Parties entering into commercial contracts, often seemingly mundane ones, can make serious mistakes which subsequently come back to haunt them.
Many people think there is no need to formalise a contract in writing, merely relying on an informal, verbal arrangement. Some agreements (particularly IP-related ones) must be in writing to take legal effect and, even if a verbal arrangement does give rise to a legally binding contract, there is ample scope for confusion if there is no written record of who is meant to do what and what will happen if anything goes wrong. If a dispute arises under the contract and the parties' obligations and remedies are not written down in black and white, the court will have to rely on verbal evidence and recollections, which may differ widely, making dispute resolution difficult.
Parties should seek legal advice in drafting and negotiating a contract, which will ensure wording is unambiguous and certain questions are answered: Have all the eventualities been covered? Can the company actually meet its contractual obligations? Does it have satisfactory remedies if the other side is in breach? Does the agreement comply with the relevant laws and regulations?
Without a solid contract, even if both sides are sure of what they want and have a good relationship, they may later fall out and end up in costly litigation. Defective or onerous contracts can also be a deterrent to potential investors and merger partners.