The Agreement You Don’t Need — Until You Really Need It

Many commercial disputes begin with the same sentence:

“We never thought we needed a formal agreement.”

When a business relationship is going well, putting detailed agreements in place can feel unnecessary. Business partners trust each other, suppliers deliver what they promised, customers pay their invoices and everyone understands their respective responsibilities.

The problem is that agreements are rarely needed when everything is going well. Their real value becomes apparent when circumstances change.

A handshake can leave a lot unanswered

Informal arrangements remain common in business, particularly where the parties have known each other for years. However, memories differ and relationships change.

Consider two people who establish a business together on a 50/50 basis. Initially, they agree on everything. Several years later, one wants to sell while the other wants to continue. One believes the business is worth $500,000 and the other believes it is worth $1 million.

Who can sell? How is the business valued? Can one partner buy the other out? What happens if neither can afford to do so?

A properly prepared agreement can answer these questions before emotions and significant amounts of money become involved.

The same principle applies to your customers and suppliers

Good agreements aren’t only important between business owners.

Your terms of trade should clearly establish matters such as payment obligations, what happens when invoices remain unpaid and the circumstances in which services can be suspended or terminated.

Similarly, important supplier, contractor and service agreements should accurately record what each party is expected to provide and what happens if those expectations are not met.

The objective isn’t to create unnecessarily complicated contracts. It is to remove ambiguity.

A ten-page agreement that nobody understands is not necessarily better than a concise document that accurately reflects the commercial arrangement.

Templates can create a false sense of security

Downloading a contract online can feel like an inexpensive way of protecting a business, but the important question is whether the document actually reflects how your business operates.

A generic agreement may contain clauses you don’t need while overlooking protections that are genuinely important to your particular business.

Contracts should support the commercial relationship rather than simply exist in a folder somewhere.

As your business grows, agreements should also be reviewed. The contract that worked when you had two employees, a handful of clients and one location may no longer be appropriate when the business has expanded significantly.

Think about the difficult conversations while everyone is still getting along

This is particularly important for shareholders and business partners.

Discussing what happens if someone wants to leave, becomes unable to work, dies or fundamentally disagrees about the direction of the business can feel unnecessarily pessimistic when a venture is just beginning.

In reality, that is often the best time to have those conversations.

It is much easier to agree on how a future disagreement will be handled while everyone still agrees.

The same principle applies to commercial relationships generally. Clear expectations at the beginning can prevent expensive arguments at the end.

The cost of prevention is usually considerably lower

Businesses sometimes avoid obtaining legal advice because they are concerned about the upfront expense.

Unfortunately, resolving a commercial dispute after it has developed can be considerably more expensive than having appropriate documentation prepared at the outset.

Legal costs are only part of that equation. Disputes consume management time, interrupt operations, damage relationships and create uncertainty that can continue for months or even years.

At EAS Legal, we see commercial agreements as part of good business planning rather than something businesses should only think about when a dispute arises.

The best agreement may be the one you never need to rely upon.

But if something does go wrong, you will be very glad it is there.

Frequently Asked Questions