Handshake Dilemma

The plain and simple truth: Written contracts help you avoid business trouble without going to court.

By Ed Alexander
Entrepreneurship Law Firm, PL, Orlando

 

"Why bother with a written contract? They're not worth the paper they're written on. I do business the old-fashioned way, by handshake."

Often, business owners tell me they don't use written contracts because they'd never sue. They'll say the only people who benefit from lawsuits are lawyers.

While I'd agree that, in most cases, a lawsuit isn't a good response to a contract dispute, detailed, well-written agreements still provide important benefits for your business.

Having seen disasters resulting from poorly written and “handshake” agreements, I know firsthand that good written contracts save money and strengthen business relationships.

First, a written contract helps you recognize a situation where you don't really have a deal. Businesspeople want to make things happen. So, they'll hammer out an arrangement on a couple of big issues and think they've put a deal together.

But the devil is in the details. Its only when businesspeople have to address all elements of the proposed arrangement that they find areas of disagreement.

Recently, I prepared a contract for a client who said the other party would pay within 30 days. So, I added wording requiring interest 30 days after the invoice. The other party's attorney told me his client didn't pay interest. I said, “Fine, your client just has to pay within 30 days.” He didn't find that funny. He said it wouldn't work. So, I suggested 45 days. Again, no. Then 60. No.

Because the interest issue was addressed in the written contract, my client discovered there was no understanding on payment. The other party would pay when it felt like paying — important information to know before you do the deal!

When preparing a detailed contract, things such as payment terms, warranties, delivery of products, scope of services, dispute resolution (i.e., avoiding court) and other less glamorous, but nonetheless important issues come up. The parties have to discuss these up front and work out the details amicably or walk away without harm.

Second, contracts help you identify people who won't live up to their word. While contracts aren't crystal balls, observing the way the other party deals with a contract is enlightening. Red flags should fly when the other party signs the agreement without reading a word or objects to reasonable terms.

I once negotiated with a business owner who wanted his obligations painted with a broad brush. He continually refused any particulars, preferring general statements like "help to market the product" and "pay a reasonable fee." Every time we tried to nail him down, he'd refuse the specific language. Needless to say, my client questioned whether there was much behind the flowery language.

Third, people can have legitimate disagreements about their obligations. When things are going smoothly, a written contract is tucked away in the filing cabinet. But when a problem arises, the parties can look to it for history and expectations. This helps deal with the problem and can save a valuable business relationship.

Finally, although you might never sue on a contract, someone could sue you. A written agreement can be your best defense.

If you have a poorly written agreement, you might find that Florida law gives the other party the upper hand. You might have failed to limit warranties or other rights given the other party by law.

The benefits of a complete, detailed, clear and well-written agreement apply to all business relationships, including those with customers, vendors and employees as well as between partners. Well-drafted, detailed written contracts will reduce business problems, strengthen business relationships and protect your business from claims and lawsuits, even if you never intend to use them in court.

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Alexander is founder of the Entrepreneurship Law Firm in Orlando and author of the book “10 Common and Costly Business Killing Legal Mistakes and How to Avoid Them.” He works regularly with the University of Central Florida's Business Incubation Program, among other local business clients.

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