Recently, I was thinking about the number of legal contracts that are entered into everyday by thousands, if not millions, of people that they may not event be aware of.
From a legal perspective, every time you purchase a drink from a newsagent, or a t shirt from a high-street retailer, you are entering into a consumer contract to purchase goods. There is no written contract in place, but the terms of the contract are still binding. One reason for this is due to consumer contracts being underpinned by a complex statutory framework automatically you, as a consumer, rights that you may not be aware of.
However, there are times – typically in the context of business-to-business deals – where a “Gentleman’s Agreement” is reached (i.e. where no written contracts are entered into), but there are also no clear statutory or other legal mechanisms in place to ensure the terms of that agreement are enforceable. In these cases, are the terms of a “Gentleman’s Agreement” legally binding?
Yes and no.
From a legal perspective, a “Gentleman’s Agreement” is an oral contract which has arisen between two parties. This means there are no written terms and conditions of the contract, which oftentimes means the terms cannot be evidenced.
This does not mean that those terms are not enforceable, however – a contract does not need to be in writing for it to be legally binding. A legal contract will form wherever the following elements are in place:
i) an offer is made by one party, which is accepted by another;
ii) there is intention to create legal relations between the parties; and
iii) there is “consideration” (i.e. the parties each exchange something in value, such as payment of money in exchange for a promise to perform services).
Without each of these elements, no legally binding contract will have formed.
As such, you can see how oral contracts or “Gentleman’s Agreements” have the potential to be legally binding. However, proving that each of the formation elements have arisen in an oral contract will oftentimes be difficult, which represents a risk to your business.
Having clearly written contract terms in place between businesses allows those businesses to clearly demonstrate that the formation requirements have been fulfilled – and this is why we advise having these agreements in place.
You should also be aware that there are times when oral contracts will never bind parties. For example, the assignment of ownership in copyright between a web developer and a client will not be valid unless the assignment is made in writing and is signed by the assignor.
In light of the above, we recommend having clear, simple, but strong and legally binding, terms in place when you are agreeing to something important. These contracts don’t need to be longwinded or contain complicated legal jargon – they simply need to protect you from a legal perspective.
If you need assistance with any commercial contracts, please contact us and we’ll be happy to assist.
Written by Tom Broster, Associate