12 PRACTICAL REASONS

WHY ONE SHOULD USE WRITTEN CONTRACTS

WITH

SUPPLIERS AND SERVICE PROVIDERS

 

 

 

BY JOHN (“JOHNNY”) E. MILLER

 

About the Author

 

Benjamin Franklin said "an ounce of prevention is worth a pound of cure." [1]  This is really correct in dealing with suppliers and service providers. Just one dispute with a supplier or service provider can create huge problems. Clearly, in this area, written contracts are the “ounce of prevention” that can certainly help reduce future problems.

 

In my thirty year contracts career I have discovered the amazing fact that many large and small companies are still routinely entering into oral agreements with some of their suppliers and service providers.  It seems convenient and fast.  However, it can result in real problems down the road.  As a result, I have developed the following simple list of twelve practical reasons why such a practice is unwise.  By providing this list to those individuals in a business who continue to enter into such oral agreements, its helps them to more fully understand why it is wise to use a written agreement:

 

1. It may sound a lot like a fairy-tale that some folks  have grown up in homes where one never locked the doors, where one settled a deal with a simple handshake,  and where one received what was originally promised.  Unfortunately, the world has changed and it’s just not the way anymore.

 

1. A buyer could try to convince a court or jury that the buyer’s version of the oral contract is correct, but without a written contract, it will be the buyer’s word against the supplier’s word, and there’s no telling whom a judge or jury will believe.

 

1. A written contract has the beneficial effect of forcing the buyer and supplier to really think through the deal somewhat longer than it takes to say … “It’s a deal”.  A well thought-through writing drives the completion of a much better understanding among the buyer and seller.  The buyer and seller individually may interpret the deal quite differently if it is just an oral agreement.

 

1. A carefully drafted written contract definitizes the entire deal with one’s suppliers. This helps to prevent suppliers from unilaterally changing the arrangement at a later date and at the buyer’s expense.

 

1. A written contract serves several practical purposes.  Some of those purposes are obvious and some are not so obvious.  A written contract impresses upon the parties the importance of the event. It requires the parties to seriously consider the effects of performance and nonperformance. Signing the written contract is the useful activity that convinces the parties of the importance of their commitments.

 

1. Nowadays, savvy buyers want explicitly stated guarantees (express warranties) for the products and services being acquired so that those products and services meet certain desired requirements. If one wants express warranties, one’s written contract can clearly describe those warranties.

 

1. If one’s supplier is breaching the arrangement, the process of proving whether and how much the supplier should pay can be quite expensive and very time-consuming.  One’s contract with a supplier should thus state the buyer’s remedies in the even of a supplier’s breach.

 

1.  If one wants to charge a supplier for the buyer’s attorney's fees and court costs incurred to resolve a supplier’s deficient performance, one’s contract must state that the buyer intends to do that.  Otherwise, one probably will not be able to recover applicable attorney's fees and court costs.  Often, the inclusion of such an attorney fees/court costs clause in a written agreement may be the only way it is economically feasible for the buyer to litigate.

 

1. The laws governing business dealings can differ greatly from jurisdiction to jurisdiction.  If one has a supplier located in another jurisdiction, the question of whether to apply the laws of which jurisdiction will invariably arise in a business dispute. The question of where the lawsuit should take place may also arise. A written agreement can settle these two issues.

 

10.  There's more to a written contract than simply what appears to be the broiler-plate legalese.  It is also a fixed reference point.  During the on-going course of the relationship, should there be a misunderstanding about results, period of performance or other issues, one can easily refer back to the written document and quickly resolve the issue.

 

11.  A written agreement can be an important method for establishing that one’s supplier is operating as an independent contractor. This could really be useful in the event one needs to prove to the IRS (or other tax authorities) that the supplier is an independent contractor and not an employee.

 

1. A signed writing is absolutely legal necessary for some specific types of deals in most states in the US.  The requirement of a signed written agreement is defined in the applicable Statute of Frauds provisions and the Uniform Commercial Code provisions in most states in the US.  Other countries have requirements for certain specific types of contracts to be in writing too.  Typically, in the US, (1) contracts for the sale of good over $500, (2) agreements transferring real estate, (3) contracts, by their terms, that cannot be completed in one year, and (4)  many specific types of contracts are required to be in writing.  To play it safe and put it in writing.

 

Use this list of 12 practical reasons as one of your resources the next time you need to convince someone to use a  written agreement.  You will find that it will cause many issues to be surfaced and identified for consideration regarding the merits of written agreements. 

 

Perhaps Samuel Goldwyn, in one of his Goldwynisms, said it best when he stated … “A verbal contract isn’t worth the paper it’s written on.” [2]