Because clarity today prevents conflict tomorrow
In the fast-paced world of business, handshakes and verbal agreements feel efficient. They’re not. Regardless of your enterprise’s size, every aspect of management and ownership demands written documentation.
From shareholder agreements and partnership structures to employment contracts and supply chains, no business undertaking should proceed without a written agreement governing the relationship with the relevant parties.
More Than Just A Record
The obvious rationale for a written contract is that it constitutes a record of the agreement. This record keeps your stakeholders—lenders, insurers, senior management—happy and it’s what judges or arbitrators will rely on if disputes end up in court.
“[A contract] is a roadmap for execution of your business projects.”
The value of a contract extends far beyond liability—it’s a roadmap for executing your business projects. Take construction contracts, for example. These contracts are often negotiated by senior management, but the work is performed by project managers, accountants and field staff. These teams need to be “on the same page.” A well-drafted contract provides the operational details they need, payment provisions, change mechanisms and specific procedures for giving notice. Without this roadmap, your team is working in the dark.
Dispute Avoidance & Resolution
Taking the time to negotiate a contract prevents disputes before they start. It forces parties to ask, “What if?” when nothing is binding yet and relationships are still good. Wrong assumptions can be corrected, misunderstandings cleared up—all before anyone’s locked into a commitment.
When disputes do arise, contracts let you control how they’re resolved. The default mechanism for resolving disputes is court litigation, which is often slow and expensive. A written contract allows parties to agree on private mediation or arbitration at the inception of the relationship. Trying to agree on mediation after a fight has started, when passions are running high, is rarely successful.
“Without a contract, you expose your business to signifi cant risks.”
The Cost of Operating “Naked”
Without a contract, you expose your business to signifi cant risks. Consider these scenarios:
- Scope Creep: You enter into an agreement for construction services to your business premises. You agree on a price but then the contractor alleges that extra work was required and therefore the price has now increased. There is no way to determine what the original scope was and how the increase in price has been determined.
- Shareholder Disputes: Two friends start a business expecting that both will actively work in it. Aft er a disagreement, one stops working but returns a year later demanding dividend payment. Without a shareholders’ agreement making continued employment a condition for receiving dividends, the corporation may still be required to pay dividends to the shareholder who stopped participating.
- Employment Disputes: Your business has certain policies which you want to be considered as part of the employee’s obligation to comply. The employee doesn’t follow any of those policies. You may not be able to enforce those policies as they were never written down or included as conditions of employment.
The Danger of DIY & AI
To save money, many business owners turn to internet templates or AI tools to draft their agreements. While convenient, this is a dangerous practice. Generic templates oft en fail to account for laws in your specifi c province or country (for example, using American legal terminology for a Canadian transaction). AI, while powerful, lacks the judgment to understand the nuance of your specifi c industry or the strategic intent behind a deal. AI draft s are based on the prompts that it receives. You may not know if certain matters are relevant to your situation and leave them out in your prompts. As a result, the AI draft may not include provisions which are critical to the business relationship with the other party. Using a template without a lawyer’s review is like building a house using a blueprint found on Google Images; it might look like a house, but it may collapse under the fi rst sign of stress.
A contract is your business’s primary defense against chaos and clarity is how it protects you. Make sure yours gets it right.
Imtiaz is a Lawyer at OP Lawyers.
