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Common Contract Myths

There comes a time where every professional thinks about contracts. Perhaps a client requests that the business sign a nondisclosure agreement. Or, the business is just starting out and its business owner knows many of its clients will expect a contract. Still, many businesses and professionals do not embrace the contract. Why? Contract Myths.

Contract Myths, Myth 1:

“If It’s Not In Writing, It Doesn’t Count”

A contract is, in simple terms, a promise for a promise. Example: a promise that Business X will do something in exchange for Business Y’s promise to pay. Two parties can enter into a valid verbal contract with no written terms whatsoever. Truthfully, there are some contracts that do have to be in writing in order to be enforceable. Many states have what is called a Statute of Frauds. The Statute of Frauds spells out certain contracts that must be in writing in order to be enforceable. Contracts for the sale of real estate, or prenuptial agreements, for example, are often included in that list.  So the myth that leaving a verbal agreement as-is, without reducing it to writing, means that the agreement “doesn’t count”? Consider this myth busted. Verbal agreements can certainly be valid.

Contract Myths, Myth 2:

“A Dispute Will Be Easier To Resolve If There’s No Written Contract”

Oh, buddy. This myth could not be further from the truth. No written contract = combing through emails, text messages, and conversations in order to determine who made what promise and who agreed to what terms. (This is usually done by an attorney in the litigation or pre-litigation stage). Lack of a written contract often comes up in the partnership context, for example. A written contract is not required in order to form a partnership, so, issues arise if there is no written agreement. For example, the question of what constitutes partnership property, or what the division of profits and losses should be. If it’s not in writing, and there’s a dispute, it’s not surprising when folks on each side of the dispute disagree on these issues. Of course, all this might have been avoided if the partners reduced their agreement to writing.

Contract Myths, Myth 3:

“If I Pay For Something, I Own It (No Contract Needed)”

Wrong. Particularly in the context of copyright, paying for something doesn’t necessarily mean that you own it. A copyright transfer is not valid unless it is reduced to writing. Furthermore, payment could mean a lot of things. It could mean permission to use something forever, permission to use something for just one specific purpose, etc. Payment does not necessarily result in ownership. One fairly easy way to make clear that the payor expects to own the material at issue is simply by reducing that understanding to writing.

Contract Myths, Myth 4:

“Contracts Make Clients Nervous”

There are still those that think that if they present a client with a contract, the client might think that the service provider is trying to “trap” the client. Though contracts can certainly be used for unscrupulous purposes, the devil is in the details. (Specifically, the details stated in the contract.) The purpose of a contract, plain and simple, is to clearly state the terms of the deal, business relationship, or other transaction. Is the client upset that you did not perform a specific task? A solid, written contract might clearly lay out each expectation and deliverable. And referring back to the contract could quickly put you (or the client) at ease. Did a client pay when you expected the client to pay? If a written contract states payment terms, there should be no question as to the amount due and the payment due date.

The Point: Contracts can be your friend. Putting contract terms in writing makes it clear to each contracting party what is expected of him or her and should eliminate ambiguities.