Why a written contract is important

Written contract

Why a written contract is important

700 466 Thomas Paoletti

If you lose a 2 million dollar project because you forgot to finalize a contract, what can you do?

Nothing, I’m afraid.

If something like this happens, you can’t react afterwards and hope to fix it.

That contract is lost forever.

I’m not speaking about a hypothetical case, but of a real occurrence. Here in Dubai, a big Italian company participated in a request for tenders, having all the qualifications to win it. Instead, at the last moment, it was awarded to another company for lack of a signed contract.

How does something like that happen?

It happens because the drafting of correct and accurate contracts instrumental to company regulation is a largely disregarded practice. 

I’ve noticed that this is common both in Italy and also here in the Emirates.

In national and international contexts, the approach is to act only when a problem comes up. 

Only then is the entrepreneur racked with the thought: “I should have known better”.

Up to that time the approach has most probably been:

  • using a contract circulating within the company for ages and which has always seemed to work;
  • combining clauses taken from different contracts;
  • downloading from the web a sample contract without even worrying about revising it

In the worst-case scenario, the contract doesn’t exist at all.

And when a client comes to me because he/she did one of these three (or four) things, he/she is generally in real trouble, as the problems have compromised business functioning and efficiency, with obvious negative consequences on profits and competitiveness.

For example, if I don’t regulate the relationship with a vendor to whom I have outsourced the production of a good or the execution of a service, in case of delays, interruptions, inefficiencies or failure to deliver the good or service, I will have to incur extraordinary costs, such as:

  • costs related to the investment of corporate time and resources in order to solve the problem amicably — phone calls, emails, meetings with the counterparty;
  • costs of the external advisors to solve the problem technically — lawyers, accountants, etc.;
  • “personal costs”, related to the family environment which suffers from the concerns the entrepreneur inevitably takes home.

Given that a company produces dozens, hundreds or thousands of commercial relationships, if the entrepreneur doesn’t bother to regulate all of them through ad hoc contracts drafted by a qualified professional, problems and unexpected circumstances can arise quickly and the entrepreneur can end up lost in a maze of conflicts.

I’m referring to everything related to business: from tenancy contracts, to leasing agreements, to contracts with suppliers, with clients, to contractor and subcontractor.

A qualified professional is capable of drafting a tailor made contract, solid in its essential parts, such as:

  • the contracting parties: it’s not about filling in the blanks of a preprinted form by typing the corporate name, the address and the VAT number, but about correctly identifying the entity representing the party and verifying the power of the legal representative;
  • the object of the contract: on this point it is necessary to make a distinction between two different legal systems, common law and civil law. In the first case, the two parties negotiate by means of an independent and self-contained contract, meaning that its provisions are not subject to supplements from codes of law. On the other hand, in civil law countries, like Italy, the contract I draw up is automatically supplemented by civil law rules, which can be suspendable or not. If I put in the contract a mandatory clause, that is against the law, it will be declared void and replaced by rule of law. One of the most crucial things is to determine the object of the contract correctly, since it determines itself the applicable legislative provisions;
  • the obligations of the parties: in this case it is fundamental to make clear and regulate not only the primary provision but also the ancillary ones, by determining their economic value and if they are or aren’t covered in the general compensation of the contract.

These are just some of the points that are extremely important to regulate in a contract.

Many other elements – of differing nature and complexity – need to be taken into consideration and tackled on-a-case-by-case basis with a view to finalizing a tailored contract with appropriate measures avoiding conflicts between the parties as much as possible. 

Does the contract have an economic value? 

It certainly does, but unfortunately its perception in a business setting is weak and, alas, the lawyer is often seen only as an extra cost.

People prefer to invest in the resolution of commercial problems, rather than in their prevention.

And yet, we only need to apply a simple saying, which, if it’s true for everyday life, is even more so in business: “prevention is better than cure”.

If you want a more detailed explanation of the subject, go read the next post.

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