Why Contracts Aren’t All That Important Until They Are

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As a small business owner or entrepreneur, you may not believe in long, detailed contracts. You may figure that since you are honest and have great relationships with your stakeholders you don’t need to memorialize every detail of the agreements you make. But this is not the case.

Creating a contract seems like it should be pretty easy: Fred Smith will create the phone application for Sally Jones, Sally Jones agrees to pay Fred Smith $xxx; John Willis will drop off the widgets, Sally Williams will pay John Willis $xxx. This seems to cover all the relevant information and is sufficient as long as nothing goes awry. However, think of a big merger taking place on just a handshake and with no lawyers. You may not be quite as big, but all the same issues are still relevant.

The reason why contracts are so long, even for relatively simple sets of circumstances, is because they cover a significant number of issues that have proven to arise from contractual relationships in the past.

For example, a motivational speaker based in San Diego was hired by a company in New York to give a speech to their consulting department, and at the last minute the motivational speaker received the opportunity to speak at a Fortune 500 company for more money in Silicon Valley the same day. The speaker decided to take the new opportunity and was not able to make the original booking.

The original organization would likely want to sue the motivational speaker, and if no contract was in place, would be able to do so in New York. However, if there was language in the contract stating all legal actions had to be brought in San Diego, the speaker would be able to avoid the cost of having to fight the case in New York. She would save the time and expense of having to find lodging and an attorney in New York. She would also likely be able to continue to run her business during the trial since she is still in San Diego and even use an attorney she already has a relationship with.

As a second example: you own a small pizza restaurant and you agreed to sell pizza at a traveling fair that is coming to town. The day before the opening day of the fair there is an earthquake. None of the fair’s equipment is damaged because nothing had been set up yet, but your store is demolished. The fair plans to go ahead as scheduled and still wants you to serve pizza. However, you are unable to do so due to the state of your shop.

If no contract is in place, and the fair tries to sue you, they would likely win because you did break your promise to serve pizzas. However, if part of the agreement includes language stating that if an earthquake strikes, a fire breaks out, or terrorists attack, etc. causing you to be unable to perform, you are not breaking your promise and you will be able to successfully defend against the fair’s lawsuit.

It is important to include these types of clauses (and many others) within your agreements. There are a number of different sections that can be included, sometimes specific to your set of circumstances and some more general. These types of disputes do have a real possibility of arising, and when they do you will have wished you had a detailed and specific contract.


William Mond

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Throughout my career, I have worked towards making affordable legal services accessible to small businesses with all levels of capitol. This path has allowed me to start my own law firm, which specializes in small business counseling.

I hold a B.S. in Business Management from Humboldt State University, in Arcata California, as well as a J.D. from the Thomas Jefferson School of Law, in San Diego, California.