Contracts And Documenting Your Business Relationships

Posted on January 12, 2012


Businesses are about relationships: customers, suppliers, employees, investors, banks, partners, strategic partners, etc.  Without these other parties, we have no business. And while we may have altruistic and good goals of dealing with good people that we trust, these relationships sometimes break down. Contractual and business law, for the most part, has developed to create a set of rules in which businesses engage one another.[1]

Sometimes the relationship is governed by common law[2], sometimes statute [3], sometime government regulations govern the relationship, sometimes a contract (written or oral) supplements, modifies, or restates the legal relationship that exists between, or amongst, the parties. The law of contracts (which is the basis for business organization law) defines the relationship; this law is based on centuries of business people interacting.[4]

At this point, the sage and stock advice says that the prudent person emphasizes their documents. There is wisdom to this advice. Oral contracts can and do arise (see next week’s article), and when the relationship sours, a he said/she said emerges, and litigation ensues.

I am cognizant of this advice, but it should be taken with a grain of salt. Too often, parties spend an enormous amount of time and resources in order to formalize a relationship. They engage attorneys; they exchange several versions of contracts; they compromise, wrangle, cuss the lawyers and finally meet in the middle and have a fancy celebratory dinner. The next day, they figure out that the document does not exactly square with the transaction; one party may be more involved or less involved than originally planned. All of the business parties are comfortable with the new relationship, but are hesitant to have lawyers redo the agreement.

That is not to say that you should be flippant in documenting the relationship. If someone is working for you, they have a motive, probably pecuniary, and that motive needs to be dealt with openly. When things go unsaid, or more importantly unwritten, expectations are not met and issues arise. Clarifying the expectations in writing is an important aspect of both business law and doing business in general.

Balancing the necessity of formalizing a relationship with the necessity of letting the relationship develop over time is a major challenge for the business person. However, I believe that mastering that balance is fundamental to doing business. I also believe that lawyers have a tendency to push formal documents too soon in the relationship. [5]

Part of this bias on behalf of lawyers is that lawyers are concerned that they will be held at fault if the relationship deteriorates. Lawyers can and should do better — focusing on more simple contracts and focusing on contracts that can be undone quickly. Lawyers can also let relationships develop a little more without dire warnings of the devastating consequences of not having a thorough (and consequently expensive) contractual document.

Essentially, however, business people need to be the driver of contracting. They need to understand it; they need to understand when to do it; they need to understand clearly the obligations put on both themselves and the other party and be able to clearly articulate why it is so.

In Summary:

  • Be aware of people’s motives. Have a presumption of capitalism and make sure that someone’s end goal is something that can be accomplished.
  • Document those expectations in a written format.
  • Apply the appropriate (no more, no less) formality to documenting the relationship.

Mike Goodrich
Goodrich Law Firm, LLC

[1] See The Business Lawyer, Feb 24, 2009, George W. Dent, Business Lawyers as Enterprise Architects. From the conclusion: The role of business lawyers, especially in enterprise design, is broad. And although much of this work can be done legally without admission to the bar, knowledge of the law is so essential to it that it would be foolish to try.

Changes in business are increasing the need for lawyers’ skills. Transactions like strategic alliances and venture capital financing have proliferated.  They often require complex planning, 230 and enterprise design for these transactions is evolving rapidly. Innovation comes from many sources, but lawyers certainly play a key role in the process. (Footnotes omitted.)

[2] Common law is the civil legal system used in Alabama and all other states except Louisiana. Case law or precedent controls the relations.  The sale of services is governed by common law for example. If a service provider and a customer get in a dispute, absent a contract, civil law (or prior court precedent) will be the legal standards applied to the facts of the case.

[3] The uniform commercial code, which has been passed into law by all fifty states, is an example of a codification of laws. Article Two of the UCC governs the sale of goods.

[4] When I was in law school, two things surprised me: first, the basis of some of the cases goes back to England – 15th/ 16th century.  Second, contract law permeates all aspects of business: for example, when you walk into a McDonald’s, the menu is an offer — we will sell you a small hamburger for $0.99 when you walk to the register and order one; you accept their offer — offer and acceptance — the basis of all contracts.

[5] See later blog — Lawyers Natural Tendencies and how to manage them better.