September 28, 2018

The Importance of Written Contracts

Why is a written contract essential when conducting business?

Businesses conduct numerous transactions daily, each ranging from having simple to complex terms. Many small businesses and nonprofits prefer doing business informally with other parties, e.g. handshake, oral contract, or promises. This is especially true in situations where people know each other, are trying to save money, where one party is in a lesser position to demand a contract, or an organization is used to doing things informally. A lease, a purchase agreement, or a loan document intended to be legally binding between parties are all examples of a contract. Unless it cannot be avoided, an organization conducting a transaction should not forego a written contract. There are several reasons why having a contract in writing is crucial. 

First, a well-drafted contract will define and memorialize the terms binding to all parties. This will eliminate many uncertainties regarding the role and obligations of each party. It will also prevent one from inserting additional terms in a contract. Because of contract law, evidence of additional terms contradicting the final contract is usually not admitted. Furthermore, a written contract will make it difficult for a party to claim ambiguity or to challenge the existence of a contract. Finally, by having a written contract, an organization is protecting its interest by reducing the chance of a court interpreting the contract in ways that may negatively affect the organization. Remember, the court has the power to “fill in” the missing terms and interpret an ambiguous contract. 

Second, state laws, including those of West Virginia, usually require that a contract is in writing in some circumstances. This requirement is generally known as Statute of Frauds. West Virginia requires a written contract when:
a)      An agreement cannot be performed within a year,
b)      A promise is to pay another person’s debt, 
c)      A contract for sales of good where the price is $500 or more, and
d)      A contract for sale or lease of real estate has a duration of more than one year.

Note: there are many other instances where a written contract is required. Although state laws will vary, many will have similar provisions as listed above. 

Finally, the process of creating a written contract is good business practice. By writing a contract, it actually forces the organization into thinking about all the essential terms during the drafting and negotiation phase. The contract will also establish a clear relationship between the parties from the beginning. An organization should not expect a relationship to last forever. Partnerships and business deals ending on less than desirable terms are not uncommon. It is difficult to go back and amend a contract or put one in writing in the future. 

A written contract is a must-have for any organization when conducting business. However, having a written agreement is not enough. A written agreement must also be well-drafted for it to be enforceable and effectuate the intention of the parties. If you need assistance in reviewing or drafting such documents, Legal Aid and its Community Economic Development program can help. Keep in mind that the information contained in this post is for educational purposes only and provides only general information and a general understanding of the law. You should contact Legal Aid or another attorney to obtain advice on your specific situation.