pay their vendors that quickly. Or the customer that is demanding extra services, extra revisions, extra features, etc. insists that those demands aren’t extras, but simply what you agreed to provide.
3. Details Get Misinterpreted
Putting your business agreements in a written contract often reveals details (and sometimes whole areas of discussion) where the parties haven’t completely understood one another or haven’t reached a complete agreement. There is just something that happens when we convert your emails and bullet points into complete sentences and paragraphs that reveals these missing details. Every single time a client has told me that the negotiations were all done and neatly wrapped up and that I just needed to put the terms into a legal document, they’ve been wrong. Negotiations aren’t done until everyone signs on the dotted line.
"Negotiations aren't done until everyone signs on the dotted line."
So many of the problems I see clients face with handshake agreements or relying on a series of emails and text messages boil down to misinterpretation. Your customer is paying you late because you didn’t agree on payment terms beforehand. Your client is demanding extra services because they thought such items were already included. You shook hands on the deal without addressing the details. Even the email chain goes down winding roads and rabbit holes and tangents. You discussed X, Y, and Z, but did you reach a final agreement on all three or only on X and Z? Did Y get tabled for later, or was it still being discussed while other parts of the project got underway?
A written contract doesn’t mean that there will never be a dispute, and it doesn't guarantee that your customers will always pay on time. But it does mean that we have a clear set of expectations governing each party’s obligations. One side can no longer change their mind about the terms of the agreement. We’re not relying on a mashup of emails and bad memories to try and piece together the terms of the deal. And if the contract is drafted well, all of the little details have been covered. Worst case scenario, we may need to take action to enforce the terms of the agreement, but we’re not starting from square one trying to prove that there was an agreement in the first place.
If you need help cleaning up your business contracts, learn more about our Contract Drafting and Review Services.