Contracts–sometimes they matter, sometimes they don’t

A contract is one of the most fundamental elements of modern business and commercial law. A contract is designed to represent the meeting of the minds of the parties, and allows them to fix the future.

A well-drafted contract details all of the important, relevant aspects of a deal or transaction. As to length, they can be a few pages to virtually book-like. They may encompass a single transaction between two parties, or they may create an ongoing relationship that lasts for years.

And that last part is important. Business is always about relationships. Unless a company is vertically integrated to the point of owning the land where the raw materials are extracted or grown for their products, all the way up to owning the retail space that sells the product to the end consumer, they need to work with other companies.

A new lawyer, fresh out of law school, made a small error when drafting a contract. He had written $400 million, when the correct sum was $425 million. He was panicked at the thought of a $25 million error.

The client, however, took the error in stride, laughing when informed of what had happened. The client called the other party to the contract and had the error fixed.

Why did the client laugh at a potential $25 million loss? Clearly, the relationship between the two parties was such that neither was attempting to sneak something past the other side.

The long-term relationship was probably more valuable than $25 million. Of course, if the relationship had soured, those two mistyped numbers could have been worth $25 million.

However, the next time they probably double-checked the numbers of their contract before submitting it to the other side.