What Is a Contract, and Why Every Business Needs It in Writing

Introduction

Every day in business, decisions are made, deals are discussed, and promises are exchanged. But here’s the question: are all promises legally binding? If you shake hands on a deal or verbally agree to provide a service — is that enough?

In reality, trust alone isn’t sufficient. While verbal understandings may reflect the intent of the parties, they often lack the clarity and protection businesses need. This is where written contracts come into play. They offer not just enforceability, but structure and legal certainty making them a cornerstone of professional business conduct.

What Is a Contract?

A contract is a legally binding agreement between two or more parties that creates mutual obligations enforceable by law.

To be valid, a contract typically must include:

• Offer and acceptance

• Mutual consent

• Consideration (something of value exchanged)

• Intention to create legal relations

• Legal capacity of parties

• Lawful purpose

Contracts are fundamental to business — they govern everything from client relationships and employment to vendor payments and joint ventures.

Is a Verbal Agreement a Contract?

Yes — under Indian law, a verbal agreement can be a valid contract if it meets the essential elements listed above. However, enforcing a verbal contract is often challenging, because:

• There is no written proof of what was agreed.

• It's hard to prove terms, timelines, or obligations in court.

• Misunderstandings or disputes can easily arise.

So, while a verbal agreement might be legally binding, it’s not advisable — especially in business.

Why Do You Need a Written Contract?

A written contract serves as a reference point and protective shield for all parties involved. It clearly outlines essential terms, rights, and responsibilities. Here's why it's crucial:

• Scope of Work / Obligations: Specifies who is responsible for what, when, and how.

• Payment and Consideration: Details pricing, payment terms, penalties for delay, and billing milestones.

• Term and Termination: Clarifies how long the contract lasts, renewal conditions, and how it can be terminated.

• Dispute Resolution: Establishes jurisdiction, mediation/arbitration procedures, and governing law.

• Acts as Evidence in Case of Disputes: A written contract becomes the strongest legal evidence if a dispute arises.

• Protection Against Future Risks: Defines liability, remedies, indemnities, and risk allocation mechanisms.

• Compliance with Law: Certain agreements — such as employment contracts, property transactions, or shareholder agreements — are required by law to be in writing (e.g., under the Indian Contract Act, Companies Act, and others).

• Builds Professionalism and Trust: Written agreements promote transparency and show that your business operates with seriousness and credibility.

Why Legal Opinion Before a Transaction Is Important for Business Owners

For business owners, entering into complex transactions such as Shareholders’ Agreements (SHA), Share Subscription Agreements, or Management Remuneration Agreements requires more than just commercial understanding — it demands legal precision. These types of agreements often come under scrutiny from regulatory frameworks like the Companies Act, the Income Tax Act, and other applicable laws. Obtaining a legal opinion before finalizing such transactions helps ensure that all legal, tax, and compliance aspects are properly reviewed and addressed. This proactive approach not only empowers business owners to make informed decisions but also allows them to structure deals strategically and avoid unforeseen pitfalls. A legal review can prevent expensive litigation that may arise from poorly drafted or one-sided contracts, saving both time and financial resources. Moreover, business agreements are not just commercial documents — they must align with a range of legal requirements. For example, an employment contract must comply with labour laws, while service contracts must address indirect tax obligations like GST. Seeking legal advice before signing ensures full compliance, minimizes risk, and builds a solid legal foundation for the business transaction.

Conclusion

In business, a handshake isn’t enough. A well-drafted contract not only formalizes an agreement but also protects your interests, reduces risks, and ensures legal enforceability.

Whether you're a startup founder, investor, or established business owner, understanding your contracts and seeking legal guidance before signing is key to operating safely and smartly.

At Prolead, we assist businesses in entering into crucial contracts such as Shareholders’ Agreements, Share Subscription Agreements, and other complex legal arrangements. We provide valuable insights from both a tax and company law perspective to help business owners make informed decisions. Whether you're raising capital, onboarding investors, or structuring strategic partnerships our expert team ensures your contracts are legally sound and commercially practical.