Advantages & Disadvantages of a Written Contract

Man signing contract
Image Credit: Jakub Jirsák/iStock/Getty Images

Written contracts generally protect your interests more effectively than a verbal agreement. In fact, some types of contracts are only binding when written. However, written contracts often are time-consuming to complete and complex to understand.

Spells Out Terms

A written contract clearly lays out the responsibilities, duties and commitments for each party involved. In some complex deals, a contract contains a number of elements. Without a written agreement, it is difficult for people to remember everything agreed to in the contract.

The process of preparing and drafting a written contract also lead to more thoughtful and well-planned agreements than an impulsive verbal agreement. Writing the agreement allows you to use lawyers or expert preparers to make sure everyone's rights are considered. The contract also serves as checklist to evaluate what, if any, items remain on your to-do list.

Enhances Enforcement

Some verbal agreements are legally binding. However, a written contract almost always enhances your enforcement opportunities. Without written terms, a legal dispute often turns into a scenario where it is your word against that of the other person or company.

State and federal laws sometimes dictate that a written contract is required for legal enforcement. Real estate transactions and debt payment agreements are among the contracts that must be written, according to FindLaw. A lack of a written contract puts much of the decision-making power and authority in the hands of a judge, such as when business partners want to dissolve a company.

Limits Flexibility

Formalizing an agreement puts restrictions on your ability to operate flexibly in the future. A clear example of this point is in employment law. When a company has an employee sign a contract, it creates clear rules on each party's duties. In contrast, work at-will agreements give both the employer and employee greater flexibility in their roles.

If a company isn't happy with certain elements of the agreement after the fact, it must attempt to renegotiate or bear the burden of the legally defined terms. The same challenge exists in some business agreements, where a defined contract can limit the flexibility of the respective parties or partners to collaborate in handling planning and implementation activities.

Takes Time and Creates Confusion

A drawback of written contracts relative to oral agreements is the time involved. Some prefer to rely on a gentleman's agreement or informal arrangement to avoid the time investment in drawing up a contract. Also, creating a contact often means getting lawyers involved, which leads to costs for one or both parties.

Lengthy contracts intended to cover the legal bases of one or both parties also lead to delays and possible confusion. A long contract may require thorough review by the non-drafting party's lawyer. Complicated language makes it difficult for courts to adjudicate disputes in the future as well.

references