How to decide when you need a written agreement (and when you don’t)

“You have a deal!” said John as he reached over to shake Paul’s hand. Paul was elated. He knew the new business venture could reap rewards for both parties. However, Paul had been burnt before in a similar deal and knew he should have a written agreement with John. But, he wasn’t sure John would go for it – and he didn’t want to lose the deal.

Why John might back out at the last minute

Negotiations with John had been going on for some months. John had been reluctant at first, but Paul had managed to swing him around. Paul feared that if he whipped out a formal legal document at this stage, John would change his mind.

This has happened to Paul before. Having been burnt by a previous business bust-up, Paul knew the importance of having a written agreement. So on a previous occasion he had instructed a top city law firm to prepare a watertight contract. What he got back was a lengthy document, full of legalise, and a bill for several thousand dollars.

A big bill and no deal was not an attractive option

When John presented this document to his previous prospective business partner he saw the look of horror on his face. His prospective partner’s first concern was the legal costs he would have to incur having his lawyers check over the agreement. Ultimately it got put in the ‘too-hard basket’ and so the deal collapsed.

Paul didn’t want this to happen with the present deal, but he knew that if he went to see his lawyers, that was a real possibility.

Why lawyers produce lengthy, complicated documents

Lawyers are trained to be thorough and like to cover every possible eventuality. No lawyer wants to be sued for professional negligence, so whenever they receive an instruction it is the lawyer’s natural instinct to prepare the most watertight document possible. At the back of their minds is always the possibility that they might miss something and then get sued. After all, they have a duty to their professional indemnity insurers.

However, preparing a watertight document takes time. Since lawyers charge by the hour you can bet that preparation of the agreement is going to lead to a huge legal bill. Also, a lengthy document is likely to put off the other party, as Paul found when he first instructed this firm.

For big deals this type of document is essential, for smaller deals you may not be able to justify the cost. A document which covers the bare essentials may be all that s required. However, there will be very few lawyers who are prepared to do this and put their professional indemnity insurance on the line. That makes it difficult for people like Paul.

Paul had two options

Paul realised that he only had two options. Either he relied on John’s word and the strength of their handshake, or he prepared an agreement himself which he covered off what he thought was necessary. Reflecting on the issue, Paul didn’t know where to start when it came to drafting an agreement, so therefore he opted for the more dangerous route of relying on John’s word. After all, he had known John for nearly a year and felt that he was a good judge of character.

Unfortunately John let him down

Unfortunately for Paul, after four months the deal went belly-up. John claimed that there had been a misunderstanding at the outset when he agreed to the deal and was now trying to avoid What Paul believed he had agreed to do. Paul knew that if he had an agreement then there would have been better clarity at the outset and the deal would either still be alive, or the break-up could have been made easier. As it was, the break-up was starting to get messy.

Paul could have avoided this problem, had he known what to include in a basic written agreement.

 

Print this pageEmail to a friendUse this article in your newsletter/magazine