Name: Moises D. Macaranas Jr.

Program: BSBA – OM (ETEEAP)

Subject: BAC102 Business Law (Obligations
and Contracts)

The Importance of Obligations and Contracts

1. Contracts serve as a record of rights, responsibilities, and obligations:

Foremost, contracts function as a reliable record of the rights, responsibilities, and obligations
of the parties who have signed it.

An effective contract will describe, in detail, what duties each party has to one another, how
these ought’s to be performed, what they will be measured against, and when. As a result,
contracts act as a useful document for each party to refer to when reminding themselves of
the responsibilities they owe and are owed.

By using contracts in this way, businesses can apportion and minimize risk, since there is a
degree of predictability and clarity surrounding who is responsible for doing what, and on
what terms. This fundamental knowledge can then be relied on by a business to inform
subsequent business decisions.

2. Contracts make private promises legally enforceable:

The intention to be legally bound is a core component of any contract, and it requires that for
a contract to exist and be enforceable by law, both parties must share this intention.

This means that, unlike other, less formal promises, a promise in a contract is one that you
have a legal right to enforce in court, typically where another party has breached the terms
originally agreed and caused you loss of some sort.

For all businesses - big and small - a contract will protect you in the event of wrongdoing. Not
only will a contract empower you to take legal action if the terms you agreed to are violated,
but it will also explain which jurisdiction you can take this action under, and what steps to take
to do so.

3. Contracts formalize a relationship between parties:

Before the contract process even begins, two or more parties will have agreed to work
together in a mutually beneficial way.

Contracts are a way of formalizing a relationship between businesses, as well as outlining how
you’ll maintain this relationship, what obligations you need to fulfil, how long you will fulfil
them for, and for what price.

Fast-growth companies that are scaling will need to enter these relationships frequently and
nurture them well, so understanding what is expected of each other and being accountable for
the promises made is essential to developing a more fruitful relationship in the coming years.

4. Contracts ensure you get paid:

 Another purpose of a written contract is to stipulate the payment process and capture
revenue. When a construction company offers to deliver their service to another business, for
example, there is almost always a cost attached. A contract will explain this cost, along with
other details, like:

 The exact amount of money due to be paid.

 How frequently payments will be made.
 The payment method to be used.
 The costs associated with late payment.
 Terms and dates relating to auto-renewal.

Therefore, a contract also acts as a safeguard to guarantee your business’ right to payment on
a certain date.

5. Contracts provide an opportunity to increase revenue:

Many businesses can also use contracts as an opportunity to generate higher revenue. This is
commonly achieved in two ways:

A. By negotiating contract terms to increase value

It’s simple. By negotiating contract terms that work in their favor, like increasing the
price paid for a certain software subscription, or upselling a certain service, a
business can increase their revenue. Contract negotiation is the perfect opportunity
to make the deals being agreed upon more valuable.

B. By making the contract process more efficient

Contracts are designed to make a deal official, which results in revenue. Therefore,
any barriers that prevent fast and frequent agreement are also barriers to revenue.

6. Contracts prevent disputes between parties:

At a basic level, contracts are a tool that helps businesses to agree more. Since contracts are a
collection of terms that parties have reached a consensus on, they are very effective at
preventing conflict and contractual disputes in the future.

What businesses want when entering a new relationship is a win-win situation, and a contract
represents that being achieved.

In any successful contract process, there will already have been opportunities for parties to
discuss, edit and suggest terms, meaning that there is little (if anything) for them to disagree
about in the future - particularly where the process has been truly collaborative.

7. Contracts guarantee confidentiality:

Another essential purpose of a contract is that it can grant you specific rights and requests that
are important to your business, and confidentiality is a prime example of this.

It is not uncommon for parties to a contract to be exposed to sensitive information about one
another, or at the very least, to have information about the transactions involved in their
relationship.

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 Where parties are reluctant for this information to be shared, contracts serve as a perfect
opportunity to ensure that the client or business they are dealing with holds these in secrecy
using non-disclosure provisions and confidentiality clauses within the written contract.

8. Contracts enable formal collaboration between teams:

If managed well, contracts can also facilitate formal collaboration between teams and
departments.

In business, a contract is rarely approved by just one person or department. Rather, contracts
are often passed between departments, typically (and often painfully) via email for input and
approval, which is an incredibly time-consuming but also very important stage in the contract
lifecycle.

With so many parties involved in the contract review process, contractual agreements provide
the perfect opportunity for departments to collaborate and discuss the business direction and
how to achieve the best results from an emerging contractual relationship.

In some cases, parties may even enter into exclusive contracts that prevent them entering
into relationships with other providers or competing companies. Establishing important details
like these early on is key to ensuring all parties know how they're expected to work together.

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