Top 5 Functions of Business Contracts


In the course of running a business, you inevitably require to enter into contracts with various stakeholders.  Contracts are agreements in which one party commits to providing  products, property or services to another in exchange for payment. Contracts may be either verbal or written.

Verbal contracts (also referred to as oral agreements) are informal in nature and do not have a written record.  For example, casual labourers may be engaged through verbal contracts. On the other hand, written agreements provide a written record of the intention of the parties. Verbal and written contracts are valid and enforceable provided they have the elements listed below:-

  • offer and acceptance
  • lawful purpose
  • lawful consideration
  • clear and certain terms
  • parties have capacity and have consented to the contract

It is noteworthy, that there are some contracts that by law must be in writing. For instance, contracts dealing with land sale/purchase or employment contracts that are periods greater than three (3) months. Additionally, verbal contracts are hardly used in formal business contracting because they create a lot of gray areas. In particular, when disputes arise, it is difficult to determine the obligations of the parties and one can only rely on verbal assurances/witnesses produced by parties. Further, resolving such disputes can be a protracted and strenuous process. This Article focuses primarily on the role that written contracts can play in a business.

Functions of Business Contracts

A business can benefit in various ways by having written contracts.  Some of the key benefits that can be derived from contracts include:-

  1. Record of agreement – contracts provide a record of the agreement reached between the parties. This is useful because in the event of a dispute, it is easy to identify obligations and the recourse available to the offended party.
  2. Management of relationships – It is advisable to proactively  manage the business relationship during the duration of the contract to avoid disputes.  Consider assigning a contract manager work to manager the performance of the contract and  resolve/escalate any ensuing issues.
  3. Management of cash flows-  a business exists to meet particular needs. Nonetheless,  its ability to survive and thrive depends on how well it manages cash flows. A well-drafted contract assists in cash flow management as it stipulates the contract amount and the payment terms. These terms enable financial managers are able to plan effectively as they can easily determine when funds shall be received or paid out.
  4. Risk Mitigation tool- written contracts provide clarity on the responsibilities of each party, the price and payment terms. This reduces the risk of potential disputes and litigation.
  5. Dispute Resolution Mechanism – contracts provide a mechanism for resolving ensuing disputes. Possible mechanisms include mediation, arbitration or the court process.


In as much as contracts are useful, most business leaders do not enjoy the process of drafting or reviewing the terms of contract. It is advisable to have a lawyer on call who can look through your agreements to ensure that the contracts adequately protect your interests and minimize potential risks. Your lawyer can also assist in interpreting  and highlighting the key the terms of contract that require monitoring during the term of the contract.

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