When we run an analysis of search terms that are used by people looking for legal advice on business services, one of the most regular searches we see tends to be along the lines of “Should I accept a person’s word when doing business?” This always causes a deep sigh from the commercial team, who hold the position of, ‘if you want to do business with a gentleman (or lady), why on earth would you just rely on their word?’.
If someone asks you to enter into a business agreement with them based merely on the shake of a hand, the question must be “why take a chance?” Looking at it in the most positive light, a gentlemen’s agreement (realistically this is a verbal agreement) is as enforceable (or unenforceable) as any other verbal contract. Do you want that uncertainty when you are investing money in a business project?
The enforceability of a verbal agreement will largely depend on trying to establish exactly what the terms of the agreement are. These could be contained in a letter, a series of letters, an e-mail or exchange of e-mails, or even scribbled on a napkin during a meal, known as “the traditional back of envelope” document.
Whilst we acknowledge it may be possible to establish some of the terms of a verbal agreement, it will at best be cumbersome and time-consuming putting together all the various documents, scraps of paper or emails etc. There is also a substantial risk that some points may be missed out altogether.
The real risk here for someone trying to rely on a verbal agreement is in trying to establish to the satisfaction of a Court that the terms of the contract were actually agreed between the parties.
You can probably see where this is going. The bottom line is that you really should not rely on any form of verbal agreement. Put it in writing! It may not be necessary to have to go all the way to drawing up a lengthy contract – simple bullet points of what has been agreed may well be sufficient.
We are moving into the area covered by ‘Heads of Terms’ or ‘Heads of Agreement’ – a very useful compromise between having nothing at all or something as ineffective as a gentlemen’s agreement and the comprehensive commercial agreement mentioned above.
Whilst Heads of Agreement are more often than not expressed to be non- binding and of no legal effect (save for a couple of points e.g. confidentiality provisions), it is possible to have binding Heads of Terms if the parties are confident that the bullet points are sufficiently detailed to give a concise ‘mini-contract’ from the date of signing.
The risk is that the Heads of Terms, if not drawn up correctly, will not do this and the parties will back themselves into a corner and agree to take on obligations which may prove difficult or impossible to enforce. As always, it is sensible to take proper legal advice on any such document before signing it. Please note that it is always better to have something in writing than to rely on a, so-called, ‘Gentleman’s Agreement’.
Need some realistic and applicable legal advice on contracts, gentleman’s agreements or any other aspect of legal services for business?
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