As commercial lawyers we often encounter a situation where parties are supplying goods and/or services to each other, but where the written contract is either non-existent, lost over time or consists simply of a commercial agreement without accompanying "legal" terms. A misconception in these instances is that there is no contract governing the relationship. This is unlikely to be the case – it may simply be that the contract terms are not (or are no longer) in written form or are in a less traditional format (e.g. an exchange of emails). A situation which is (at least in theory) no less binding on the parties than if the contract was in writing in the traditional form.
So why have a written contract in the first place, especially if contracts do not always need to be in writing in order to bind the parties? There are a number of reasons why parties’ contract in writing, one of the more obvious is that it provides a far greater degree of certainty over the terms of the contract if those terms are written down. Even at a practical level the parties will want to be clear over what is being supplied, how much is due to be paid and when, the consequences of the parties not doing as they say and how the parties can exit the agreement.
There are many other provisions that parties usually look to agree, and certainty of terms applies just as much to what is included in a contract as what is excluded. Written contracts can include "entire agreement" clauses which are designed to make it clear that the contract is limited to its written terms (and sometimes other agreed documents), with a view usually to excluding any other terms, whether written or oral, from the contract. This might then prevent a party to the contract from relying upon anything not written down in the contract, or indeed certain oral representations made between the parties. Ultimately a written contract becomes a record of the agreed bargain between the parties. The clearer this record can be, the less likely it ought to be (or so the wisdom goes) that the parties end up in dispute over the terms of their contract. It must be said though that having a contract reduced into written form does not always mean that the parties will not end up in dispute over the terms. In some instances the law also implies certain terms into specific types of contract (some of which cannot be excluded), and the parties may not always be aware of what these terms are and their effect. This can be compounded in situations where the parties agree one thing in writing but act very differently in practice, or where an exchange of emails between the parties varies the contract terms or creates new ones.
Often therefore the intent behind the written contract is, where possible, to minimise scope for further debate on the contract terms, although there are a range of factors that influence how successful this might be, including the actual conduct of the parties.
There can be situations where a party may consider it in its interests not to have a written contract in place. Lack of certainty of terms can work in favour of a party in certain situations, particularly in those situations where the terms implied by law are preferable to those it may have attained in a written agreement. An example of this is in relation to liability, where parties may seek to limit their financial liability to each other in a written contract. Take away the written contract and the parties are left only with the limits and exclusions that the law provides – a position that may be in the favour of a buyer or customer. Parties may also dispense with a written contract because there are industry-standard terms that govern their relationship, more formal than a purchase order.
However, avoiding using a written contract comes with a health warning as it is clearer to deal with the terms implied by law into the written contract itself. In any event, under English law some contracts have to be in writing in order to bind the parties, and examples of these instances include contracts for the sale of land, certain types of corporate share transfers and guarantees.
The takeaway message therefore is a simple one: written contracts aim to provide greater certainty of contract terms, are likely to assist in the event that things do not progress smoothly and may also be mandatory in certain scenarios.
For more information, please contact any member of the commercial contracts team at Stevens & Bolton LLP.