Put It in Writing

In former blogs, I’ve discussed contracts and their enforceability. Many of my clients - especially those in the construction and retail business - have asked me why I insist they get a written memorandum of their agreement with their customer. Allow me to elaborate:

1. Defining the terms of the agreement. Placing an agreement in writing sets down, in black and white, each party’s agreement. Oral contracts are open to each party’s interpretation of the terms of the agreement and result in misunderstanding and often litigation.

A prime example of this type of issue is the so-called “Change Order.” This type of contract is normally used in the construction industry to identify a change in the terms of the original contract. Some change orders merely identify changes in specifications having no impact on the cost of construction. Other change orders may have an impact on the cost of construction or identifies additional work to be performed. Placing the change in writing avoids the conflict in the interpretation of the change order, sets forth the terms of the change order, identifies the type of change order and any additional costs to be paid.

2. Avoiding statutory violations. Many state and federal statutes require certain terminology to be placed in a contract. Consumer protection laws and Regulation Z are typical examples. Home solicitation sales require specific language regarding a consumer’s right to cancel a contract. Regulation Z requires an entire form be completed outlining a debtors payments and the calculation of interest. Failure to include this language in a contract can have enormous consequences by way of fines, attorney fees, statutory penalties and, in some instances, criminal prosecution.

3. Warranties - In selling goods and services certain warranties are implied by law. For example, it is implied in law that a mechanic warrants that he repaired a vehicle properly. Other implied warranties are so called “merchantability” warranties - warranties that ensure that the product or service being sold can be used properly. Another warranty is the warranty that the product is fit for a particular purpose - that the merchant knew the particular use for which the product was being purchased and warrants that the product will perform that application. In real estate there are warranties relating to title and merchantability. If not specifically limited in writing, expensive litigation could ensue interpreting these warranties.

4. Avoiding protracted litigation. Oral contracts are notoriously troubling because the terms of the agreement are open to interpretation. Placing an agreement in writing avoids what is called “parole evidence” - the introduction of representations made outside the contract. Placing an agreement in writing sets forth all the terms of the contract and avoids the issue of your customer claiming something that is not in the written agreement

I’ll never forget the day I attended a local chamber of commerce luncheon. Seated at my table was a contractor. We entered into a conversion regarding a major issue he was having with his original contractor over the terms of a contract. He claimed he did the work and then, at the contractor’s request, performed additional work. He billed for this work and the contractor refused to pay him. Why? Because the contractor claimed this additional work was performed to correct problems under the original contract. I asked him if this additional work was agreed to in writing. His answer was no. I asked him why. He stated he was already on the job and didn’t think that he needed to take the time and besides, “[he] didn’t want to get the contractor angry and wanted to avoid a headache.” Well, he exchanged one headache for another.