Contracts--not the Internet, e-commerce, wireless communications or the latest new widget--are what run the global economy. Whether you realize it or not, you enter into contracts every day, and each one has the potential for windfall and liability. Many business people think that written contracts are costly and time-consuming--get an attorney involved and negotiations are certain to collapse.

Certain types of contracts must be in writing, such as those involving interests in real estate or contracts that cannot be performed in less than a year. Still others, such as employment contracts, should be in writing to prevent certain legal obstacles. Employment is usually considered an "at-will" arrangement; either party can terminate the contract at will. Oral employment contracts are therefore considered "illusory" and are unenforceable.

However, oral contracts generally are valid and enforceable. What people often fail to realize with an oral contract is that they are entering into a contract with or without the paper. Failing to formalize terms and conditions on paper causes several things to occur.

One consequence is that the law will substitute its terms for missing ones. In fact, this is true even for written contracts; all a court needs to enforce a contract are essential terms (and price is very often not an essential term). If, in a contract involving the creation of an original work, the parties fail to specify or transfer ownership in writing, the Copyright Act dictates who the owner is. With very few exceptions, this is not the person who paid for the work.

Another effect of failing to memorialize an agreement is that parole evidence, or evidence not in the signed contract will muddy the waters in any dispute. As a general rule, parole evidence is considered in contract disputes only to explain terms, not to contradict them. In today's Internet economy, flurries of e-mail messages can be an evidence nightmare. A formal, written agreement can help you sleep better.

Still another downside experienced by some contract-haters is that they never really experience a meeting of the minds. In its simplest terms, a contract is nothing more than an offer, acceptance of the offer, and consideration. The offer-acceptance thing is just a meeting of the minds, but under what terms?

Let's use the copyright-ownership example again. The buyer and seller may have two different ideas about who owns the copyright. The author, knowing a bit about copyright law, may know that he is the owner by default, and may intend to retain that ownership. The buyer, on the other hand, may be a small company building its first Web site or looking to upgrade its current Web site. It may think it's the owner because it paid for the work. With no written agreement, how can anyone claim that there was a meeting of the minds?

Many business people get by without written agreements and never have a problem. Others experience their first problems only after using written contracts. For others, the cost associated with drafting and negotiating formal contracts is prohibitive. For the rest of us, here are some contract basics.

Negotiate all the terms up front. Get the messy stuff out of the way. Have your disputes before the contract is signed. Often, surprise terms such as copyright ownership are either deal killers or deal makers. One way to deal with surprise terms is to provide alternatives. For example, offer to sell the copyright but for more money than merely licensing certain rights to the work. (Be aware that assigning copyright rights, or exclusively licensing them, has serious consequences. Always use copyright counsel when dealing with copyright issues.)

Another example of a surprise term is venue for litigating disputes. Given the ease of global business these days, venue choice has become more important in smaller contracts. Each party will want to litigate disputes in its own backyard. One way to handle this potential deal killer is to agree to litigate on the defendant's turf. This can often make the would-be plaintiff think twice about bringing suit.

Get over length prejudice. A short contract is not necessarily a good one. People who are scared by long contracts are probably just trying to leave themselves an out. Include all the terms you want. Remember that leaving them out means that the law will insert its own.

Make sure you include warranty disclaimers and that the disclaimers are adequately drafted. There are certain implied warranties in every contract. Among them are the warranties of merchantability and fitness for a particular purpose. Merchantability means that the goods or services are fit for the ordinary purpose for which they are used. If, at the time of contracting, a seller knows any particular purpose for which the goods or services are going to be used (and knows that the buyer is relying on the seller's skill to provide suitable goods or services) the warranty of fitness for a particular purpose is implied.

When contracts involve intellectual property, there are many things to consider. In contracts where the buyer is providing some content or material to be used in creating the contract property, the seller needs to be certain that use of the provided material does not infringe any third party's rights. One way to handle this is to ask for warranties of non-infringement. These warranties are designed to ensure that each party has or obtains all necessary rights in and to original works of authorship in the contract. Such warranties are not, however, guarantees. Because many people misunderstand intellectual-property ownership, they make these warranties and representations without thinking, and are often wrong.

One way of dealing with this problem is to clear the intellectual property yourself. Ask to see what rights were granted. If a license was granted and not merely implied, make certain that sufficient rights were granted. For example, a Web-development company does not necessarily have the right to digitize a logo created by a third-party graphic-design firm.

Although many contracts have indemnification clauses, indemnification (payment by one party to the other for legal fees or judgments as a result of the indemnifying party's acts or omissions) is only as deep as the indemnifying party's pockets. Always keep in mind that an ounce of prevention is worth a pound of cure.

Consider whether you really want to arbitrate disputes rather than litigate them. Many people feel that arbitration is less costly than litigation, and in many cases, that is true. However, there are drawbacks to arbitration. Arbitrators do not need to know or understand the law, nor do they need to follow the rules of evidence. Arbitrators also have a tendency to want to split the bounty in half and give everyone something. Most troubling of all, and with few exceptions, you can't appeal the arbitrator's decision.

Online contracts can also cause headaches. One electronic issue is whether "click-wrap" licenses are valid, and there is little reason to think that they aren't. One party's performance is often the "acceptance" part of the contract. Therefore, a Web-site user who gains access to certain areas only after clicking on an "I accept" button cannot rely on the argument that he did not read the contract.

Lastly, a word about E-SIGN (Electronic Signatures in Global and National Commerce Act) the law passed last year that makes electronic signatures as binding as analog ones. E-SIGN was enacted to deal with the question of whether electronic contracts were valid. Remember how some contracts need to be in writing in order to be enforceable? This is so because the Statute of Frauds says so. Contracts involving, among other things, the sale of goods more than $500, must be in writing, signed by the party to be charged with its breach.

For most contracts used by small businesses, electronic or not, there doesn't seem to be any major benefit to E-SIGN. It does not purport to make e-contracts binding, but it does establish that a contract is not invalid or unenforceable merely because it is signed in electronic form. One final warning: Beware of forms and contracts that you may find online. Using those contracts can land you in a heap of trouble. Don't rely on the legal advice given to others; get your own. You deserve it.

Scott J. Fine is a partner with the law firm of Fine Hummel PC in Huntington, N.Y.