A commercial manager in Aberdeen once said to me, “A lawyer sees the risk of everything and the value of nothing“. I wonder what Oscar Wilde would have thought about this twist on his original quote about a cynic from Lady Windemere’s Fan.
A great advantage of a small to medium-sized business is its ability to be nimble and flexible in its approach to conducting trade. Sometimes those are the very abilities that are the difference between the success and failure of that business. The process of having contracts agreed in writing can be viewed as nothing more than an opportunity to introduce cost, delay and complexity, which are not exactly within the business model. Trying to persuade such a business of the need to have its contracts agreed in writing is thus not always an easy task. After all, the majority of contracts are made verbally, and yet the world keeps on turning, and the law only requires contracts to be in writing in very specific circumstances (see Requirements of Writing (Scotland) Act 1995). What justifications can there be for spending time and resources on drafting and negotiating a contract when a business has survived just fine so far?
The Benefits of Written Contracts
At the outset, it must be acknowledged that the need to enter into a written contract will always be a matter of fact and circumstance. Each business will have to weigh the complexity, cost, risks and urgency of performance of the contract, against the risks associated with proceeding by verbal consensus. A good lawyer appreciates the fact that a business may be right to proceed without a written contract in many circumstances. However, there will be instances in which by far the best course of action would be to agree upon a fully termed written contract before any work begins, where the commercial risks associated with not having a written agreement can far outweigh any short-term gains.
There are a number of ways in which a written contract can serve to mitigate risk to your business. These include:
It provides clarity as to what terms apply and mitigates the risk of parties forgetting what they agreed. Some transactions are complex. In those instances, there is no substitute for entering into fully termed written agreements;
- Bad Faith
It mitigates risk of parties acting in bad faith. If a long period of time has passed between agreement and performance, what was once a good deal may have become a bad one for your counterparty, and they might try to extricate themselves from it. A clearly written contract is an external source of evidence as to what was agreed that does not rely on the good faith word of your counterparty;
- Institutional Knowledge
It avoids reliance on the knowledge of key individuals within an organisation that can be lost between agreement and performance;
- Position at Law
It avoids reliance on the common or statutory law, which may be unclear and subject to change;
- Reduces costs over long term
The costs of negotiating a written contract can be far less than the costs associated with trying to enforce verbal agreements;
- Highlights Misalignment
The process of writing it all down in greater detail is a means of discovering whether parties are quite as aligned as they first thought they were, acting as a check and balance before decision on whether to enter into a contract is made; and
- Value of Comparison
There is value in comparing one contract against another in that doing so can serve to highlight where the gaps in agreements are. You may not appreciate how complex a transaction is until you have reviewed contracts on similar matters.
Overall the matter will forever boil down to balancing risk vs reward. What we encourage businesses to do is to take the time to fully assess the level of risk their business is agreeing to take on for them to make a valued judgement as to whether the reward merits taking on such risk.