If you think business is about driving a hard bargain and writing a binding contract, you just don’t get it. Yes, you may be able to bully and/or dupe your way to getting what you want. But you’ll turn what could become a good, productive lifetime relationship into a one-time gain – and damage your reputation.
I have the same philosophy when it comes to contracts: Trying to enforce a contract simply because you have a stated advantage in writing is not good business.
Intelligent businesspeople – long-term thinkers who are smart enough to have some idea of how life really works – make deals that are good for both parties. And they change those deals when the relationship gets unbalanced.
That sort of approach respects the natural rhythms of the world – the ups and down, the ebbs and flows, the positions people are in at various stages of their lives, and so on.
If you get what I’m saying, you may sometimes wonder whether there is any reason at all for written contracts. Wouldn’t it just be better to make all relationships oral, non-obligatory, and temporary?
The answer is “no.”
In many cases, contracts recognize the natural cycles of relationships and establish some fair way of dealing with them. The most common example: You and I come together to start a business. I have the money and the knowledge to get the business going, but I don’t have the time. You have the time, but neither the money nor the knowledge. The natural course of that business is going to be one-sided one way for several years … and then one-sided the other way for many years thereafter.
In the beginning, I’m going to be providing most of the value – in terms of money and knowledge. Once the business is matured, you are going to be providing most of the value. In fact, I’ll be providing little if anything at all.
Still, we might say that a fair deal for such a situation, assuming you were going to be paid a salary from the business, is that we were going to be partners for life. I couldn’t get the business going without you, and you would never be in the business without me. I am giving you the chance of a lifetime, and you are giving me the means to add to my wealth.
In such a case, we might have a contract that lays out the framework for a “fair” deal. We might, for example, allocate a salary to you from the beginning that increases, according to some arms-length parameter, as your skills improve. In addition, we could include a bonus based on the company’s profits. The equity and profit distribution could be 50/50.
This is a deal that will seem generous to me and fine to you when we first make it. But years later, when you are doing all the work and the business doesn’t need my money or knowledge any more (in fact, your knowledge will have exceeded mine), the 50/50 part may no longer seem fair.
That’s why you have a written contract instead of just a handshake agreement. You negotiate for fairness in the beginning – and you use the contract later to remind you of why you thought the deal was fair.
A good contract includes:
- A clear explanation as to why the deal, as agreed to, is fair, along with the principles of fairness that govern the deal.
- Clear and detailed examples of who gets how much for doing what.
When things change – as they inevitably will – a well-written contract should serve as a very useful tool to make any adjustments that are necessary. (Assuming, that is, both parties are still operating in good faith.)
MT has written more contracts for me than anyone else. He’s not only one of the most capable attorneys I know, he’s also a great natural businessman. Here’s what he has to say about contracts:
“Contract law is more esoteric than you might imagine. Judges first must ask (and this is the standard contract question), ‘Did the parties have a meeting of the minds?’ In my law school days, I thought to myself that this sounded more like Star Trek than what I thought law would sound like. But it’s true: A contract to be valid must first show that there was a ‘meeting of the minds.’
And this means your language cannot be ambiguous. The terms must be clear. The exit strategies must be straightforward. The payment terms cannot be based on conditions that are unclear. In short, clarity is the key. If not, the other side says, ‘Well, Your Honor, I understood the language to mean this and not what he said.’ And if the language is unclear, your contract may not be a contract after all. The judge may say, ‘Well, there was no meeting of the minds here, and I can see why – because the language was ambiguous. I hereby rule the contract null and void, since it was never truly formed.”
“As for creating one-sided contracts and thinking you’re getting away with something, I could not agree more with Michael Masterson. Legally, a one-sided contract only leads to breaches and litigation. Make a contract clear and fair, and you’ve got yourself a good deal. In the end, the process of contract is really just a way to ensure that each party understands the deal. It’s a ‘memorial,’ not a future gun. Memorials make money. Guns kill.”
What I said about formal business contracts applies to informal contracts too. Say you make a deal with your employees: Sell 100 tickets to the Conference and we’ll take you to Las Vegas. It’s a great promise. And it serves its initial purpose in motivating them. But you have to clearly articulate the deal – and put it in writing. (Are those full-paid tickets? What about cancellations? How many days? What kind of hotel? Who pays the mini-bar? And so on.) If you don’t do that, the original incentive, which was meant to produce sales and increase morale, could actually backfire.
So make fair deals – and document them in writing. And remember that the purpose of a contract should never be to enforce an unfair deal … but to remind you of how and in what specific ways you thought the deal was fair in the beginning.[Ed. Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]