In the first in a series of blog posts looking at the contractual regime in Scotland, often identical or similar to the position in England and Wales, I’ll look at the key elements of what constitutes a contract and dispel a common myth.
Failure to realise whether a binding agreement is in place, or indeed what it covers, can result in significant financial and reputation damage.
Take the case of Burgess v Kempson, where a 15-minute discussion over a decade earlier resulted in a £7.5million claim. This dispute centred around advice from Mr Burgess to increase the value of Mr Kempson’s land. While the court found there was a contract in place, luckily for Mr Kempson, a technical point of law meant the claim was ultimately unsuccessful. Without that technicality, he may well have found himself on the hook for millions of pounds.
Often these issues arise with oral contracts or because a contract wasn’t signed by both parties.
As such, let’s take a look at both of those scenarios as well as some contract basics.
CONTRACT PRINCIPLES
There are five key elements that form a contract:
- An offer
- Offer acceptance
- Consideration (usually payment in exchange for goods or services)
- An intention to create a legal partnership
- Certainty of terms
In commercial settings, such as business to business communications, there is a presumed intention to create contractual relationships.
ORAL CONTRACTS
It’s a common misconception that oral contracts aren’t legally binding.
There are only a few examples where this doesn’t apply, such as agreements for the transfer of land, which do have to be in writing.
However, by their very nature, oral contracts can be problematic when disputes arise.
Not least because determining the terms, or indeed the very existence, of an oral contract ultimately comes down to one party’s word over another’s. In a court dispute, this means the judge ultimately deciding whose evidence they find more reliable and credible, leading to significant risk and unpredictability for everyone involved.
In a case against Sports Direct owner Mike Ashley, a former colleague alleged Mr Ashley had entered into an agreement with him worth £15million during a night out.
During the court hearings, Mr Ashley said he could not recall whether he made the deal but if he had it would have been “just banter” and that it would have been obvious to everyone that he “wasn’t being serious”.
The judge found while the company’s senior management meetings would, on occasion, “combine discussion of business matters with the consumption of alcohol”, the night out in question was a “considerably less formal occasion” with no “agenda or structure”. The claim was unsuccessful, but it is easy to see where issues might arise around oral agreements.
UNSIGNED CONTRACTS
Consider a situation where your client sends your business a purchase order, asking you to provide 50 widgets on September 3 to a specific address.
The purchase order has your client’s terms and conditions attached and you’re asked to sign and return a copy. You do not sign and return a copy but do deliver the specified items on the requested date. The client pays in line with your terms and conditions.
Two months later, they get back in touch to say the widgets don’t work as they ought to, and they’d like them repaired or replaced in line with the contract warranty.
Are you bound by the provisions in your client’s terms and conditions?
Chances are the answer is yes.
Your business received the proposed contract and while you didn’t sign it, you didn’t challenge it either. Plus, you delivered the goods in line with the contract terms. In other words, even if the contract wasn’t signed, your actions could be relied upon to demonstrate that you accepted its terms.
Had you instead challenged the warranty provisions and asked for them to be deleted from the terms and conditions, then proceeded to deliver the widgets in line with the rest of the contract, the situation might be different.
It wouldn’t be clear cut, but you could argue that while you fulfilled the order, you did so under protest in relation to the warranty provisions.
That said, neither of these options is best practice. Ideally, you shouldn’t carry out any work until both parties have agreed — and signed — the contract.
PROTECTING YOURSELF AND YOUR BUSINESS
The best possible advice to protect you and your business is to put everything in writing.
Where you have verbal conversations with clients or suppliers, consider whether anything said could be considered contractual and, if so, follow up with an email. If you do not intend anything that’s communicated to a client or supplier to be binding, include wording that the discussions are “subject to contract” or “are not intended to be contractual in effect”.
Be wary of inadvertently accepting the terms and conditions of another party by performing in accordance with a contract that you don’t intend to be bound by.
At the very least, if you are unhappy with the terms of a proposed contract, issue written correspondence to the other side, setting out what elements of the contract you don’t agree to. Best practice would be not to proceed with any performance until the applicable terms have been agreed.
The key takeaway is that it is not necessary for there to be a neatly packaged document, signed by both parties, in order for there to a binding contract in place, but that it’s far less risky, and ultimately much easier to resolve any issues that may crop up, if there is.