Why are Agreements important for Business?

Updated: May 15, 2020

Agreements can be as simple as a handshake, or verbal offer and acceptance. You may have complete trust in the party you are doing business with, to the extent that a "handshake deal" seems sufficient, and secure. After all, business relationships thrive on foundations of trust and mutual understanding.  But Remember Your business is your livelihood. It needs to be protected. Business owners expose their businesses to risk and ruin because they do not have the most essential agreements in place to protect them. Drafting of an agreement is an art. Agreement can be an incredibly powerful and useful tool when used correctly in your business.

Agreement can be defined as mutual understanding between two or more persons about their reciprocal rights and duties regarding past or future performances.

Agreement  becomes essential due to the following reasons-

  1. Describe Responsibility

  2. Legally Binding

  3. Proof of Records to avoid Misunderstanding   

  4. Provides Security & Peace of mind

  5. Provides Confidentiality

  6. Mitigation of Risks

  7. Avoid expensive litigation proceedings & Provide Recourse

  8. Collaboration and Communication Tool

  9. Help to maintain compliance

  10.  Act as way to smoother termination

  11. Establish a Time Frame, Describe Payment  &  Generate Revenue

  12. Identify and Protect Intellectual Property

Describe Responsibility Agreements help in determining what are the responsibilities of parties. Here, both the parties are lawfully responsible to perform their duties as stated in Agreement. Any deviation is considered as a breach and, either of them has the right to take appropriate action.  Additionally, they  can determine what parties are not responsible for.

Legally Binding

Agreements bind parties to their agreed responsibilities. In case either of the parties does not fulfill a part of their agreement, they are in breach of the Agreement, which can be grounds for legal action.

Proof of Records to avoid Misunderstanding Agreement  legally serves as proof of Records for future reference of what parties have mutually agreed. Agreements outline exactly what's the obligation of each party. The details and the whereabouts of the parties are inserted which more clearly stating intention and willingness to be a part of the business. They Set Expectations and Get Everyone on the Same Page by removing all confusions, misunderstanding  & reducing disputes. Provides Security & Peace of mind

Agreement plays a pivotal role in making the parties secure as it clearly specifies all important information related to the deal . Drafting an Agreement is a mandate and it is required for both parties to read the consented rules and abide by them. Agreement act as legal evidence if any dispute arises.

Provides Confidentiality Most of the agreement includes a Non-disclosure & Confidentiality clause. Parties are not entitled to reveal the confidential information with any third person. In case of disclosure they will be subjected to suffering as per agreed rules.

Mitigation of Risks Agreements include alternative dispute resolution i.e. negotiations, mediation,etc which make sure that both parties get the best out of it. After negotiations, when an Agreement is signed, it is enforceable and both parties are bound to adhere to it leading to minimization of loss. It protects both parties to mitigate risks and conflicts in the future. Avoid expensive litigation proceedings & Provide Recourse When a parties breach agreement it will be used as a general reference on what the parties have agreed and will help determine who has not fulfilled their obligation. Having a readily available agreement provide remedies available to the parties, reduces the chances of bringing the issue to litigation proceedings, which could be very costly and time-consuming. Ultimately, an Agreement is an insurance policy that’s main aim is to protect both parties. If an Agreement  is breached, whether intentionally or unintentionally, either or both parties involved can take steps to solve the disparity and come up with a solution. Most agreements contain a governing law section or remedy clause.

Collaboration and Communication Tool Agreement helps Parties work together towards a decided goal by collaborating and establishing communication. When an agreement is signed, both parties feel assured in the final result because of written and effective communication.

Help to  maintain compliance

Unless Parties have a legal background, it’s likely they’re often not thinking about compliance. Having a procedure set in place for agreements, helps parties remember to stick to what they have agreed & Increases Operational Efficiency.

Act as way to smoother termination Tenure of the contract is also highlighted in the agreement  which provides more clarity regarding the termination in detail. However, there are specific clauses as well as mentioning the termination acceptance even before the completion of Tenure.

Establish a Time Frame, Describe Payment  &  Generate Revenue When agreements are processed successfully on time, they help in generating more revenue. Making the Agreement processes timely indicates that parties are capable of getting into more agreements, signing more deals which will result in bringing more income. Agreement resolves issues regarding payment, timeframes and the consequences of late payments. Agreement is a useful way to cover issues that businesses usually overlook. Leading to More Money, More Time, Better Clients &  Enhancing Business.

Identify and Protect Intellectual Property As a creative business owner, trademark and copyright issues are likely to intersect with your business frequently. For businesses, their intellectual property, including their brand identity, brand value and consumer recognition, is the most valuable part of their business, thus protection of Intellectual Property becomes important. Conclusion Every organisation should have Agreements—from the first employee who is hired through every deal signed. Sending out an agreement is a symbol that an organization cares about having a detailed record of a relationship that they are making a commitment to everything from wording to negotiations gives each party an idea of how the other functions.

The above reasons make Agreements important to secure and protect business from crooked clients, vendors, employees or investors. Besides, it can safeguard parties from future sufferings they may face. 

However, drafting an agreement, taking into account all these factors is challenging since several legal terminologies & clauses are used, this is a time-consuming process. So, it is advised to seek the help of an expert lawyer to help you through the process. Agreement drafting is much economical in respect of loss you can bear in future on not having one so.


This article is based on the relevant legal provisions and as per the information existed at the time of preparation; and in no event writer shall be liable for any direct and indirect result from this blog. This is only a knowledge sharing initiative, it should not be construed as legal advice.

About the Author - 

Advocate Gazal Daga LL.M. , LL.B. (Gold Medalist) (Founder, Legal Gazal & Associates)


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