Why Don’t People Make Contracts?
I am often called upon to facilitate the resolution of business disputes. This is work I am good at and can generally reach some sort of agreement between parties. The parties in dispute are seldom happy about the outcome and that is a measure of my skill. I tell people that if you’re both unhappy, the resolution is fair. People usually don’t want fair; they want victory, revenge, and spoils. Too bad. If you want the best possible outcome to a dispute, don’t enter big business deals without a contract! In other words, avoid the dispute.
Consider being called into the middle of a dispute over something like the allocation of revenue between two businesses in a sales dispute. Two business owners get together and identify some great synergy. Hey! You’re great at marketing and I have million dollar product ideas! How about you make and sell my product and we split the money? I supply the ideas, you make and market the goods. We can’t lose!
Oh yes you can. 2 or 3 years later, when the whole thing fizzles, both parties want millions of dollars. A dispute is born.
As you read this, you’re probably thinking that I am making a very over-simplified example. Here’s the punchline. I’m not. People enter agreements like this all the time without anything to govern the deal. No contracts. I know, I can’t believe that intelligent people would do that but they do.
A simple contract is pretty easy to draft. ANYTHING is better than nothing. Even if the parties lack the skill and knowledge to draft a formal contract and even if both parties want to avoid the expense of having an attorney draft the contract, a simple ‘in your own words’ agreement is still a lot better than nothing. Why? First, there is a limit to the amount that can be claimed in a verbal contract. Second, most states impose life spans on verbal contracts. In most states, a verbal contract cannot extend beyond a year’s time. (Get legal advice)
A simple contract states who the parties to the agreement are and what this deal is all about. Terms are defined (what does splitting the money mean?) and any restrictions of the parties are defined (you can only sell in the state you are based?). A duration is generally applied. You might make the contract renewable by agreement each year. The point here is not to list all the details you need, the point is to make the bloody contract. As you go through that exercise, you might see the need to have an attorney review what you are doing. As you think of “what ifs”, you’ll see the need for the contract. The exercise alone will benefit you.
When the dispute breaks out, and it will because every relationship eventually hits a rough patch, you will have something to govern the resolution. Even a poorly drafted contract gives a starting point for discussion of resolution. No contract always means a free-for-all. And those always start by people making insanely high and irrational demands. Always. When that happens, there is often slander and libel. That’s dangerous territory because a court CAN award damages if someone spreads damaging untruths about a business. Courts won’t award (usually) damages in a business dispute with no contract. That means cutting the baby in half. The courts won’t arbitrate stupidity. The objective is separation, not jackpot.
Please, if you decide to contract with your best friend, bring in a new partner, establish some ‘money’ split on a project, or share office space with someone, MAKE A CONTRACT.
Chris Reich, TeachU