Is a verbal contract worth the paper on which it is written?

We regularly see clients who say “I haven’t got a contract”. What they mean is “I haven’t got a bit of paper”. Under English law almost any contract (except for buying land or a guarantee) can be made by word of mouth (or email). The main difference is that there is much more room for disputing the terms of a contract if it isn’t recorded – that’s more business for lawyers. Even for those areas where writing and signature are required the courts may find those in an exchange of emails.

A contract comes into existence once the parties have agreed the terms. It isn’t necessary for them to have agreed all the terms. The test is objective – the court looks at what the parties have said and whether the essential terms have been agreed. That is now commonly working through a set of emails.

Even for substantial commercial contracts there no requirement for greater formality. It is possible to create a legally binding contract before a document is drawn up and signed by the parties, even where they both expect to move on to that. As one judge put it – “Even if certain terms of economic or other significance have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.”

Even where there is an agreed intention for further condition to be fulfilled or terms to be agreed that may not prevent the contract coming into existence, if a reasonable person experienced in the business sector would think it had. A statement that a ‘formal contract will then follow in due course’ did not necessarily indicate that acceptance of a signed quotation was not legally binding.

If the parties can’t agree such further terms the existing contract is not invalid. If the parties can’t agree the court will, if necessary, enforce terms that are standard in the sector or give business efficacy to the terms agreed. What the court is very unlikely to do is to write in for you the terms that are often the most important, such as limitations on liability or practical protections for your assets and intellectual property.

The lesson is that when negotiating contracts all written communications relating to negotiations and contractual terms should be marked “Subject to Contract” unless and until you are to enter into a binding agreement on the basis of the terms agreed. As you approach that point be ready to instruct a solicitor to prepare a formal contract. Help us do that for you by letting us have clear “Heads of Agreement” setting out the essential commercial terms, and marked “Subject to Contract”. Help us save you money and protect your business.