The danger of not having a written agreement
The classic handshake deal between a customer and a supplier is fraught with risk. I regularly receive instructions from clients who find themselves embroiled in a commercial dispute with a supplier, customer, business partner, employee – or even a relative – where the dispute is exacerbated by a failure of the parties to have recorded in writing the parameters and particulars of each party’s respective rights and obligations.
The sorts of reasons I often hear for not having a written contract include:
- I was confident in my relationship with Mr X so I didn’t think that we needed a written contract
- I didn’t think a written contract would be necessary given the size of the transaction”
- At that point in time I didn’t think I would ever find myself in a court battle with the other side
These reasons often turn out to be misconceived. Parties that fail to sign written agreements formalising their business transactions will often regret not having formalised their commercial relationship in writing should a dispute arise.
The main reason why legal agreements are most frequently set out in writing is to avoid confusion or ambiguity around the intention of the parties as to their rights and obligations vis-à-vis one another. On the other hand, an oral agreement, an agreement evidenced by conduct or created on a handshake, will often leave the parties in a situation where they will at some point in the future argue about the scope of the relevant transaction or who should take responsibility in any given circumstances.
By failing to record the agreement reached in writing, the parties will be left to try to prove, through relying on varying forms of evidence, the terms of the agreement. But seeking to rely on evidence in a court dispute requires consideration of a whole raft of evidentiary rules and doctrines, such as the infamous hearsay rule, which may in certain circumstances result in a party’s evidence being rejected.
The absence of a written agreement does not mean there is no legally enforceable contract. If the essential elements of a contract are present, then a contract may still be enforceable. Generally in order for there to be a valid legally binding contract, it will be necessary to demonstrate than an offer has been accepted, consideration has been given and that there has been a ‘meeting of the minds’ as to the subject of the contract. Other factors will also come into play in evaluating the existence of the contract and its enforceability.
And in certain limited circumstances, Australian common law will impose obligations on parties to pay monies, even in the absence of a written contract. The principle known by the latin term “quantum meruit” will in certain circumstances permit a plaintiff to recover from a defendant so much money as he reasonably deserves, preventing a defendant from being unjustly enriched. There are other legal doctrines that may have an impact on the prospects of enforcing a contract.
A properly drafted written legal contract should be able to give each party comfort in knowing precisely what its legal rights and obligations entail. Contractual documentation prepared by a lawyer who understands the subject matter of the transaction will help avoid both simple misunderstandings and significant contractual disputes and will assist in the preparation of a written document that is more likely to be understood by a judge determining the outcome of a dispute if the matter proceeds to court.
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Please contact me if I can assist with the preparation of a legally binding written contract.