It’s a question that lawyers are asked repeatedly.
While the simple answer is resoundingly ‘yes’ in terms of basic contract law principles, there are many situations where clients are either unaware a contract has been formed at all, or where their situation could have been improved by having a written one.
For clarity and certainty, the golden rule is ‘get it in writing’. A common misconception is that this means a lengthy legal document, signed and witnessed, but the good news is that it can be far less formal.
What is a contract?
Fundamentally, a contract is an agreement between parties which only requires four simple elements to become legally binding, namely: an offer, an acceptance of that offer, some consideration (each party giving and receiving something), and an intention for the parties to create a legal relationship.
To give an example, during a conversation in the pub I might offer to sell you my car for £200 if you pay me in cash right then and there. If you said that you were ok with that as long as I delivered it to you the next day, and I agreed to this, a binding contract has been formed. In that example the contract, although verbal, is just as binding in law, as if it had been in writing given all four elements are present.
Situations like these, where an informal conversation has inadvertently formed a binding contract, can easily lead to problems because it’s not always clear exactly what was agreed, if anything!
We all hope contracts act like insurance policies – they’re a comfort to have and you shouldn’t have to use them unless there is a problem. But it’s an unfortunate reality that sometimes one party doesn’t hold up their end of the bargain and the other needs to remedy this via a legal route.
Where there is no written agreement it can make it harder to take legal action. For example, where is the proof that anything was agreed at all, let alone the exact terms that were set?
Whenever a party makes a claim for breach of contract, the aim of the legal remedy is to put the claimant in the position that they would have been in if the contract had been fulfilled – as near as can be achieved by financial compensation anyway. This means any legal proceedings will focus on the financial losses of the claimant that were caused by the contract breach. But if the terms of the contract are unclear, incomplete or in dispute, making that calculation can be very difficult and that can be a problem for both claimant and defendant.
So how might this affect your business?
Many issues I see in businesses stem from those informal or verbal agreements, often made a long time ago.
This is especially the case when it comes to smaller businesses or those who have grown or changed significantly since they were first set up. Casual arrangements may well work for small or simple tasks, but as the business grows and becomes more complex, there are more nuances and scenarios that need to be considered.
Picture Jim, the business owner who buys and sells furniture. A buyer agrees to take five dining tables, so Jim calls his supplier to place the order. A week later, the buyer tells Jim he’s got cash flow issues and is therefore cancelling the order. Jim contacts his supplier immediately, only to be told the goods are on the way and Jim will still have to pay for them.
What’s Jim’s recourse? In this situation, very little as it’s unlikely Jim can enforce the arrangement with the buyer, and it’s not his supplier’s problem that Jim’s sale has been lost. Given it’s only a few tables, it may not be too concerning, but what if Jim’s UK buyer was a national chain and he was acquiring five thousand tables at a cost of hundreds of thousands of pounds?
This is where it is really important to consider the parts of any arrangement you’re entering into which may carry risk to you and your business. Clear written agreements, one with the supplier and another with the buyer could have gone a long way to helping Jim, such as terms binding the buyer to complete the purchase or a supplier agreement with specific cancellation terms.
It is the critical elements you should get down in writing to be sure everyone has agreed to them and that you have evidence of that agreement. While this can be done via any written means, including email or WhatsApp, it won’t surprise you to hear a lawyer recommending the benefits of a carefully drafted contract! It doesn’t need to be complex, but your lawyer is likely to have come across similar situations and will probably have suggestions for things to include that you haven’t contemplated.
Ultimately, while contracts, whether written or not, are there to provide protection and peace of mind, they are most useful when there is no ambiguity. As verbal agreements can lend themselves to misunderstanding and a lack of clarity, to avoid problems in the future, my advice is simple: Always, always, always, put things in writing.