Why are Contracts Important in Business Transactions?

If you run a business, your business depends on all kinds of relationships: With customers or clients; with employees; with vendors of goods and services; with lenders and landlords, just to name a few. Each party to a business relationship brings to it a set of expectations with respect to what he or she will give and get. A contract is a useful tool for describing and defining the expectations of each party to a business relationship. Why is this important?

Establishing a measure of certainty

Think of a business relationship as a house. A contract is the blueprint for building that house; a reference for its operation and maintenance. A contract captures the rights and obligations of each party; the terms and conditions of their respective performance; and what each party will gain from the relationship. A contract articulates remedies in the event that one or the other party fails to perform as expected/required. By clearly defining the terms and conditions of a business relationship and the consequences of a failure to perform in accordance with those terms and conditions, a contract provides a measure of certainty, and can quantify the upside and downside inherent in a business relationship.

It’s all in the details

To understand how a contract works, we can look at a lease, which is one kind of contract. If I want to lease office or warehouse space, I first want to quantify exactly how much space I want to pay for, and how much I will pay. I want to be specific about the term of the lease, and what I may or may not do to the leased space in terms of renovations or alterations. I want to know whether and when the landlord can raise the rent. Are utilities included? Who pays the taxes? Is the building insured? Will that insurance cover my space? What happens if I don’t pay the rent? Or if the roof leaks and the landlord delays or fails to repair it and my property is damaged?

Make sure you have a structure for resolution

A contract answers all of these questions at the outset, establishing the basis on which the relationship will go forward. Knowing and understanding your rights and obligations reduces the possibility of a dispute; and, if a dispute does arise, a contract provides the framework for its resolution. That’s the “why” of contracts. Contact me for assistance in negotiating, drafting or reviewing contracts for your business.