Are your agreements with clients, contractors and suppliers legally binding?
Empower yourself, make sure you know the answers to some basic questions and ensure that you can both rely on the agreements you form and don’t end up in a contract you didn’t even know you had entered into.
Things which are second nature to me and “obvious” are only second nature and obvious to me because of my legal training and experience. Sometimes it’s time to climb down off that horse and look around at how people operate day to day and think about the knowledge and experience that they’re using to help them run a business.
What are people really thinking about reaching agreements and planning for the future?
So I went looking online at forums for people starting out in business or hitting their first problems and scouting for answers. The questions that really stuck out to me were along the following lines, and I have to say, the state of knowledge really concerned me as anyone asking any of these questions could well be in for a nasty shock:
Can you form a contract over a handshake?
If it’s not in writing, is it a contract?
If we write it down, will it stand up in court?
How contracts are formed
There’s nothing like the great feeling of sealing an important deal or purchase for your home or business.. Whether you’re securing work for yourself or your firm for the coming months or years, or confirming your purchase of goods or services, whether it’s a champagne moment and a milestone in your career or entrepreneurial journey or the massive relief of finally contracting someone to fix your leaky roof, it’s a good day.
In fact, even the most simple purchase, on or offline, involves a contractual agreement to some extent…even when you don’t sit down and sign a piece of paper with the other party.
A contract can be formed over a handshake, a beer, a coffee, a few spoken words planning the sale or supply of any goods or services. So we’re answering two questions there: an oral contract is a contract, it’s just not a great starting place as there’s literally nothing to point at except your memories and we all know how reliable that can be.
A contract can be formed in the exchange of emails, texts, even tweets. Why? Because all it takes is someone offering something, someone accepting that something and the intention that the something is going to change hands or be delivered in exchange for cash. That’s it. There’s your contract. In legalese this is known as “offer” and “acceptance” accompanied by the intention to create a legally binding agreement and consideration but let’s keep it simple.
“I can sell you this bucket and spade for a fiver”
“I’ll take that”.
Done, that’s a contract.
“I can install your bathroom for £2,000”
There you go.
When you are sitting at your computer and downloading and installing digital goods, signing up for a service or ordering those fab sunglasses from an online store, before you make your payment you will invariably be presented with a page of dull stuff – their Terms & Conditions of Sale – where you are obliged to click “Accept” or “I Agree” – or even just “OK”. That’s a contract too. The seller is requiring you to accept their terms and conditions, and, even when money doesn’t change hands, you have invariably agreed to some limits on their responsibilities to you and accepted some of your own.
But what if…?
But what if this is faulty, broken or the person wanting it changes his mind? Can he cancel? Or do you tell him you’ve already spent the fiver? What if the bathroom doesn’t fit or the customer wants to add more expensive taps and there’s nothing in writing setting out how changes are to be made?
So yes, you can form a contract over a handshake but why would you want to? You couldn’t buy a house or a car without the paperwork and the protection it provides so why enter into a contract to buy or sell things which matter to you without any paperwork? If you’re the customer, are you setting yourself up for trouble by buying from a supplier who hasn’t bothered to think about his business enough or care about you enough to consider his own processes sufficiently to jot something down so you know what’s what?
Your responsibility as a seller
If you sell to consumers, you are in a highly regulated environment, if you don’t know anything about that environment then you cannot hope to shape how you trade and your customers will have to rely solely on laws like the Consumer Rights Act 2015 which generally back consumers up to the hilt. If you’re selling online, then it’s even more important to understand who your customers are and what their rights are. Why get it in writing? So website traffic has to pass through your rules – yours terms and conditions – before buying.
If you’re B2B then it will in most cases be binding as businesses are considered to be big enough and ugly enough to look after their own interests and the courts will be reluctant to step in. What can you do to try to ensure a level playing field if you’re trading with the big boys? Read the small print, it’s your problem if you don’t.
Let’s look at the next question, “if it’s on a bit of paper, is it legally binding”. Generally, yes, unless the things written down contravene the applicable law.
Like I say above, you don’t know what you don’t know, do you….? Think very carefully about what you’re writing down and whether it really caters for the deal and the parties to that deal.
So, you’ve written a few things down and you’re wondering whether, now that you need to, you can rely on those things. Let’s put to one side the technicalities of the law that applies to consumers and to businesses and think about the bit of paper. Have you got the “offer” and “acceptance” (I can do this, I want that, this is the price)? If yes, then yes, this is a binding bit of paper and the court will look to it as evidence of what should have happened. If there are gaps in the recorded terms, then the court will fill those gaps with the applicable law and/or the evidence, whether that’s your recounting the verbal stuff that surrounding the terms or looking through emails.
You can see, then, that a piece of paper with the terms of the agreement jotted down is a double-edged sword if it’s not detailed enough, if it doesn’t properly capture the deal, if it contravenes the relevant law, it’s not going to work for you and it may actually do more damage than good.
So what do you need to do to avoid the fall out of a missing or badly written contract?
It’s not that hard, but don’t tell the (other) lawyers I said that.
You need to think about what it is you’re getting into, what you expect to get out of it, what money is changing hands and when and who you’re selling to/buying from. What about cancellation or refunds? These are the basics.
Once you start to think about the basics, I have no doubt that you will start to think “but what if….?” and that’s perfect, do think about the what ifs and talk about them, get them down on paper, make sure everyone knows what their rights and obligations are and head off those disputes at the outset.
Once you’ve got down your “shopping list”, these form your “heads of agreement” or “heads of terms”. By this point, you might think that some of those “what ifs” need a bit more work, or you need some advice about the difference between marketing promises and limiting your liability in the contract. That’s where it’s worth getting in touch with us. We can take your shopping list and turn it into a clear, jargon-free agreement that covers up to date law as well as your written list of “must haves” and “nice to haves”.
Add those into the written terms, cover it all, it’s much much better to be safe than sorry and a little attention is better than a lot of fees later on.
“…a piece of paper with the terms of the agreement jotted down is a double-edged sword if it’s not detailed enough, if it doesn’t properly capture the deal, if it contravenes the relevant law, it’s not going to work for you and it may actually do more damage than good.”
Then, shake hands, congratulate yourself on a deal well made, and get on with it!