Small or medium-sized businesses often consist of partnerships and long-standing courses of dealings, where a formal agreement or document detailing and regulating the course of conduct, expectations, consideration, and payment between parties is absent. Deals quickly made in person but not followed up with in writing or with an agreement may stay as verbal agreements over a long period of time and may seem to be hassle-free and convenient to a lot of people.
Are verbal agreements valid?
It is true that contracts can exist without being in writing and contain the main components of a contract consists of an offer, acceptance, consideration, and the intention to create a legal contractual relationship. However, the main issue is that verbal agreements are difficult to prove.
In many cases, the agreement need only be referred to when there are disagreements between the parties or failure to deliver on the agreed terms. Consequently, verbal agreements may lead to contradicting statements and representations about what was actually agreed and can make it very difficult for parties to reach a resolution or settlement amongst themselves, especially if the relationship has broken down. This may give way to the following undesirable scenarios:
- When a party disputes the terms later on, claiming that something different was agreed to
- When a key contact or staff member of the party leaves, without properly handing over and communicating the agreed terms to their replacement
- When a party disputes the terms due to the business relationship breaking down
- When the agreement takes place over a long period of time (e.g., multiple decades) and the memory of the terms become unreliable
The uncertainty of the contractual terms become very costly to prove and establish; oftentimes professional legal advice is required and the disputes that come out of it tend to be very long-winded and contentious. Not only do the parties need to pay hefty legal fees at the end, but their commercial relationship and everyday business operations are likely to have been gravely affected as well. This is particularly detrimental for SMEs as the strength of their agreements may heavily rely on longstanding relationships and good faith. The smaller scale and tighter operation margins of SMEs also mean that any kinds of dispute may place significant strain on their operations and finances.
Avoiding disputes
To avoid such situations, there are a few avenues that SMEs can consider, such as drafting a short agreement written and signed, detailing the skeleton and key terms of the business relationship between the parties, including but not limited to the agreed scope of work between both parties, payment terms, termination and exit clauses, and liability and confidentiality terms.
Even when a full-blown agreement is not drafted, written confirmation or summary by way of email is extremely helpful in proviing the existence of an agreement and the terms agreed upon. This can prevent the majority of scenarios where a party suddenly denies certain aspects of an agreement.
However, to eliminate any possibility of being placed at a legal disadvantage, or to minimise the risks of any dispute arising from the parties’ competing understandings about the agreement, it is legally and financially responsible to have a contract drafted or reviewed by a legal professional who can then advise on the meanings, implications, and liabilities of certain terms, and the content of the agreement in a more general light.
If you need advice or assistance, please contact Nath Solicitors on 0203 983 8278 or get in touch with the firm online.