If you want to do business with a gentleman (or lady), why on earth would you rely on their word?
The question must be “why take a chance?” At its best, a gentlemen’s agreement (realistically this is a verbal agreement) is as enforceable (or unenforceable) as any other verbal contract. Much will depend on trying to establish exactly what the terms of the agreement are and 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 “the traditional back of envelope” document.
Whilst it may be possible to establish some of the terms of an agreement, it will at best be cumbersome and time consuming putting together all the various documents. There is also a substantial risk that some points may be missed out altogether.
Another 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 see where this is going “the bottom line is that you really should not rely on any form of verbal agreement” get it in writing! To do this, it may not be necessary to go to an all singing all dancing 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 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.
Let’s put it another way – if parties enter into binding Heads of Terms, even if there are in reality difficulties with some of the provisions of the Heads of Terms, nevertheless the parties may be substantially better off by having entered into such a document than with nothing at all. As always, it is sensible to take proper legal advice on any such document before signing it.
If you want to know more about how to protect your business interests please contact Nick Richardson.