There comes a time in business when it grows to the extent that you need systematic systems and processes to manage it, and if you don't put them in place, things get out of hand. One such important process is having clear legally binding agreements with clients, business partners, employees, vendors, stakeholders etc.
In India, where people are more relationship focused, agreements are seldom written down, and business is done based on a word, or a handshake, some times in coffee shop. However if an agreement is not written down, there is ample scope for future misunderstandings and mismatch in expectations from both parties on what is expected, what is covered, and what is not. In the case of a person who is self-employed, the worst loss due to such misunderstandings is of one's own time or a small amount of resources, however if the contract is a high value one undertaken by an organization that extends over several months and involves a high investment of time and resources, the loss could lead to employees careers being affected, and the future of the organization itself could be in jeapordy.
Hence although both parties must put in place measures to ensure good relations, clarify expectations and establish trust in each, they must also insist on a written contract. A good amount of time can be spent in negotiating such a contract, but once the contract is in place, it saves time on renegotiating and reduces chances of relationships being damaged due to misunderstandings or gaps in perception.
Early in business, one must choose clients wisely. If you or your client are not in a position to sign a contract due to uncertainties of any kind, then it is best to not enter into any medium or long term engagement at all.
