If you have a good relationship with your counterparty you may be comfortable entering into a relationship based on a “gentlemen’s” agreement or a more informal agreement than a written agreement. However, we would always recommend entering into a written agreement regardless of the strength of your business relationship.
Why we recommend entering into a contract?
The biggest benefit of a written contract is it (if well drafted) provides proof and certainty of what has been agreed between the parties. The terms agreed between the parties should clearly outline each parties obligations, rights and duties under the contract as this helps manage each party’s expectations under the contract and minimises the risk of any disputes or misunderstandings as to what was agreed.
If a written agreement is not in place then the parties may be left piecing together bits of correspondence or verbal communications as well as legally implied terms to ascertain the terms which govern the relationship. This approach lacks certainty and can result in costly and time consuming disputes between parties.
How do you know your liability under the contract?
Businesses need to understand what the liabilities and obligations of the business are under any new business arrangement. The best way to do this is to enter into a written contract with the counterparty. It is only then that a business will have a full understanding of the businesses’ exposure and risk under the contract. A written contract also provides you with the opportunity to add in additional protections which might be necessary to balance the risk under the arrangement and which wouldn’t apply if not specified in a written contract.
What happens if a dispute arises?
It is often only when something goes wrong that a party looks to rely on the contract, and without one, the terms of the arrangement can be extremely unclear. We have seen on many occasions that clients do not have a written agreement in place and then if something does go wrong the disputes are usually complicated by the fact that there is no written agreement which in turn may make them more costly and time consuming.
Relying on a “gentlemen’s” or informal agreement to avoid time and costs associated with drawing up a written contract could cost you considerably more in the future if a dispute arises.
How can we help?
For strategic advice on commercial contracts, please contact our commercial team.
