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Contractual complications – verbal and informal arrangements

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Posted by Matthew Goodwin on 14 July 2015

Matthew Goodwin - Tax Disputes Lawyer
Matthew Goodwin Associate-Solicitor-Advocate

In a previous article, we have discussed the top tips for avoiding contract disputes. A vital point to bear in mind when entering into contracts is the importance of pre-contract and mid-contract verbal or email discussions between contracting parties.

Provided the key components of contracts are upheld, as set out below, verbal discussions and amendments can be binding on both parties, irrespective of whether you formalise the deal in writing. This can be particularly important in pre-contract discussions where the key points of service have been agreed, even if some of the finer points are yet to be formalised.

It should be noted that property contracts and guarantee agreements cannot be entered verbally.

Key contract components

For a contract to be binding, whether verbal or written, it must have four key ingredients:

  1. Offer: The first stage for a binding contract is a definitive and clearly stated offer to do something.  This could be to provide goods or a service, but will have to be precise, avoiding estimates or notices of intention.
  2. Acceptance: Only what is contained in the offer is capable of acceptance.  Acceptance must be clearly communicated to the offeror, and cannot seek to incorporate any additional terms to the offer.  An attempt to amend the offer before acceptance will constitute a counter-offer, capable of acceptance by the original offeror.
  3. Intention and capacity: For a contract to be binding, the parties must have intention and capacity to create legal relations.  This intention is imputed into all contract discussions unless otherwise stated. For a contracting party to not be deemed to have had an intention to create a legally binding contract, the documentation must explicitly state that.  Parties are generally deemed to have capacity as long as they are not children and, if signing on behalf of a company, are authorised to enter into such agreements.
  4. Consideration: Finally, for a contract to be binding, there must be consideration for both parties.  Essentially, this means that both parties must derive some form of valuable benefit from the contract.  Usually this would be payment in return for a service.  Other forms of consideration can include agreeing not to do something or agreeing to refrain from exercising some form of right.

For a contract to be binding, all four of the above elements must be present. This is irrespective of whether a contract is formally written down, discussed in email correspondence or made over the telephone.

Non-formal contracts

Something which is being seen more and more regularly in contract disputes is issues surrounding non-formal contracts – i.e. contracts which do not have formal terms and conditions attached to them.

Email correspondence

An exchange of emails discussing a service a company would like to acquire can be sufficient to satisfy the Key Contract Components and form a legally binding contract. This is irrespective of whether or not the parties’ intentions were to enter into a formal contract. If the key aspects of a contract have been agreed, e.g. service, price and timeframes, then a contract can be enforced. Even if some key aspects are missing, the court is prepared to impute these terms into an incomplete contract to give it business efficacy or to bring it in line with industry standards. The court is regularly asked to work through email correspondence between two parties to ascertain a contractual agreement.

It is not enough to say in email correspondence that you would like to formalise the conditions of a contract. If you do not want to accidentally enter into contractual relations by email, then you should head any negotiations “Subject to Contract”.

Verbal discussions

The same principle applies to verbal discussions. The court will have no issues in finding a contract between two parties which has been agreed over the telephone or at a face to face meeting. What will be harder, will be to establish what was actually agreed. Again, if the court can establish the basic principles of the contract, it will not hesitate to impute terms into the contract to give it business efficacy.

The best and most straightforward way to avoid this occurring, is to request that an offeror formalise their offer in writing (email is fine). You will at least then be able to rely on that email as a basis for the contractual agreement. Even better, you can reply accepting the offer, but mark the email Subject to Contract, thus protecting your position.  

Main issues

The main issue with informal contracts is that it is highly likely that you won’t get what you actually wanted. For example, you won’t have discussed service levels, termination options or other vital terms and conditions such as variation clauses.

Additionally, if the contract is verbal only, with no supporting documentation, any contract dispute is going to rely entirely on who said what to whom. This will often make for very messy and expensive litigation as the parties argue over what was said.

Fundamentally, if a contract isn’t formed properly, you risk paying for something you didn’t want, or not getting something that was integral to your business and losing money accordingly.

A worked example

It is so easy to accidentally enter into a contract. Say you are a business contacting potential new paper suppliers. In the initial telephone conversation with the supplier, the supplier offers you a price of 98p per ream of A4 paper. You accept this offer, and order 5000 reams of A4 paper. You ask the supplier to email you to formalise the agreement, so that delivery timetables can be agreed and terms and conditions discussed. 

You have now entered a contract for 5000 reams of A4 paper at £1.98 per ream. You have not discussed when these will need to be delivered, how they need to be delivered, what colour the paper is, whether it is recycled or otherwise, how thick the paper is, how many sheets of paper are in a “ream” or how payment will be made.

The next day, 5000 reams of A4 paper arrive at your business. You did not want all 5000 to be delivered at once; rather you wanted to call off on this contract as they were required, as you have nowhere to store the paper. Also, the reams of paper are not what you had expected. Each ream contains 200 sheets of paper, less than half of what you expected. The paper is recycled paper, is an off white colour and is too thick to go through your printers.

With the delivery is an invoice for £9,900 plus VAT plus a delivery charge plus an express service charge.

You refuse to pay this invoice, and the supplier sues you for payment. It is very likely that the court will uphold the contract that has been agreed. The court may imply some terms which make the contract more in line with industry standards, for example the number of sheets of paper per ream, but otherwise there is very little that can be done about the existence of the contract.

This is obviously a very extreme example, and should be taken with a small pinch of salt as you would have options to reject the goods in this scenario, but the point of how easily a contract can be formed is clear.  

Variations to contracts

A final point to consider is variations of existing contracts. If a contract does not explicitly state that a variation to a contract can only be agreed in writing signed by both parties, then the above warnings as to verbal and email agreements will apply.

Provided the Key Contract Components are present within the variation, then it will remain binding irrespective of whether or not it has been formalised.

Conclusion

This is not meant to be scaremongering. It is so easy to protect yourselves from accidental contracts: write down what you are discussing, ask suppliers to email you their prices, mark email negotiations as “Subject to Contract” or simply point the supplier to your legal adviser and get a simple contract drawn up.

Nobody wants to end up in a contract dispute over something that could have been prevented. It takes time away from the running of your business, costs you money and ultimately causes additional pressure in an environment where you have enough pressure already. If you aren’t sure whether you are agreeing a contract, or want to discuss your options further, contact us.

About the author

Matthew Goodwin

Associate-Solicitor-Advocate

As an associate within the tax and financial services litigation team, Matthew regularly acts for corporates and individuals, dealing with a variety of disputes.

Matthew Goodwin

As an associate within the tax and financial services litigation team, Matthew regularly acts for corporates and individuals, dealing with a variety of disputes.

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