Contracts come in many different types. A contract can be a document to rival War and Peace in length and complexity, or it can be little more than a handshake. However, it’s a contract if it amounts to a provable agreement of how business is going to be conducted between two parties. So do you really need something formal, when an informal agreement serves the same purpose?
What Is a Contract
A contract is a legally binding agreement between two individuals or organisations, where both pledge to keep to the terms outlined. Most often, it’s a business agreement between the two sides, but it can be about anything. If you agree that your kids can have a treat if they clean their rooms, that’s a contract — in theory, at least.
The important things about a contract are that the terms are clear to each side, and that it can be proven to the satisfaction of a court if one side breaks the terms. The easiest way to prove both that the contract exists and that the terms are as you claim is to have a written document that’s signed by both sides. However, if you have reliable witnesses to a verbal agreement, or if you have an exchange of emails in which the agreement is clear, these may be enough to constitute a contract.
What Are the Advantages of a Formal Contract?
A formal contract is a document, either in physical or electronic form, that lists all the terms of the agreement and is signed by both parties. Since it’s a legal document, it’s vital that the meaning of each term should be absolutely clear. Ideally, there should also be an “entire agreement” clause, stating that there are no relevant terms listed elsewhere.
Although a formal contract isn’t essential to validate a business agreement, it has several advantages. For one thing, as long as it’s properly drawn up, it means that the terms of the agreement are unambiguous. If both parties have signed a document clearly stating a condition, neither can reasonably claim they thought it meant something different.
In the same way, a signature is clear legal proof that the party has agreed to the terms. Although an exchange of emails, for example, can prove this, as long as you’re careful to preserve the whole exchange, this would make it easier for the other party to deny it. Similarly, if your contract is a witnessed verbal agreement, the witness’s memory could be challenged.
What Could Happen if an Informal Contract Goes Wrong?
As I’ve said, an informal contract is often enough, especially if you’re doing business with a long-term partner you know and trust. However, if there’s any chance the other party might try to deny the agreement exists, or precisely what the terms are, it may be difficult to prove this in court. At the very least, it can make any case you bring longer and more expensive.
With a formal contract in place, on the other hand, the party may well recognise that they have no case and settle before it comes to court. In general, it’s usually best to take the safe option and ask for a formal contract, even if you don’t expect it to be necessary.
If you want to know more about making your contracts secure, or recovering money you’re owed under a contract, give me a ring.