Why You Need a Contract in Business and its Relevance in Your Business?

Starting work without a signed contract means that your position isn’t clear, or even worse –it’s weak.

It provides a solid and concise foundation that will help you navigate the law and make sure that you are on the right side of it. Along with aiding to minimise disputes and resolve any problems that may arise; a contract will communicate to a client, not only the amount that they are required to pay, but also invoice and payment dates. It also means that the contract is legally enforceable and will be able to support you if you decide to take legal action.


Written contracts set out the rights and obligations of each party, and reduce the risk of uncertainty. Many businesses are put off by the cost of having a contract as well as terms and conditions drafted by a professional – but it far outweighs the potential cost that doing business with them could threaten later.


1. Provides certainty- Although while getting into business transactions, there is no such thing as zero uncertainty. Contracts provide some sense of security and certainty to both parties. A well-drafted contract specifies each parties’ expectation and mentions in depth all the aspects of the transaction hence providing more clarity and certainty to both parties.


2. Outlines the scope of Agreement- Like mentioned above, a well- drafted contract defines all the aspects of the transaction. It states important information like what kind of work is to be performed, how it is to be performed, due dates, payments, etc. It also defines the obligations and remedies in case of any breach.
3. Procedure for dispute resolution- What happens when there is a disagreement between you and the client? While lawsuit seems like the obvious answer. However, it isn’t a very effective way of resolving disputes. A contract specifies alternative means of resolution like mediation, negotiation, and arbitration. Most parties prefer going for these methods as a lawsuit can be expensive and time-consuming.

4. Protects both parties- Having a written contract provides security to both parties as it put pressure on the other party to meet its obligation. Having a written contract also makes it enforceable in court.


5. Provides Confidentiality-No Entrepreneur would want its companies secret getting out. To ensure that does not happen, a contract includes an NDA (Nondisclosure agreement), which protects confidential information. According to an NDA, transactions involve a third party. In case of disclosure, the concerned party will be subjected to the agreed suffering.
6. Helps in ending relationships neatly – A contract contains a termination clause that defines the provision for ending the relationship or canceling the contract with the other party. Since the contract is an agreement and is made with the consent of both parties, having a termination clause lays down the steps if one has to get out of the agreement. This helps in ending the business relationship on good terms. For eg – When your supplier of raw material suddenly cancels the deal, it can cause many problems like a sudden halt in production. A contract will require your supplier to give you prior notice before canceling the deal hence providing you time to look for a new supplier
7. Helps in keeping a record of the business – A written contract acts as a record of the business also showing the mutual consent of both parties. It contains all the relevant details about the transaction and can be used for future reference for things like delivery dates, payment methods, etc
8. Addresses the Unforeseen – A contract usually has a clause called “Act of God” which addresses the events that are beyond our control like natural disasters which makes it impossible to fulfil the contractual obligation. With this clause, in case of any unforeseen event, the concerned party won’t be deemed guilty for breach even though it failed to fulfill the duty.
9. Ensures timely payments – If mentioned in the contract, it ensures timely and accurate payment. Since it is legally binding, it also puts pressure on the parties to make timely payments. The contract also specifies the mode of payment and EMI options in case of large payments.
The above-listed points show how beneficial contracts are to entrepreneurs and how they can assist them in their business. One cannot separate contracts from business as they go hand in hand. Not only do contracts help in safeguarding the interest of the entrepreneur, but they also safeguard the interest of the employees working for the organization. Drafting a contract can be a challenging and time-consuming process. Therefore, it is advised that you should seek the help of a legal attorney to guide you through the process. A written contract ensures that strict legal action is taken in case of any breach. This in turn ensures that people in the future adhere to the rules stated in the contract.