As a general rule, oral contracts are not a good idea. They can lead to “he said, she said” battles when there’s a dispute about the parties’ obligations, and sometimes — even when the parties admit they had an agreement — oral contracts are not legally enforceable against a party who fails to perform.
The better approach is to have written contracts (that are signed by all parties) for all of your business dealings. There are a number of non-legal reasons this makes sense.
- The devil is in the details. At the outset of any proposed transaction, it is typical for the parties to focus on reaching a conceptual understanding on their most significant deal points. Sometimes that understanding is evidenced by a handshake or even a term sheet or letter of intent. Don’t rely on high-level discussions or documents that lack detail. Instead, take the next step and turn your attention to a discussion of the finer points of the transaction. It is almost inevitable that doing so will call out areas where you didn’t realize initially there would be disagreement.
- Getting to know the other party. The process of negotiating written contracts provides an opportunity to better understand how your prospective business partners might handle things in challenging situations. Observe their negotiating tactics and watch for red flags. Do they quickly sign the contract you put in front of them without reading it, suggesting they may not take the contract seriously? Do they object to reasonable terms? Do they say one thing, like “just trust me”, but insist the contract read differently? Understanding the business scruples of the people you might be doing business with is a must.
- Memories fade or differ. Don’t overestimate a memory’s strength or longevity or be unrealistically optimistic that you will remember things exactly the same way as the other party. Written documentation of the parties’ agreements and intentions is more reliable than anyone’s recollection of the commitments that were made to one other.
Written contracts that clearly reflect the details of your business transactions can help you establish relationships with strong foundations upon which to grow. They don’t need to be overly complicated and negotiating them doesn’t need to be unnecessarily burdensome, drawn out, or expensive. Whatever the cost or process is, though, the investment you make now will likely save you headaches in the future.