Don’t do business on a handshake: get it in writing!
People have been doing business together for thousands of years, and for just as long, they have been entering into verbal and written contracts. Here is a rental contract from nearly 4,000 years ago in Babylonia:
Akhibte has taken the house of Mashqu from Mashqu, the owner, on a lease for one year. He will pay one shekel of silver, the rent of one year. On the fifth of Tammuz he takes possession.Dated the fifth of Tammuz, the year of the wall of Kar-Shamash.
The parties to this contract made sure to get in writing, and the contract probably looked something like the clay tablet in this picture. If they had only agreed with a handshake, or whatever ancient Babylonians did, there could have been uncertainty about whether the landlord had actually agreed to rent his house, for how long, or for how much. The parties might have ended up in a costly legal dispute over what they had agreed upon.
I am bringing up a 4,000-year-old contract to show that people have known for a long time to document their business agreements in writing. Even in the 21st century, people can enter into oral contracts that are legally binding. But in our overly litigious society, it is critical to have your business agreements in writing. Some of the reasons why include:
- What exactly did the parties agree to? What quantity, what quality, what deliverables, timing, price?
- If one of the parties leaves the business or worse, dies, who besides the other party to the contract will know the terms?
- People forget the details as time passes
- Some contracts must be in writing to be enforceable, such as contracts for the sale of real estate and contracts that will take more than one year to complete
Written contracts define the “rules of the road” for the parties. While state case law may address many contract issues, the parties to a contract still have a great deal of flexibility to define their relationship and their respective obligations. For example, if goods or services do not meet the required quality specifications, a contract can define what remedies are available. Without a written agreement, the purchaser will have to rely on the remedies contained in state law (for example, the Uniform Commercial Code) which may be less favorable.
Parties to a written contract can specify how a dispute will be resolved: mediation, arbitration, or a lawsuit. Lawsuits are expensive, time-consuming, and unpredictable; in most cases no one really wins, and the business relationship is usually damaged beyond repair. Most business people want to avoid lawsuits, and (believe it or not!) so do their business attorneys. From my days as an in-house attorney, having to deal with lawsuits was a great distraction for our executives, who would rather have focused on growing the business than being deposed for a trial.
What kinds of written contracts should you have for your business?
- A shareholder agreement if your company has more than one shareholder, covering when and how shareholders may sell their shares or be bought out
- An operating agreement if you have a limited liability company (LLC)
- Assignments of intellectual property to your company from founders, to document that the company owns the patent, software, etc.
- Contracts with suppliers, customers/clients, independent contractors
- Software licenses, if you license software or other applications
- Property and equipment leases
- Website terms and conditions, privacy policy, and disclaimers
- Employment agreements for key employees
- Confidentiality, non-solicitation, and non-compete agreements
- Non-disclosure agreements (NDAs)
If you are starting a business, you want to put these agreements in place early on. If your business has been around for a while, it makes sense to review key agreements periodically, to make sure they are up-to-date with current law, reflect market trends, and are protective of your company’s current needs and interests, as your business has grown and developed over time.
For example, if you have been using the same independent contractor agreement for the past 5 years it is definitely time to review and revise it. The laws around who is and is not an independent contractor have changed, and if your agreement is not current, you may find that the IRS considers your independent contractors to be your employees, eligible for employee health coverage, overtime, and other costly benefits.
While as a business owner you can’t be expected to keep up with every change in laws that affect your business, a good business attorney can do that for you and ensure that your contracts and practices are in line with current law.