Is a Contract Essential?

What is a contract and why are they necessary? Why not simply shake hands to confirm a ‘deal’? Such action can be sufficient; yet what if the other party does not have the same recollection or understanding as you of the terms of the deal?  What happens then, what can you do?

Contracts are effectively a set of rules that lay down the rights and responsibilities between parties, both between themselves and those who may be affected by their actions (or inaction).  They provide useful tools to manage the relationship between sellers and buyers, developers and contractors, clients and consultants.  Whatever the nature of your organisation or business, contracts are your economic lifeblood – they manage risk and can improve company performance.  Contracts can support the dynamics of your organisation by managing change and disputes if they arise reducing time and cost risk, as well as potential damage to your reputation.

Yet how do you know if you have an enforceable agreement, what if all your business is conducted electronically or in another country?  How (and who) will enforce the rights you believe you have, or can the other party enforce its rights against your organisation?  What terms have you agreed and can they be altered in any way without incurring additional cost?

The risk comes from not knowing. You can use contracts to increase the volume of supplies and change the way in which works are carried out, whilst staying within your budget, and not opening your organisation up to claims for additional time and money. Different types of contracts can be used to place different risks on different parties – but how?

It is essential to understand how best to protect your organisation from unnecessary exposure to risk.  Contracts can provide how you and the other parties will work to avoid and minimise late deliveries, cost overruns, defective performance and substandard quality. They can include mechanisms to encourage improved performance and better quality, to reward enhanced service, and discourage substandard performance and service.

You can use contracts to agree which party takes on which liabilities (and to whom), the extent of those liabilities and any financial limits on them. How do you ensure that you are compensated for the other party’s actions, or failure to take action, or to protect your organisation from claims from other parties?

To use the words of Mr Rudyard Kipling’s Six Serving Men, contracts can provide you with the answers to “What, Why, When, How, Where and Who” – an essential tool to prevent your organisation suffering from economic anaemia.

Understand how contracts are formed? Find out more about AZTech’s The Essentials of Contracting Training Course

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