Napkin, anyone, for your next IT contract?

Press reports of a well-known music mogul-turned-talent manager being sued over a deal allegedly agreed on a napkin at dinner may raise a smile, if not a little indigestion. The serviette scribbles were reportedly signed and formalised later on, even if the mogul is now accused of reneging on the deal. Either way, it raises a question for contractors.

Does recording an IT contract informally (the ‘back of a cigarette pack’ was the old byword) make it any less enforceable?

The issue is particularly relevant to one-person companies, which often agree work through emails, messaging applications or oral discussions, writes technology lawyer Evane Alexandre, an associate at law firm Gerrish Legal.

Does an informal contract still count under English law?

Under English law, most contracts are not subject to formal requirements.

A contract will generally require five elements:

1. An offer
2. Acceptance
3. Consideration
4. An intention to create legal relations
5. Sufficient certainty of terms.

Where those five elements are present, the medium in which the agreement is recorded is usually immaterial.

A handwritten note, text message, email or oral exchange may therefore be binding, subject to limited exceptions where particular formalities are required.

In practice, disputes over informal agreements typically concern not whether a contract exists, but what terms were actually agreed. This reflects our experience since our legal firm first opened its doors in 2018.

The real contractual risk isn’t informality; it’s proof

Informality shifts the practical question from whether there is an agreement to proving what its terms are. That question will depend on the available evidence. For a sole trader or the director of a personal service company, the cost and uncertainty of resolving a dispute may be disproportionate to the value of the engagement.

Particular exposure for one-person companies

One-person contractor companies often operate informally, with one individual responsible for business development, delivery and administration. New work may be agreed during an existing engagement — without a formal written record. And this can happen over a quick snack, never mind a sit-down dinner. This informality increases the risk that important terms remain unclear.

The principal contractual risks for one-person companies

1. Uncertainty of scope. A brief instruction to an IT contractor, such as to “build the portal”, may not define deliverables, functionality, integrations or acceptance criteria. Without a defined scope, disputes can arise over what work was included in the agreed price.
2. Payment terms. Where payment timing and method are not specified, legal default rules may apply, which may not reflect the parties’ expectations. The absence of an agreed rate for additional work is another common source of dispute.
3. Limitation of liability. Informal agreements seldom contain a liability cap or exclusions. A contractor may therefore face materially greater exposure than under a negotiated written contract, subject to the ordinary rules governing recoverable loss.
4. Intellectual property. Ownership of code and other deliverables may not match the parties’ assumptions. Copyright assignments, in particular, are subject to statutory formalities, while licences may arise expressly or by implication.
5. Entire agreement provisions. Without a properly drafted written agreement, there may be greater scope for parties to rely on earlier communications or alleged collateral promises when arguing about what was agreed.

Five recommended steps for contractors

Proportionate documentation is usually enough to keep these five principal risks at bay. The jury is still out in the music mogul’s case, but a napkin alone is unlikely to be proportionate for most IT contractors’ needs.

Equally, a lengthy contract is not required for every temporary engagement in IT and other sectors.

With those two extreme approaches in mind, our legal firm recommends five steps as best practice:

1. Maintain a standard-form master services agreement, supplemented by a short statement of work setting out scope, price, timeline and deliverables.
2. Record variations in writing. A brief confirmation of the change, additional price and revised delivery date provides valuable contemporaneous evidence. Check whether the contract requires variations to follow a particular form. The napkin dispute is itself a case in point — the terms were reportedly written up and signed properly after the fact, exactly the kind of contemporaneous record that can matter later.
3. Include appropriate liability and entire agreement provisions. These can materially affect the allocation of contractual risk.
4. Address intellectual property and payment expressly, including ownership or licensing of deliverables, payment periods and late-payment consequences.
5. Exercise caution in informal communications. Emails, messages and conversations may create binding obligations, so care is needed when agreeing changes or additional work.

The takeaway

The main risk for IT contractors associated with informal agreements is not actually their form — but uncertainty about their terms.

An informal agreement — even one drafted on a napkin — may be as binding as a formal one. The difficulty often lies in proving its content.

For a one-person IT company, modest investment in standard documentation and written confirmation of key terms can be a cost-effective way of reducing that risk. Consulting a lawyer trained in contract law and specialising in the tech sector is an additional risk-mitigation step that will make sense for many IT contractors.