The advantage of the written contract in commercial relationships

My clients often ask me, “Why, a contract?” They go on to tell me that the deal points are set, that they have shaken hands, and that they’re ready to do business. It’s wonderful and trusting to conduct business on the basis of a handshake, but our society has grown too large and complex to determine multimillion dollar relationships on that basis alone. It may have been fine at a point in time when the community was smaller, when persons knew each other in both business and personal settings. The results of a broken promise were social and business ostracism. That world does not exist anymore. So, why, a contract, and why do I always insist that my clients execute a written memorandum of the deal?

A written contract serves many purposes, some obvious and some that most persons never consider when entering into a deal. First and foremost, a contract impresses upon the parties the solemnity of the occasion. It requires the parties to seriously consider the effects of performance and nonperformance upon themselves. Signing the contract is the formality that has the effect of convincing the parties of the importance of their commitments.

On the other hand, the written contract objectifies the factual content of the deal- the hypotheses of its action, suspension, execution and non- execution. When a dispute originates, the parties tend to remember only what is in their benefit. But the memories fade away and the contract is the objective copy of their primary intentions.
For most of the trade deals under article 293, par 1 from the Commercial law gives freedom to the parties alone to determine the form in which to lead their relations. By setting this regime, the legislator proceeds from the assumption that the dealer is a professional and chooses alone the way of achieving his/her aims and a protection of his/her interest for which he/she bears a responsibility. There are deals for which reality in law is determined a specific form: a written one, a notary certification of the signature, a notary deed or an entry in the appropriate registers. In these cases the legislator estimates that the stability of the legal relations requires a greater concern. This does not mean that the dealer’s interest of the stability of other legal relations in which he/she participates does not need a well produced mechanism for a defence.

The written contract works as a mechanism for the easier settlement of the arguments, between the parties of the contract, coming from it. When the parties conscientiously execute their duties, they very rear set their watch right to the signed agreements in the contract. But the good conducted contract also ensures a mechanism for solving disputes when the good communication between the parties is over and the promises in the “handshake” are only good wishes. For example, the contract could contain a method for reaching an out-of-court settlement for an arrangement of the relations in a non-execution in a fair way arranged in advanced by the parties which saves subsequently legal expenses and time. The written contract could contain also a provision which arranges subsequently under which circumstances, which of the parties assume the expenses of the case, the missed advantages and ect. , in case that the parties could not reach an agreement on the disputable question and refer it to enter in the court. The existence of such a provision has also a stimulating preventive effect – forces the parties conscientiously to cling to an execution to their obligations because every one of them has given previously an agreement for the size of its responsibility.

In connection with the eventual rise of a dispute in the signed by the parties contract, they could arrange a jurisdiction of the dispute when:

  1. they agree that the same will be heard by a court of arbitration- the arbitration proceedings flow as a first instance only which ensures faster solving of the dispute. Additionally, the fees for solving a dispute in a court of arbitration are lower in most of the cases. Another reason the parties to include such a provision could give them an opportunity to take part in the formation of the court membership as every one of them chooses an umpire and the two umpires pick out a third one- this one guarantees the detachment of the decisive body.
  2. they do not negotiate to assign the dispute in the court of arbitration, to change the jurisdiction under Civil Procedure Code (CPC) in case it is possible.
    In connection with the above it should be pointed out that a part of the rates in CPC, concerning the jurisdiction are imperative i.e. in these cases the parties could not negotiate a jurisdiction different from the determined one by the law.

The written form of the contract has a positive effect to force the parties to think more about the deal itself instead of just saying “YES”. A well conducted content of a contract passes the oral reservations which every one of the parties could interpret in a very different way. The lawyer does not prepare a good contract for a day as well as the parties which one time chosen to sign a written contract, they do not conclude an agreement at least because the project of the contract passes through the parties and every one of them comments and leaves riders and ect. The deposited additional time has the effect to preserve the parties from inconsiderate agreements and to ensure a written frame for a searching review of the consequences of signing a contract. The exerted efforts by the lawyer for preparing a good written contract means an investigation for the applicable right, law, suppose the elimination of the unforeseeable problems, which could exist in the development of the legal relations.

When non-execution of the contract, the affected party usually presents a claim for a financial compensation for the damages. At the best, the court adjudges demages calculated on the basis of suffered and foreseeable financial losses, i.e. the positive demages. The negative, passed advantages very rare are compensated in one trial. That is why the inclusion of provisions for forfeits in different kinds of non-execution – complete, partial or of poor quality, saves unnecessary legal disputes for proving demages of any sort of characters. The written form of the civil proceedings has a superb importance for proving circumstances about contracts to value above 5 000 levs as in these cases only written evidences are possible (under article 164, par 1, sec 3 CPC).

Usually the trade contracts have a continued action and the considerations of execution of the obligations frequently are realized by persons who are not parties of the contract. Subsequently in a legal dispute this circumstance could be an obstacle in the conscientious burden of the execution. This problem exists especially when for the execution of the due consideration a lot of smaller deals are accomplished within the period of the action of the contract. For example in a contract for periodical supplies. If in the written form are not arranged the way of performance of every delivery, determination of its characteristics about the persons who will accept the applications, accomplish them, sign reception- transmission report, invoices an i.e. in a subsequent dispute, the proving whether the party of the contract has fulfilled its obligations is complicated in addition. Also the execution terms, the transition of the property and the risk over the delivered objects are substantial elements of the contract content and if these elements are absent in the arrangements , there is an opportunity for an unconscientious behavior by some of the parties.

This short explanation for the advantage of the written form is a reason to think before we bind with a contract in a rush. The stability guaranteed by this form is extremely important also for the stability of the dynamic trade relations.

That is the reason why a consultation with a lawyer is the best and the most reliable way of protecting your interests and at the same time saving costs.