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Verbal Contracts

Tuesday, April 26th, 2016

A 2016 High Court decision, (Grizzly v Stena), is a reminder that agreements do not have to be set down in writing to be a binding contract. However, it can be difficult to prove oral agreements and their terms. Those who regularly discuss and agree terms by telephone or in meetings should consider confirming their agreements in writing especially if you want to avoid expensive court action.

Why verbal agreements are not ideal:

Organisations that frequently do business together often develop a strong relationship based on trust. That trust can create a sense of security which might lead to a more casual approach to contracting – like agreeing terms and conditions for their deals on the telephone. Despite strong relationships, there is always the chance of a breakdown in communication – and that makes it hard when the parties realise they have different views on what they agreed in discussions. In other words, problems arise when things go wrong!

The court’s review in such cases can be an onerous task and involve consideration of the evidence on not only verbal discussions but also on the parties’ past commercial dealings.

Often, the court will decide on whose evidence is the more credible and whether a binding contract had been entered into in verbal discussions and the fact that there may not have been written confirmation of that agreement could be irrelevant.

So in the case above, none of this expensive court review would have been necessary if they had written confirmation. In this case, the owner was found liable for a considerable sum.

Some tips if you frequently make oral agreements

-Always follow up agreements you have reached in oral discussions with an email or a letter setting out what you have agreed

-Your written confirmation should follow as soon as possible after the oral agreement is reached while it is still fresh in your and the other party’s mind

-If you keep a diary or a notebook, you might consider using it at the time of the discussion to record who you met and the key terms agreed (but still send written confirmation to the other party)

-If agreement to certain terms was hard won, do not be reticent about confirming your strength of feeling about particular terms. For example, “As you know, it was crucial that we agree a payment date of []… because []”. You might also want to thank them for their compromise – or point out your own compromise

-If the other party disputes your written confirmation of what has been agreed orally, take time to clarify the agreement and ensure you agree on all points with the other party. Ensure the clarification is also recorded in writing

-Your circumstances when forming an oral agreement can be significant. For example, if you agree something outside your normal business practice in a meeting or by telephone, it is especially important to record that agreement in writing

-Frequently entering or amending agreements by telephone or in meetings, can lead to expectations that you will behave in a similar way in the future. If you are discussing terms, always state clearly whether you regard the discussion as binding or just a preliminary or exploratory discussion. Alternatively, change your practice – start to confirm all oral agreements in writing. Better still – contract only in writing

-Remember that the above tips also apply where you agree orally to make changes to a pre-existing written agreement

-Try to ensure that you agree the terms of your agreement before you or the other party start work. Negotiating your fee or pay after you’ve done some work is harder – especially if your relationship with the other party deteriorates in the meantime.