It is common for people working through the legal issues of their business and personal transactions to feel overwhelmed by the sheer amount of paperwork their lawyers thrust in front of them. Many business clients that I have worked with, especially old-timers, have looked at a stack of papers tabbed with yellow “sign here” stickers, shook their heads and, with a sigh, asked “why couldn’t they just do a handshake deal?”
This sentiment is not without merit. It is true, we live in a litigious society, where people are often too quick to bring their matters before the law than resolve them amicably. Modern business interactions involve parties (such as insurers, creditors, and state agencies) beyond our immediate circle of neighbors and friends, making it difficult to develop a good rapport, and making social capital a less valuable currency. In this environment, the “gentlemen’s agreement” of lore is a fossil supplanted by sleek bland boilerplate contracts as inscrutable as they are thick.
That being said, folks who still prefer to conduct their affairs the way mom and dad did should take note: there are advantages to using written contracts that go beyond anticipating (and avoiding) future litigation.
Having the terms on paper helps clear up ambiguous assumptions.
Even parties who approach a mutually beneficial deal with absolute good intentions can have different ideas about the particular details. Consider a farmer who wants to lease some barn storage space to a neighbor. They have agreed that the renter will pay $500 per month and in return, will get to use the entire floor space of the lessor’s barn. That sounds simple enough. But what day of the month should payment take place? Will there be a grace period if renter misses a payment (and what happens if payment is never made)? Will the renter have to furnish his own insurance? Can he do repairs on his equipment in the barn? The parties may discuss these items, but memories fail. Writing down the terms will clear up most doubt about what was agreed to.
Often I have been asked by contracting parties to offer an opinion on a specific term of an agreement. If the issue was fully addressed by a clause in the contract, it is a simple process for me to point to it and their signatures and say, “this is what was agreed to.” In most situations, this will satisfy the question and the parties can remain on good terms.
The mental exercise of writing things down helps people think through potential problems.
Any teacher or professor will attest to the value of this as a study technique: writing things down helps not only with retention but comprehension of the subject material. This theory applies similarly to business transactions. When parties enter a business contract, it is a useful exercise to articulate and write down the particular terms of the agreement, as it gives the drafters opportunity to consider other issues that should be addressed. There is no magic to contract law. Most people entering a contract have a good sense of what it is exactly that they expect to get out of a deal, and where they want protection. Writing the ideas down helps develop these thoughts. A lawyer can translate the raw ideas into legal terminology for the final document.
Some claims are unenforceable without a written and signed contract.
On the more substantive side, some contractual transactions must be written down and signed to be legally enforceable. New York’s Statute of Frauds requires that certain types of contracts be in writing to be enforceable, including contracts for the sale of real property interests, contracts for the sale of goods in excess of $500, and contracts which by their terms cannot be fulfilled in less than one year. This rule, as one law professor told me, is designed as a shield, not a sword. It is principally about protecting people from frivolous claims for large sums of money by requiring the plaintiff produce evidence of a clear intent to contract before they can get their foot in the courtroom door. Where performance has occurred and some form of acknowledgement of the agreement can be demonstrated by the conduct of the parties, a court may consider exceptions to the Statute of Frauds. However, it is best to avoid the issue in the first place.
As a final note, a partner in our firm has often reminded me that a contract is only as good as the man or woman behind it. In any situation, do your homework and know who it is you are contracting with and what they are trying to get out of you. Remember that “a flattering mouth works ruin.” If a deal does not feel right or seems too good to be true, trust your instincts and take your business someplace else.