There is a famous quote, “A Verbal Contract isn’t worth the paper it’s written on” this is attributed to Samuel Goldwyn, although the quote is a misreporting of an actual quote, which was praising the trustworthiness of a colleague: “His verbal contract is worth more than the paper it’s written on” and sometimes it may just be beneficial for a company to not have a signed contract.
The general view held by many lawyers is that a business should always enter into a written contract when undertaking a major project or purchase, however, often the business is potentially better off signing no contract at all, and here’s why.
In English law, a contract does not have to be a formal written contract; it does not even have to be in writing. Most contracts that SMEs enter into are based on meetings, telephone calls and email exchanges. Sometimes, these are accompanied by written purchase orders or even a company’s standard terms and conditions.
If anything goes wrong with the performance of a contract, the first thing a lawyer or a court will do is to look at what the contract says. They will examine the written evidence (contracts, orders, terms and conditions, emails, letters, and notes of meetings and telephone calls) and what anyone has to say about the communications. They will then try to piece together exactly what was agreed, where was there a meeting of the minds, between the parties.
If there is a signed contract, the court will often just look at what that says and ignore all the promises made before the contract was signed. If the contract does not in fact say what was agreed, then the parties are likely to be bound by what is in writing rather than what was actually agreed beforehand.
Take the following scenario: a purchase manager has had extensive contact with a salesman, who made an initial presentation and after that, the manager had raised various questions. The salesman answered all the questions positively and promised the world.
The contract has been sent over to sign. Everyone was busy so the contract wasn’t read carefully if at all, perhaps it was a misunderstand of the legal language and no one at the business quite understands it all. The other party has put the Company under time pressures, and the Business just signed the contract.
Later something goes wrong and the Company has its lawyer look at the contract only to discover that what the business had thought had been signed wasn’t actually what the contract says.
Usually, contracts contain clauses (normally towards the end) saying that the contract is an “entire agreement” and that no party can rely on representations made prior to signing it. What this means is that, usually, an
aggrieved party, will not be able to say that the contract was different from what was actually agreed with the salesman. The Company is bound by what the written contract says. Sometimes, it is done deliberately to trick the unwary, but, usually, the other party is just trying it on by adding clauses to the contract that are very much in their favour. They anticipate that this act will lead to negotiations on the terms and expect the other party to get back to them suggesting changes to the contract before actually signing it.
A lot of the time, clauses are added covering events that where not even discussed with the salesman. Maybe these are things that the non-breaching party simply didn’t consider crucial immediately and thought that they could come back to these issues later, they did not expect the problems to come back and bite them.
It can often be that the negotiations that led up to the signing of the written contract set out better what was actually agreed than the contract itself. If this is the case, you might be better off signing no written contract at all.
If a business is going to sign a contract, and often it is best to do so as it avoids arguments later, make sure it says what was agreed to. It should be gone through carefully, clause by clause and the signing party should consider what each clause means. If the reader is not sure, then the party should get legal advice on just what the contract says and be prepared to negotiate. If the other party is keen to get the business, they’ll usually be prepared to go to some lengths to accommodate the party.
Acknowledgement: Gary Cousins – Cousins Business Law
NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is firstname.lastname@example.org.