Business mentor: Save heartache by getting it all in writing

Q. Are verbal agreements binding contracts?

A. Simon Harvey, lawyer, replies: It is a common misconception that verbal agreements cannot form binding contracts. If the fundamental characteristics required to bring a binding contract into existence are satisfied, a contract can be either in writing or wholly verbal; or, partly written and partly verbal.

Some contracts are, however, required to be in a written form, or evidenced in writing and signed, for them to be enforceable.

What are the requirements for a binding contract?

At a basic level, a contract requires at least two parties who intend to enter into a legally binding relationship. There must be an offer made by one party expressing a willingness to be bound by a contract on certain terms.

The offer may be withdrawn on notice unless there is a separate contract to keep it open for a specific period of time such as an option agreement. To create a binding contract the offer must be accepted without qualification or condition by the person(s) to whom the offer was made.

An attempt to accept on terms different from those offered is not an acceptance, but a counter-offer which itself must be accepted for a contract to arise.

An acceptance must be communicated to the person making the offer and is effective only once it is received unless sent by post; in which case, acceptance is effective on posting. Acceptance communicated by email, however, must actually be received by the offerer.

To be a binding contract, each party must have paid for the other party's promise. This payment is known as consideration.

Consideration is not required, however, if a contract is made by deed which is a special type of written contract.

Once a contract has been formed by offer and acceptance, a binding contract will result so long as the agreement is complete.

If core terms such as price or quantity, for example, have not been agreed and no machinery has been agreed or included in the contract to work out such non-agreed issues, then the agreement may be so uncertain that it cannot be enforced.

What contracts are required to be in writing?

More common ones are: relationship property agreements, hire purchase contracts, credit contracts, and assignments or exclusive licences of copyright.

Importantly, the Contracts Enforcement Act 1956 requires contracts for the sale of land and contracts of guarantee (among others) to be either in writing, or for there to be a written record of the contract which is signed by the vendor or guarantor.

Should you insist on a written contract?

A difficulty with verbal contracts can be that after concluding the agreement, the parties disagree about exactly what was agreed.

If there is no written record or independent witness to confirm the agreement, a dispute is likely to arise which means added costs for your business.

Written contracts are a vital business tool.

Litigation and other forms of legal disputes can be a financial drain and are often avoided by carefully considered, robust written agreements that have been drafted, or at least vetted, by a legal professional.

* For more information email Simon Harvey.

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