The importance of written agreements in business transactions

We’ve all been there – a deal comes up which is perfect, but we (or our counterparty) are just too busy, or otherwise disposed, and do not reduce the agreement struck into writing, or do not sign off on a draft agreement prepared by one of the parties to it.

Business transactions like this happen every day – an oral agreement is struck, without being recorded in writing. Whatever the contractual relationship – buyer and seller, service provider and customer, business partners, or joint venture parties, when the going gets tough, disputes as to deliverables, responsibilities, and what was agreed are all too common.

Written agreements are not just good practice—they are essential for protecting your interests and ensuring smooth operations when the going gets tough. This article explores why written agreements are crucial in business transactions and what should be considered when drafting them.

What is a written agreement?

A written agreement is any document in writing which outlines the terms and conditions of a contract between parties. If properly drafted, it will detail the rights, responsibilities, and expectations of the parties to it. Common written agreements which are the hallmarks of day-to-day commerce include:

• Sales contracts: agreements for the sale of goods or services.
• Partnership agreements: agreements containing the terms governing partnerships, including profit sharing, delegation of authority, and decision-making.
• Employment contracts: agreements that spell out employee and employer roles, responsibilities, and remuneration.
• Non-Disclosure Agreements (NDAs): agreements designed to remind a party receiving confidential information about their duty to protect the confidentiality of what is often sensitive information shared between parties.

Whilst oral agreements are common and can be enforced at law, they often lead to misunderstandings and disputes given differing recollection between counterparties as to what was said (or not said) and by whom, especially with the passage of time given the frailties of the human mind.

Why written agreements matter

The devil is in the detail

Well-drafted written agreements provide clarity to the parties governed by the well-documented agreement. A well-drafted agreement outlines each party’s roles, responsibilities, obligations, and expectations, leaving no ambiguity. This clarity helps prevent misunderstandings that can lead to costly disputes down the line, which can, and often do result in a third-party decision maker such as a judge being asked to try and deduce what was actually agreed, often many years before, based on the evidence of the parties.

The right protection exactly when you need it

Written agreements offer certainty. If a dispute arises, a written contract serves as evidence of what was discussed and agreed upon, making the burden of proof for enforcing the contract in court easier to discharge.

Without documentary evidence, proving the terms of a verbal contract can be challenging and often relies on the memory and credibility of the parties involved, which can lead to costly and time-consuming litigation, without certainty of who will be successful.

Managing and mitigating risk

Risk is an inherent feature of all commercial ventures. A written agreement helps manage these risks by outlining the consequences of non-compliance or breach of contract in plain, unambiguous language. By specifying the consequences of a breach of contract in writing, dispute resolution procedures, and how the contract can be terminated, many disputes can be avoided.

For example, if a partnership agreement specifies how profits and losses will be shared between partners, future fights over when and how much profit should be distributed can be avoided by the parties having already agreed on those decisions. By addressing potential issues upfront, businesses can greatly minimize their exposure to future legal disputes and the financial loss often associated with those disputes.

Facilitating better communication

A party circulating a written agreement to a counter party provides an opportunity for discussing proposed terms, clarifying expectations, and addressing any concerns before the contract is formed. Such a proactive approach can strengthen the relationship between parties and lay the foundation for successful collaboration.

Moreover, this process often identifies potential issues and risks early on, allowing for adjustments to be made before any commitments are finalised.

Key elements of a well-drafted written agreement

When drafting a written agreement, consider including the following elements to ensure its efficacy:

Parties – Identify all parties involved in the agreement, including their full legal names, business names, ACNs / ABNs (if applicable), addresses and contact details.

Purpose – Outline the purpose of the agreement in recitals or a background summary, including the specific transaction or relationship it is intended to govern, including the lifespan of the agreement.

Terms and conditions – Detail all necessary terms and conditions, including:

• payment terms;
• delivery timelines;
• default provisions;
• quality standards;
• how amendments can occur; and
• confidentiality obligations.

Dispute resolution – Contemplate how disputes will be resolved, including escalating the time and resources required to resolve disputes where informal and inexpensive methods are not effective, whether through mediation, arbitration, or litigation. This can save time and costs if disagreements arise.

Termination – Specify the conditions under which the agreement can be terminated, including notice periods and any obligations that survive termination.

Governing law – Indicate the governing law that will apply to the agreement, which is particularly important in dealing with interstate and overseas counterparties.

Common mistakes and traps to avoid

Relying on generic, DIY or online templates

Whilst templates and precedent contracts can be helpful, solely relying on generic agreements is unlikely to adequately address specific details and requirements of any given contractual relationship. Customising an agreement to reflect the unique aspects of a transaction is crucial to minimising the risk of future disputes and hurdles.

Not engaging a legal review

Before finalising any written agreement, it’s wise to have it reviewed by a legal professional to identify potential issues, both legal and practical based on their extensive experience.

Missing the molecular

Small details can have monumental implications. Ensure that all terms are clearly defined and avoid vague language capable of multiple interpretations leading to ambiguity.

Agreements past their used by date

As contractual relationships age and evolve, they may need to be updated to reflect changing circumstances. Regular review and amendment agreements is necessary to ensure your contracts remain relevant and commercially appropriate.

Protect your business with comprehensive agreements

In the complex world of business transactions, having a written agreement is not just a formality—it is best practice and should be a business fundamental across all you do.

By taking the time to draft comprehensive, clear agreements, you can protect your interests, minimise disputes, and foster successful business relationships. Remember, investing in a well-structured written agreement today will likely save you significant time, money, and stress in the future. Talk to us today for a review of your legal documentation and we can advise on any gaps that need filling, and any opportunities that need leveraging to ensure you’re in the best shape.