26 July, 2021
One of the biggest misconceptions is that just because you do not have a document in writing means you do not have a contract. A contract does not have to be in writing. A contract simply requires:
For this reason, many businesses enter into contracts orally. Whilst oral contracts seem quick, easy and cheap at the time, they are fraught with problems: such as establishing exactly what obligations exist, a lack of corroborating evidence when the parties disagree about what was said and agreed at the formation and/or whether the original contract was varied by conduct for example. When one party breaches a contract, the enforceability of an oral contract is far more complicated, and this is why oral contracts are so frequently litigated over.
It is common for two parties who disagree over the terms, to have a genuine belief that their opposing 'version' of the oral contract is correct. This will ultimately lead to a trial where a Judge will have to make findings of fact based on what evidence there is, in order to establish the terms of the oral contract for the purposes of determining the case. This is never an ideal situation to be in.
It is always beneficial and advisable to have the terms of any agreement in writing for the following reasons:-
1. Clear terms - A written contract will clearly set out each party's obligations under the contract, the term of the contract and how disputes have to be dealt with. Also, contracts can build in flexibility by predicting different scenarios and how those may be dealt with as the term of the contract progresses. This provides a clear understanding of what is expected and when thereby reducing the chance of dispute. Oral contracts tend to be ambiguous and vague; open to a degree of interpretation, and you will have to rely on the party's recollection of the oral contract, which sometimes can differ. This often turns into a 'he said she said' situation.
2. Enforceability - A written contract provides proof of the exact terms that have been agreed by the parties and it is therefore usually clear when a party has breached those terms. The facts are applied to the legal contract and a breach can be established or not as the case may be. A written contract may also have specific clauses setting out limitations of liability in the event of a breach or liquidated damages clauses that say what is to be paid in the event of a breach. The clarity of a written contract can greatly improve a party's chances of a successful Court action for breach of that contract and can undoubtedly help to reduce the costs of litigation by avoiding lengthy arguments about what was said, by whom and when.
3. Alternative Dispute Resolution - A well-drafted written contract will usually set out what is to happen in the event of a dispute between the parties including the applicable law and jurisdiction of any disputes. The contract will usually propose a method of Alternative Dispute Resolution (mediation, arbitration, etc). These ADR options are often a lot cheaper and quicker to reach a resolution as compared to the traditional court route, that many parties embark upon when there is no written contract.
4. Ending the Contract - whether it be a lease, a contract for sale or a contract for services, all contracts will come to an end at some point - but how? As with many oral contracts, the parties at the time may not give much thought to the conclusion of the contract and subsequently, do not consider how the contract will end. A well-drafted written contract will set out how and under what circumstances, a party can bring the contract to an end. This can help reduce the time and costs spent between the parties arguing over when and how a contract can be ended. It may also set out how the contract can be renewed and on what terms.
It is best practice always to have your written contracts drafted by a commercial solicitor. A badly drafted contract will lead to more problems than solutions. For businesses, a well-drafted contract can be one of the best investments to make at the outset of a commercial relationship.
If you are involved in a contract dispute, whether it be a written or oral contract, and wish to obtain advice, please contact Stephen McArdle in our Dispute Resolution department by emailing Stephen McArdle or by phoning 01254222435.