Why have a written contract?
August 30, 2009 10:15 PM Filed in: Contracts
Much of a company’s value is contained in its
contracts. Those contracts can be either oral or
written. Oral contracts involve less work at the
front end, but may end up costing a company more in
the long run. Written contracts, in contrast, involve
more work at the front end, but may end up costing a
company less in the long run.
Good written contracts can help protect a company’s value by reducing risk, such as litigation risk. It’s no secret that litigation is expensive, time-consuming, and slow. It’s therefore prudent to reduce litigation risk, to the extent reasonable.
One source of contract litigation is a dispute about an issue that the parties didn’t consider. Drafting a contract, even a relatively simple one, can help the parties think through basic issues such as term, termination, payment terms, confidentiality, ownership of work product, governing law, etc. The process of committing an agreement to paper can help parties identify and amicably resolve potential problem issues in advance.
Another source of contract litigation is an ambiguous contract term. Ambiguity means that there is more than one reasonable interpretation of a contract term. The odds of having an ambiguity are much greater when there’s nothing in writing, which, in turn, increases the chances that, at some point, the parties will have a dispute about the terms of the agreement. Such disputes can lead to litigation. Not having a written contract also complicates any litigation that arises out of the ambiguity. Proving the terms of an oral contract in litigation can be a complicated and unreliable exercise. That translates into greater expense and risk.
A well-drafted written contract, on the other hand, can serve as a hedge against litigation, by discouraging it in the first place. If litigation does occur, a good contract can, all things being equal, increase the chances of obtaining a favorable result, either at trial or at an earlier stage of litigation. A court would attempt to establish what the parties intended at the time they entered into the agreement, and a written contract is usually the best evidence of that intention.
Good written contracts can help protect a company’s value by reducing risk, such as litigation risk. It’s no secret that litigation is expensive, time-consuming, and slow. It’s therefore prudent to reduce litigation risk, to the extent reasonable.
One source of contract litigation is a dispute about an issue that the parties didn’t consider. Drafting a contract, even a relatively simple one, can help the parties think through basic issues such as term, termination, payment terms, confidentiality, ownership of work product, governing law, etc. The process of committing an agreement to paper can help parties identify and amicably resolve potential problem issues in advance.
Another source of contract litigation is an ambiguous contract term. Ambiguity means that there is more than one reasonable interpretation of a contract term. The odds of having an ambiguity are much greater when there’s nothing in writing, which, in turn, increases the chances that, at some point, the parties will have a dispute about the terms of the agreement. Such disputes can lead to litigation. Not having a written contract also complicates any litigation that arises out of the ambiguity. Proving the terms of an oral contract in litigation can be a complicated and unreliable exercise. That translates into greater expense and risk.
A well-drafted written contract, on the other hand, can serve as a hedge against litigation, by discouraging it in the first place. If litigation does occur, a good contract can, all things being equal, increase the chances of obtaining a favorable result, either at trial or at an earlier stage of litigation. A court would attempt to establish what the parties intended at the time they entered into the agreement, and a written contract is usually the best evidence of that intention.
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