To stay out of court, get it in writing

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By Lauren | July 31, 2009

Continuing my Friday series on keeping your business out of court, let’s take a quick look at something professionals and service providers may initially resist: using contracts and engagement letters. For some reason, some people are very reluctant to ask their clients and customers to enter into a formal contract, preferring to keep things more casual. “Can’t we just do business on a handshake?” they ask. And yes, they can - but at their legal peril.

Forget everything you’ve seen on court TV. It’s still legally possible in this country to enter into a verbal agreement that’s every bit as binding as a written contract. Verbal agreements can work just fine, as long as you and your customer or client are pretty much in sync about what you’re going to do, when you’re going to do it, what you’re going to deliver and how much you’ll be paid. But if problems emerge, deadlines backslide, payment is delayed, or your customer expects something different than you ultimately deliver, you may be in for a long, expensive and stressful legal battle. If you go to court, it’ll be your word against your client’s, and the court will decide which of you is more credible (which gives you a 50/50 shot of being believed). Even worse, if a judge or jury decides that you and your customer weren’t playing on a level field - that you were more sophisticated or that your customer reasonably relied on you to place her best interests before your own - you may be facing a real uphill battle to prove that you weren’t at fault.

Screenwriters love to use contracts as “gotcha!” plot devices, but that’s really not what contracts are for. A good contract simply explains what you and your client or customer expect when entering into a business relationship, and drafting the contract together is a great way to ensure that you’re both on the same page before you start to work. If you’re still not comfortable asking your client to sign on the dotted line, write up your understanding of the assignment in an engagement letter, memorandum or even an e-mail and make sure your client receives it. (Engagement letters are considered such a useful tool for clarifying client obligations and expectations that most lawyers are required to send engagement letters before undertaking work for their clients as a matter of professional ethics.) That way, if you’re not in agreement about what happens next, you can fix the problem before your client or customer tries to fix the blame in court.

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