In the commercial environment, so much is about building relationships with other businesses and entering into agreements to develop and enhance your business. However, when those agreements have been secured, having a written commercial contract in place is essential. This ensures that the parties are certain about their objectives. Moreover, it helps prevent disputes in the future as situations or relationships change.

Formation of a written contract

A contract is essentially a legally binding agreement between two or more parties. It can be reached orally or in writing. This creates a promise between the parties that they will fulfill their obligations. It also allows them to exercise their rights under the contract. It’s important to bear in mind that, with regards to written contracts, the agreement is only valid once all parties have signed.

To understand the basic formation of a binding contract, it’s important to ensure that all of the key requirements are satisfied. These are offer and acceptance, certainty of terms, and consideration (money or payment for a service). Additionally, there must be an intention to create legal relations. If one of the above elements is missing, there is no binding contract. Therefore, it is unenforceable.

What happens if there’s no contract?

If a contract can be formed orally, one might ask why there’s a need to worry about having it in writing? Not having a written contract in place is highly likely to lead to misunderstandings in the future. This is regarding what the parties have agreed to do. For example, if one party suffers a loss as a result of the agreement and tries to bring a claim against another, it would be extremely difficult to rely on an oral agreement in court. This is because the terms are uncertain. The court would find it difficult to assess whether there was a binding contract. They would also need to know what the terms of that contract were. By having a written contract in place, the court can assess the terms that have been breached and review whether the clauses are enforceable.

Fenchurch Advisory Partners LLP v AA Ltd

The recent High Court case of Fenchurch Advisory Partners LLP v AA Ltd provides a clear example. There is a need for clarity in showing a binding contract, particularly in a commercial context. In this case, Fenchurch contracted with AA Ltd to assist in the sale of its home insurance business in July 2018. They had undertaken a substantial amount of work for AA. Although the parties heavily negotiated the terms of engagement, they never signed the engagement letter. The CFO of AA emailed Fenchurch to confirm the final fee details. This was done so that the final engagement could be prepared for signature. Fenchurch confirmed and agreed to the final fee details.

When AA realized that they were no longer proceeding with one of the projects they were working on in January 2020, Fenchurch sued for various fees alleging that there was a binding agreement between the parties. The High Court had to determine whether the agreement on fees created a binding contract.

High court decision

It was held that there was never a binding contract in the first place. The High Court concluded that although the parties intended to create a binding agreement sooner or later, they didn’t intend to be bound immediately. They were still finalizing the terms of their agreement. It’s also worth noting that AA’s email only dealt with the fees. It didn’t concern other outstanding points (including uncapped indemnity and triggers for payment of a success fee) in the engagement letter. As the outstanding points above were of paramount importance in understanding what the parties agreed to do, it couldn’t be said that there was a binding contract between the parties.

However, Fenchurch did have a claim in restitution. They successfully argued that AA had been unjustly enriched. The court found that even though AA’s business didn’t proceed, Fenchurch’s work still helped AA reach this decision. Fenchurch had provided AA with a valuable benefit. Thus, it was unjust for AA to take that benefit without payment to Fenchurch.

The case above shows that there’s a real risk of agreeing to the terms via a chain of emails. This is because there’s a possibility that the key terms have accidentally been omitted. In the event that there’s a breakdown in the business relationship, a written contract outlines the steps that are agreed previously between the parties. If this isn’t in place, the parties may have to consider what was communicated verbally or find email correspondence. This approach lacks clarity and can lead to time-consuming disputes between the parties.

Avoiding the pitfalls of not having a written contract

To ensure the agreement goes smoothly, the parties should clearly discuss their intentions during the negotiation stage. If you don’t intend to be bound until the document is signed, you should include a disclaimer. For example, saying that “we have no intention to enter into a binding agreement until both parties sign an agreement in writing.” This would ensure that the parties won’t perform their contractual obligations until the contract has been signed.

Although many SMEs would believe that producing a written contract is cumbersome and time-consuming, it should always be in writing to avoid any doubt. Even if you believe that you can trust the other party, failure to do so would lead to further complications. It could potentially impact the relationships you’ve built with other businesses.

If you don’t have a written contract in place or suspect that the terms of your contracts aren’t up to date/scratch, our team at Farringford Legal will be able to help you review, draft, and amend your contracts. We also provide advice on the terms of the agreements.