Written by Steve Sidkin
1 September 98

It’s a phrase that we often hear when a client is asked to recall the details of an agreement.

Many agreements exist without the need for written documentation. But, the protection enjoyed by a business under an oral agreement is unlikely to be as certain or comprehensive as that achieved through a written agreement.

Recently a client came to us about a dispute with his supplier. Unfortunately, neither our client, nor his customers, were happy with the performance of the supplier and our client sought to end the relationship. However, in their haste to progress what they foresaw to be a profitable business opportunity, each party had put to one side the drafting of the agreement, intending to deal with it at a later date.

Having given no thought to the practicalities of termination, the position of all parties, including that of our client and his customers, was uncertain. Our client was in a precarious position regarding possible claims from the supplier. If he had dealt with these issues before making the agreement and put the result in writing, it would not have put his business in jeopardy, or incurred unnecessary expense.

Concerns can be addressed by careful drafting of terms and conditions. Such concerns may be the ability to recover goods in the event of non payment, or to increase prices when external circumstances would otherwise result in the business making a loss.

Committing the agreed terms to paper has legal, commercial and financial advantages in addition to peace of mind for those concerned. But merely writing down the day to day contractual nuts and bolts is insufficient. It is important that the agreement accurately reflects the parties’ intentions in all eventualities; in particular, the likely areas of dispute.

The passage of time

The precise terms of a long standing agreement become hazier with time in the memories of those who use the agreement, whilst the mechanics become more familiar! But, an unexpected occurrence is likely to raise long forgotten issues. Each party will have different recollections of what was agreed depending on their expectations at the time the agreement was made. Such intentions may not even have been raised with the other party at the time the agreement was made, each party assuming that the other had similar intentions.

Clarity of terms

Prices quoted in an oral agreement may be unclear as to whether they include transport, packaging and VAT. A written agreement reduces the possibility of a customer being misled by the claims of an enthusiastic sales representative.

Murky issues

Its amazing how compliant people will be if you catch them at a good time. Equally so, if you make demands of people when they are at their least receptive you are less likely to achieve your goal. The other party is more likely to be reasonable at the outset of the agreement rather than when a problem is looming. This is the time to raise the murky issues.

Agreements are often executed while both parties are looking to the future with enthusiasm for the new transaction. In the interests of ensuring that the transaction goes ahead and so as to avoid any bad feelings, neither party raises unpleasant issues. Those issues may be the methods of termination, the division of assets and the appropriate forum and country to bring proceedings. Without guidance, such issues become far murkier when the need to address a problem is imminent.

Protection of intellectual property

It is important to ensure that by permitting the other party to use trade names or other intellectual property rights, a business does not surrender its goodwill without adequate controls. During the agreement the other party may wish to add the trade mark to other products or trade under the same name. The business name may suffer from being associated with products of a lower quality. When the agreement has come to an end, the user may be very disgruntled at the thought of parting with a trade name for which he has built up a substantial amount of goodwill. Further he may have registered his right to that name in that country or on the national trade marks register.

Competition

Having spent time building a customer base, a party may have no intention of relinquishing his customer contacts with which he has developed a good relationship over a period of time. Termination of the current agreement would be an ideal opportunity for it to seek a better deal with a competitor using its existing customer contacts as an incentive.

Even if a terminated party is prevented from dealing with the other party’s customers it will have acquired knowledge of the local market which it will be able to use to its advantage in the future, very likely at the other party’s expense. Almost certainly it would raise objections to a clause preventing it from dealing in its usual stamping ground. Although a distinct advantage to the terminating party, this would prevent the terminated party from trading near its roots and take away the livelihood of its employees. Such a dilemma needs to be discussed and resolved prior to signing the agreement.

Issues not subject of the agreement

Where an agreement does not address a certain point, the court may imply terms into the agreement to cover the gap. Such terms may include a supplier’s liability for defective goods. In commercial contracts it is sometimes possible to limit or exclude such liability. Subject to statutory requirements this will be the case provided that the exclusion is clear and brought to the attention of the other party when the contract is entered into.

Commercial advantages

There are additional non-legal benefits to making a written agreement. A written agreement demonstrates commitment to the subject matter of the agreement. If the agreement is specified to be for a minimum duration, both parties can be secure in the knowledge that the whole transaction will not collapse before a particular date. Otherwise, the whim of one party may deprive the other from the chance to make the agreement a success.

Producing the agreement may also indicate a party’s position of strength. He who drafts can structure the agreement according to his own terms of trading. The fact that a party uses its own standard agreement is a reflection of its commercial success.

Targets

Targets laid down in an agreement will focus the minds of the parties on what they realistically expect to achieve by entering the transaction. The targets may be in the form of number of sales achieved, quality standards to be met or new customers introduced. What one party considers is a realistic target may be just a pipe-dream to the other!

Financial Implications

Financially the cost involved in producing a suitable written agreement is fractional compared to the cost of proceedings in the event of dispute. A clear record of the agreement between the parties will often address the issues raised and therefore assist in avoiding wasted management time and unnecessary legal costs.

The use of written agreements is a form of protection from the risks inherent in commercial transactions. Furthermore, the advantages perceived by a business will be not only greater commercial effectiveness in its dealings with customers, but also internal administrative efficiency.

This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or any member of the Fox Williams’ agentlaw team.(www.agentlaw.co.uk)

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