Contractors' Questions: Must my friend and I bother with a contract?

Contractor’s Question: My firm and I have had lots of contracts without many issues apart from hold-ups on signing, which is why I’d like to supply a good friend of mine without a formal contract. There’s money to be made for both of us but we need to start straight away so waiting to draw up contracts isn’t ideal. What’s the worst I should prepare for if I don’t get our agreement in writing?

Expert’s Answer: Firstly, whenever you buy or supply any products or services you are entering into a contract. Most contracts do not need to be in writing in order to be legally binding. The fact that there is no written agreement does not alter that position, except in a few specific cases such as contracts relating to property.

Having established that legally a contract exists (whether you like it or not), here are some of the main disadvantages of not having a written agreement:

  • If you do not have a written document clearly setting out all the details which apply, there will be uncertainty as to the terms which apply to that contract.
  • If there is no written documentation at all between your business and your customer – your friend in this case, the terms which apply to the contract will be implied into it in various ways. There are various statutes and regulations dealing with the supply and purchase of products and services generally. Others will be sector specific or will depend upon the type of contract. In addition to statutes and regulations, court decisions in past cases and trade custom and practice could also have an impact on your contract.
  • Statutes, regulations, previous court decisions and trade custom and practice will, where relevant, apply to the contract automatically, but in some cases it is possible to vary their impact by written agreement. Without checking what applies to your contract, you will not know whether it is favourable to your business or be able to consider making any permitted changes.
  • If there is any dispute relating to the contract – for example, about the products or services supplied or payment terms - it will firstly be necessary to establish what terms apply to the contract before it will be possible to determine the rights and obligations of your business and those of the customer. Working out what terms apply could be a far from straightforward process which may well lead to further dispute.

These are just a few of the reasons why I would recommend that you give proper consideration to the contracts entered into by your business. Having done that, you may still believe that in all circumstances it is reasonable for your business to rely on whatever legal position applies without putting agreements in place. Such a decision will mean that for commercial reasons you accept the lack of clarity as to the terms applicable to the contract and the inherent risks, including the potential complexities and costs of resolving any dispute which may arise.

The expert was Sue Mann, business contracts lawyer at Cousins Business Law.

Thursday 3rd Sep 2015