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How Having a Good Contract Saves Your Business Money

While lawsuits involving big business tend to grab the headlines, litigation affects small businesses more than you may think. As a 2020 article citing information from the U.S.  Chamber Institute of Reform indicated, more than 40 percent of  small businesses were either threatened with or involved in litigation.  As you may imagine, being sued can create significant financial hardship. Even if a business can recover in the short term, any damage to its reputation may be too much  to overcome.

That’s why exerts say it is so important to have the correct liability insurance. But having a proper written contract in place may save your business money by preventing a lawsuit in the first place.

What is a contract?

In its essence, a written contract is a formal agreement between two or more people. In a business context, it is usually an agreement between the employer and his or her employees, or between the business and a client or customer.

In general, it will detail:

  • What will happen
  • When it will happen
  • How it will happen
  • Available recourse if any party does not fulfill their contractual obligation(s)
  • Reasons for termination
  • Any other pertinent matters

Why is it so important?

For business purposes, a contract is vital for several reasons. First, it is legally enforceable. Secondly, it serves as proof of  the specifics to which you and the other party or parties agreed. Ideally – and this is critical – it will also prevent misunderstandings, since each party gets to review the contract. 

A well-drafted written contract will also give each party confidence. This is because everyone will know what is supposed to happen, when it is supposed to happen, and available options if the other party or parties  don’t live up to their end of the bargain.

Next – and this is something we haven’t yet touched on – a  solid contract will allow you to safeguard certain proprietary information. However, it will only allow you to do so if it includes terms pertaining to confidentiality or non-disclosure.


Most contracts include stipulations pertaining to payments. Specifically, they will stipulate when payment should be made and how it should be made. For instance a contract may stipulate that a deposit is required with the remaining amount due upon  delivery of goods or services. Alternatively, a contract may specify that  payments may be made in installments as long as a project is ongoing.

Finally, a contract allows parties doing business in different states to stipulate which state law will prevail in the event of a dispute. This type of provision saves a lot of headaches (and money) should anything go wrong.

The bottom line

So, how does a contract save your business money? It does so by allowing all parties to manage expectations and avoid misunderstandings. It also helps you avoid costly, unpleasant and time-consuming litigation by serving as proof of each party’s obligations as agreed.

The legal team here at LawPLA would be happy to answer any of you questions or concerns about contracts for your Los Angeles business. All you have to do is give us a call to schedule a free consultation. You can also fill out the form on our contact page.

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