Bizstartup.ie - NewsWhy do you need a written contract?

The use of a written contract is good business practice, assists legal certainty and allows businesses to manage their risk and avoid nasty surprises. Here are the reasons why it is important to have one.

Risk management 

A written contract gives certainty to any business transaction.  It is possible to have oral contracts but the terms of an oral contract, by its very nature, can be difficult to ascertain.  This increases the possibility of disputes arising. In contrast a well-drafted written contract will clearly set out the rights and responsibilities of the parties.  Thus a written contract operates as a risk management tool.

Dispute resolution

 Due to the fact that in a written contract the parties’ responsibilities are clearly set out, the risk of disputes is reduced as each party’s obligations are clearly defined.  Where there is no written contract and a dispute arises then the parties risk not having their rights upheld and face the prospect of potentially expensive litigation to try to enforce their rights.

Limiting liability  

Another advantage of written contracts is that it is possible to limit your liability to a specific amount.  Thus risk can be managed by specifying a monetary amount as the cap on their liability.  It is also possible to exclude certain terms which are implied by law.  One such implied term in contracts for the sale of goods is that goods sold are fit for purpose. However, it is possible to exclude this term in business-to-business contracts, provided that the exclusion is fair and reasonable.

Default rules 

Certain default rules are implied into contracts by law. However these can normally be varied by agreement between the parties. This is important as the default rules may not be the terms upon which the parties want to do business. 

For example, section 31 of the Sale of Goods Act 1893 provides that unless otherwise agreed a buyer of goods is under no obligation to accept delivery of goods by instalments.  Thus, a seller who wants to provide goods in instalments needs to specify this in his contract.