“Get it in writing!”
You hear that phase all the time, and it’s good advice. When conducting any business dealing, it’s wise to put everything down on paper so there are no misunderstandings in the future. With that in mind, let’s look at some key reasons why you need written contracts:
Clarity of Intentions. The primary reason a lot of verbal contracts fail is because the parties change, memories of what was originally said become cloudy, and one individual’s version of events can frequently be different than another’s. In addition, discussions about topics like business plans, founder responsibilities, and financial management can’t be considered closed if they’re not in writing. A written agreement allows all concerned to examine what’s agreed to. If there a question about a term in a written agreement, the parties can discuss it prior to committing to the business.
Proof of Details. A written contract serves as proof of the details of the agreement between the parties. It’s the documented understanding of what the parties intended. As such, the rights and duties of each party should be clearly defined. This includes terms such as the time for performance, payment terms and conditions, what happens if no payment is made, what state’s law applies, termination rights, the rights in the event a party doesn’t perform, and how disputes will be resolved.
Enforceability. As discussed below, some types of contracts have to be in writing to be enforceable, such as, among other things, contracts for the sale of real property, real estate leases for more than a year, and agreements to pay someone else’s debts. In New York State, employment of 1099 contractors must be in writing if they will earn over a threshold amount per year.
Protection. If a business partner makes a significant investment of his or her own funds, intellectual property, or labor into an organization, a written agreement is key. Without stating how they will be repaid, or how capital was contributed, they’ll be unprotected in the event the partnership dissolves.
Easier to Resolve Disputes. When a business disputes happens, partners have to work together to resolve the issue quickly. But if there’s a logjam, a third-party mediator may be called in—or, in some instances, the partners may feel the need to dissolve the business. When this happens, it’s easier to settle if there’s a written agreement. For example, a mediator can consult the agreement when determining how to proceed. A written agreement can help resolve the dispute and get the business back on track. We find that it’s easier to prepare for disputes when there isn’t one, than try to negotiate those terms when there is already conflict.
Confidentiality. A major benefits of written contracts in business transactions is the chance to agree to confidentiality and non-disclosure terms that will protect classified information. With a written agreement, the parties are legally bound to keep secret the transactions involved and the information shared among them. Anyone who violates this confidentiality agreement can then be held liable under the agreement.
When Must an Agreement Be in Writing?
New York General Obligations Law § 5-701, which is known as the Statute of Frauds, requires certain agreements to be in writing. This includes the following situations:
- There’s no possibility of full performance of its terms within a year (meaning you have to be able to complete the contract in a year);
- The contract concerns real property;
- One party assumes responsibility for the financial obligations of someone else;
- It’s made in consideration of marriage, except mutual promises to marry (i.e., a pre-nuptial agreement);
- The contract involves a promise to make a testamentary disposition;
- The contract involves the sale of goods of $500 or more; or
- The contract involves a promise to pay a debt discharged in bankruptcy.
Business owners should be aware that a claim to enforce a verbal agreement may be immediately dismissed in court if it violates the Statute of Frauds.
Contact Us
Drafting and reviewing business contracts is one of our key areas of focus. We love the clarity that a written contract can bring to a deal, and getting the details right is paramount.
Reach out to us with your legal needs, and we’ll let you know the value we bring, and the cost we charge. You’ll find that we stand by our motto: “Build. Not Billed.”® Because LOVE LAW FIRM is here to help you build your business—not just bill you for it.
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Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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