Get it in writing: why oral contracts aren't worth the paper they aren't written on

Oral contracts: every lawyer's nightmare.

Despite the fact that writing as a form of communication has existed since about the 4th millennium BC (ie just before Bruce Forsyth started his presenting career at the BBC) it is still quite common for agreements not to be written down.

There are many, many reasons why this might be the case:

We don't need to write it down. We've shaken hands on it. It's a gentlemen's agreement

We don't have time or the money to spend faffing with technical documents and lawyers

 ... or

I'm allergic to paper

When things are going well, an unwritten or 'oral' agreement is unproblematic; but the moment that things start hitting the proverbial fan, life can get very complicated indeed. Suddenly, you are in the 'how-long-is-a-piece-of-string' school of uncertainty: ‘what did we agree again’?

Where there is no written evidence as such, the courts are forced to act like forensic scientists, trying to work out what the Dickens has gone on. It can be like trying to work out the history of a game of 3D chess.

A recent decision in the Court of Appeal (Farmer v Winchester & another*) has reiterated that the court is entitled to go through a party’s conduct, correspondence and course of dealing to establish the terms of an agreement where there has been no agreement in writing.

This is not a cheap process. Nor is it much fun.

Of course, life is so much easier if you get the terms of the agreement down on paper in the first place.

So what happened in this case?

Mr Farmer paid to the Winchesters £119,500 to help finance the Winchester’s new business venture. In turn, Mr Farmer received 20% of net profits of the business (before deduction of salaries) over nine years, totalling some £635,000. However, the Winchesters then refused to make any further payments of profits to Mr Farmer, saying that there was no contractual agreement between the parties and that the previous payments were made out of goodwill.

Mr Farmer wasn't particularly happy about this and issued proceedings in September 2012, seeking declarations as to his entitlement under the agreement which he alleged existed and ‘an account of sums due’. The original judge decided in Mr Farmer’s favour. The Winchesters then appealed and lost.

The court confirmed that where parties have proceeded for a long period on the basis that they have a legal agreement, the court will strive so far as possible to supply any gaps in the agreement by a process of implication.

In this case the court took into account the fact that:

  • draft agreements were negotiated but never agreed
  • the claimant, Mr Farmer, had received regular payments for nine years
  • the conduct of the parties suggested that an agreement existed, and
  • correspondence (both sent and unsent) emanating from the defendants (the Winchesters) asserted the existence of an agreement

So what should you do now if you have an important agreement or arrangement that hasn't been committed to paper?

  • Firstly, don't panic. Have a nice cup of tea. Perhaps have a Hobnob or two and a bit of a think. Work out in your head where the various documents evidencing some of the agreement (eg emails) might be. Who agreed what and when?
  • Secondly, work out the value of the deal. Is it worth worrying about? What is the worst case scenario if nothing is done? What are the parties' expectations?
  • Thirdly, where you have any concerns, have a word with your legal advisors who should review any unwritten investment arrangements, in particular. It may be possible to commit the agreement to paper even if it is a very short document. Something is typically better than nothing. Admittedly, it can often be tricky to convince the ‘other side’ that something should be done so try to find a natural time to review the agreement or arrangement (eg ‘we said that we would review the contract after a year, so we are contacting you now to do so and to arrange a meeting. How does next week work for you? We were thinking that it might also be a good idea to get some of the terms of the agreement committed to paper (etc.)’)

Even more importantly, if any future agreements are made, it is vital that they are governed by robust written agreements to minimise risks and provide certainty to all parties.

It is clear that, although the law recognises the validity of oral contracts, their limitations can be easily exposed in commercial arrangements.

Remember folks: paper is your friend!

(Apart from paper cuts. They still remain the epitome of evil. But that’s a different story for a different day.)

*  [2013] EWCA Civ 1235 [2013] All ER (D) 32 (Nov))

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