Is an unwritten agreement still a contract?
Tom Maple, partner in the Dispute Resolution team, considers whether contracts have to be in writing and/ or signed for them to be binding.
Laymen (and, at times, solicitors) often misunderstand whether they have a contract, where the contract is not in writing or is unsigned.
I recently took on a six figure breach of contract case where the first thing my client told me is he didn’t have a contract. After discussing matters, it was evident that what he meant was that there was no written agreement. In this regard, given the parties had been trading for several months, it was apparent that some form of contract was in place. That case prompted me to think about the issues and writing a precis of the relevant issues.
Formation of a Contract
A contract does not have to be in writing. To form a contract you need:
- An offer;
- Acceptance of that offer;
- The intention to enter into a contract;
- Terms which are clear; and
- Consideration (i.e. something in exchange – usually money but it need not be, it can be money’s worth).
If you have those five things, whether in writing or not, you have a contract. If it’s in writing it’s a written agreement, if it’s not it may be an oral agreement or an agreement formed by the conduct of the parties (often called an “implied contract”).
In my experience, the question of whether there is a contract is most regularly in dispute in two situations:
1. Where a contract was drafted but never signed, but where the goods or services which were the subject of that contract were still provided;
2. Where the client cannot point to a written or oral agreement (nor any drafts) but goods or services have nevertheless been supplied.
I don’t propose analysing these issues at any length given that there is no one answer, and it fills pages and pages of various legal textbooks. However, in simple terms, the answer to the question requires a simple analysis – what, if anything, was/ has been agreed.
In the first situation detailed above, one of the key questions to determine is whether, whilst the draft was not signed, the parties been trading in accordance with the terms of that unsigned agreement. If so, this provides prima facie evidence that the parties are trading on the terms set out in that unsigned agreement (and the clauses set out therein, such as those relating to termination (commonly the issue in dispute) are binding on the parties). If the parties have not been trading in line with those terms, then it may be that the supplier is going to be restricted to a reasonable price for his goods or services at best (in exceptional cases the service provider may not get that either). [If you are interested looking at a case on this very point, have a look at RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Company KG (UK Production) involving the famous Muller Rice brand].
In the second instance, assuming there is no prior course of dealing (potentially applicable to 1 as well), then it may well be that either you have no contract or you have an implied contact, i.e. a contract implied by the conduct of the parties. Again, the key question to determine is to work out whether the five elements above are satisfied. If so, the court may well find that the parties have a contract. However, in this instance, where the terms are not clearly defined/ agreed, it may be that the law will conclude that the terms are restricted to certain implied terms e.g. that a reasonable price be paid, the parties may terminate on reasonable notice and the price must be paid within a reasonable period which is far from ideal for many sellers and buyers.
As I say, this question has filled up pages of case reports, and cases such as that involving Muller Rice detailed above would not exist if the answer was straight forward. The critical issues involve a forensic analysis of the facts and, therefore, you should, if possible, involve lawyers at the earliest opportunity.
However, if you take one point away from reading this, it should be this: If an agreement has been reached that has not been put in writing, it does not mean you do not have a contract.
As ever, please call me if you want to discuss.