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Tips for those who enter oral agreements: a checklist for In-House Lawyers

image of two people shaking hands taken from above Print publication

12/02/2015

Oral agreements are binding – but can give rise to problems

Agreements can be oral and do not need to be set down in writing to be a binding contract.

However, oral agreements are not ideal. Organisations that frequently do business together often develop a strong relationship based on trust. That trust can create a sense of security which might lead to a more casual approach to contracting – like agreeing terms and conditions for their deals on the telephone. Despite strong relationships, there is always the chance of a breakdown in communication – and that makes proving an oral agreement hard when the parties realise they have a different recollection of what was agreed in discussions.

Ideally, contracts will be drafted, negotiated and signed. In reality of course, we all know that some people prefer or find it more comfortable to seal an agreement with a spoken ‘agreed’, a nod or a shake of the hand. Sometimes, negotiations are still continuing after works/services have started. This checklist helps those who do business that way to safeguard their oral agreements. Our tips can help reduce future argument – and expensive court or other action.

The key message is that proving the existence of an oral agreement can be hard (and expensive): so get it in writing or evidenced in writing before works/services start. A court will look at all the circumstances to work out whether there is a binding agreement – and this includes the parties’ past commercial dealings. If the oral agreement and its key terms have been confirmed in writing and that written confirmation has not been disputed, it is likely to be easier to prove the agreement’s existence.

Here are our tips for those who frequently enter into agreements orally.

Please note this checklist is for guidance only and is not a substitute for legal advice. In each case, the appropriate action to ensure that agreements are legally binding will depend on the particular facts and law. If you are in any doubt about the applicability of any of the steps below to your situation or the legal issues involved, please contact Gwendoline Davies.

Record the agreement

  • Make notes at the meeting or during the telephone call in manuscript or electronically. If necessary, take along an assistant to take notes. (But even if you do, you should still record the key terms agreed.)
  • Record who you met, where, when and who else was present as well as the key terms agreed. If there is anything unusual about the agreement and why particular terms were agreed, make a note of that too.

Follow up all discussions

  • Always follow up agreements you have reached in oral discussions with an email or a letter. Set out what you have agreed.
  • Send your written confirmation as soon as possible after the oral agreement is reached while it is still fresh in your and the other party’s mind.
  • If agreement to certain terms was hard won, do not be reticent about confirming your strength of feeling about particular terms. For example, “As you know, it was crucial that we agree a payment date of []… because []”. You might also want to thank the other party for their compromise – or point out your own compromise.

What if the other party disputes your confirmation?

  • If the other party disputes your written confirmation of what has been agreed orally, it is important to take immediate steps to clarify the agreement and ensure that all outstanding/disputed points are agreed.
  • Ensure that this further clarification is also recorded in writing.

Have you got an established custom in the way you trade?

  • Be aware that your circumstances when forming an oral agreement can be significant. For example, if you orally agree something unusual or outside your normal business practice, it is especially important to record that agreement in writing.
  • Frequently entering or amending agreements by telephone or in meetings, can lead your trading parties to expect that you will behave in a similar way in the future. This could result in you being bound by a contract when you only wanted an exploratory discussion. If you are discussing terms, always state clearly whether you regard the discussion as binding or just a preliminary or exploratory discussion. Alternatively, change your practice – start to confirm all oral agreements in writing. Better still – contract only in writing.

If you are agreeing heads of terms only

  • If you intend to agree heads of terms only and fully intend to draw up a formal, written contract after the discussion, then ensure that your discussions are held ‘subject to contract’.

Amending contracts – the same rules apply

  • Remember that the above tips also apply where you agree orally to make changes to a pre-existing written agreement.

Get the timing right

  • Try to obtain or send written confirmation of the terms of your agreement before you or the other party start work. If an agreement is disputed, negotiating your fee or payment after you’ve done some work is harder – especially if your relationship with the other party deteriorates in the meantime.

For further information or to discuss how to resolve your dispute, please contact Gwendoline Davies.

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