Agreements and Contracts – The Power of the written word
Introduction
In years gone by a handshake was sufficient to ensure a deal was concluded. In the current business environment, this is no longer enough. We find ourselves dealing with many disputes arising from differences of opinion about what was agreed. This is more prevalent in verbal agreements, but there are often times when a written agreement (or contract) is so complex as to be open to various interpretations, which requires significant legal intervention (and cost) to decide which of the parties is correct.
Contracts and agreements are more than just paperwork for safekeeping – they are the foundation for business relationships, and when well drafted, can prevent misunderstanding and disputes that can prove costly.
Whilst the terms ‘agreement’ and ’contract’ are used when referring to the same scenario, they have distinctly different meanings in a legal sense. It is important to understand the difference between the two in business and in personal transactions.
Forensic accountants can help you through the minefield.
Difference between Agreements and Contracts
An agreement is a mutual understanding or arrangement between the parties (two or more) about their rights and responsibilities. It can be verbal or written and may or may not be legally enforceable.
A contract, on the other hand, is a specific type of agreement that is legally enforceable. A contract has specific legal requirements. Certain transactions are required by law to be in writing.
The essential elements of a Contract
For a contract to be legally binding it must contain the following elements:
- Offer – proposal of terms.
- Acceptance of that offer.
- Consideration – something of value is exchanged between the parties.
- Intention to create legal relations – the parties must intend the agreement to be legally binding.
- Capacity – all parties must have the legal ability to enter into the contract.
- Legality – the subject matter must be lawful.
- Certainty – the terms must be clear and unambiguous.
- Signatures – should be signed by the parties to be legally binding and enforceable, however there are cases where an unsigned contract can become binding if you can demonstrate an intention to be legally bound.
Certain contracts have to be in writing
UK law specifies specific contracts that must be in writing to be legally binding, including:
- Sale or transfer of land or property.
- Long-term leases or service contracts, usually those over 3 years.
- Marriage agreements (for example prenuptial agreements).
- Guarantees, as in guarantee of another’s debt.
- Consumer Credit Agreements – loans, hire-purchase agreements.
- Bills of exchange and promissory notes.
- Contracts made by deed.
Other contracts that are often put in writing
Whilst not all contracts are prescribed by law to be in writing, it is recommended (and best practice) that certain types of contracts be written to save time, money and stress down the road. A list of contracts that are usually put in writing are:
- Partnership and Joint Venture agreements.
- Shareholder agreements.
- Service agreements.
- Supply and distribution agreements.
- Employment contracts (a written statement of terms is required within 2 months).
- Sub-contract agreements.
- Commercial leases or tenancy agreements.
- Franchise agreements.
- Intellectual property and licencing agreements.
- Confidentiality or Non-Disclosure agreements (NDA’s).
- Business or personal loan agreements.
Do emails constitute a written contract?
Emails can constitute a written contract if they contain all the necessary elements of a contract and are intended to be legally binding. In the absence of a formal contract, this is a great alternative but just make sure you include details that show an offer, acceptance, consideration, intention to create legal relations, and certainty about the agreement.
Emails with automatically generated signatures con be considered a valid signature for the purposes of the contract.
Email exchanges can provide strong evidence of an agreement, especially when discussing specific terms and conditions.
Are verbal contracts legally binding?
Verbal contracts are enforceable in many cases – as long as they contain the same legal elements as a written contract. If a contract is required by law to be in writing, but is not, then it may be void or unenforceable and not actionable in court.
The problem with verbal contracts is that they are difficult to prove in court if a dispute arises. It is your word against the other party’s and you will need to prove the contract exists in the first place. You will need to provide significant evidence to the court to prove your claim including text messages, proof of actions taken, witness statements, etc. all of which take time and could involve significant cost.
Written contracts are preferable as they record all the agreed conditions and minimize the risk of misunderstandings and legal disputes. Whilst you may verbally agree the terms, it is always best to follow up with a written record, even if it is in an email that can be agreed to by the other party.
Parting thoughts
Apply the mantra – “if it is not written, it is not true” – and put all important agreements in writing. This avoids misunderstandings and enforceability issues, and expensive legal fees to handle the dispute.
A contract forwards a professional image and instils confidence and credibility to your business and gives you the legal protection should you need it.
Click the link for an article on the elements of legally binding contracts.
A clear written agreement can prevent disputes, protect cash flow and provide evidence of what the parties actually agreed. In business, vague promises are risky; written terms create clarity.
- GOV.UK Business Guidance
- Companies House
- Unfair Contract Terms Act 1977
- Consumer Rights Act 2015
- Law Society Business Management Resources
Properly drafted contracts help define payment terms, responsibilities, deliverables, deadlines, dispute procedures and the consequences of non-performance.
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