It is easy to get busy and rely solely on someone’s word or a few emails to provide the structure of a deal, but this can be very dangerous. In the event of a dispute or unforeseen circumstances, you may find yourself financially liable.
Why is it important?
If Company A agrees to buy a large shipment of wood from Company B, but no formal contract is agreed upon and signed, one of two things can happen. In a perfect world, each company would honor their end of the deal and no problems would arise, but this is far from guaranteed to happen. Company A may realize they over ordered and try to get out of part of the deal, they may try to argue the quality is not what they ordered, or they may simply refuse to pay. While there are certain rights the seller will have under the Uniform Commercial Code, it is impossible to know how it will play out without a signed credit agreement. Getting a sale is great, but if it comes back to cost you later down the line it is not worth it.
What should you put in your agreement?
While you should consult a lawyer regarding specifics, there a few things that you should almost always have. You should make sure to explicitly define how much product is being purchased, what prices it is being purchased out, any defining characteristics that must be met, and what should happen in the case that any of these conditions are not met. If there are any specific circumstances that you potentially see arising, you should include what will happens in those cases. It is impossible to say everything you should include, but a general rule of thumb is to think of it as your protection against your customer not honoring the deal.
While some customers may be loyal and always follow through on their word, many others will try to take advantage of you if you do not adequately protect yourself. As always, if you think you may be in a similar situation or are curious to learn more, we recommend you contact a lawyer for a more personalized analysis of your situation.
This advice is most appropriate for companies that sell a physical product; it’s a little harder to apply to service industries, but a signed agreement for every “project” or related series is a good idea.