Gardner Leader

Verbal Contracts – why they should be avoided!

Greg Humphreys, a partner in the Commercial Team at Newbury solicitors, Gardner Leader, considers a recent case which serves as a reminder that clients should ensure that their contractual arrangements are fully documented in writing. 

I am often asked whether it is possible to conclude a contract verbally. Generally this is the case, although there are certain circumstances in which a contract must be evidenced in writing for it to be binding, for example, a contract for the sale of land, the assignment of intellectual property rights or the transfer of shares.

For a verbal contract to come into existence it must comply with the requirements for the formation of a contract.  There must be an offer, acceptance of the offer, consideration must be given and there must be intention to create legal relations. If these requirements are met, a contract comes into existence.  Therefore, two parties having a conversation may result in one person making an offer for the provision of services, the second agreeing to take up that offer in consideration of a fee for the payment of the services and on the basis that the parties intend to create legal relations.  This would form the basis of a binding contract.

Difficulty arises in trying to prove the terms of the contract.  This often results in a situation where only the testimony of each party is available to the Court, without any other supporting evidence.  

This difficulty is illustrated by the case of Robert Capewell -v- Peter Boulton.  The parties were disputing the percentage of the shareholding they each had in a new company they had formed. Consideration of the facts and determination as to what had actually been agreed was made significantly more difficult because the sequence of events had started over 10 years previously.  The court spent a considerable amount of time examining the evidence of the parties, the evidence of others that had been in attendance at meetings regarding the affairs of the new company and the  parties’ conduct in relation to the formation of the company.  The court found that the parties had reached an agreement that they would each be 50% shareholders in the company and their conduct supported this agreement. 

Both parties endured many years of uncertainty in relation to their interests in the company, which would have been avoided if the parties had concluded a written agreement.

So, although it is possible to conclude a verbal agreement, subject to certain exceptions, there is a great deal of risk that proof of the contract will simply come down to one person's word against another's, which is a highly undesirable situation and could result in significant wasted costs.

In the event that a party refuses to sign a contract, it is advisable to write to that person and confirm the terms of the contract as they are understood, to provide as evidence at a later date. In the absence of any other evidence these communications may be key in assisting the resolution of disputes relating to the terms of the contract.

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