When two parties agree to do business together, the excitement of future opportunities means that more often than not both want to focus on getting on with it rather than tying up the legal niceties of a contract. After a while, it may seem awkward to bring up that a formal contract needs to be put in place and if things are going well then who wants to think and/or talk about things not going well.
However, if there is no formal contract between the parties, then should the question of which terms apply to the relationship arise at a later stage, uncertainty is likely to ensure. While parties may believe that they can rely on being the last one in the chain of correspondence, that the last terms are the terms, they may be being lulled into a false sense of security.
Broadly, the potential outcomes are that:
- they are contracting on one party’s terms;
- they are contracting on the other party’s terms;
- they are contracting on some other terms; or
- these is no contract – although this is less likely in the context of agency and distribution agreements.
As a result, parties may unwittingly find that they are reliant on a dissection of:
- what was said at the time?
- whether the terms had been accepted by conduct?
- the communications between the parties?
Therefore, key provisions relating to subjects such as governing law, jurisdiction, exclusivity, notice, exclusion clauses, may be undetermined.
The impact of this can be significant, for example, if an agency agreement does not have a governing law and jurisdiction clause, then there is a strong possibility that the place of performance of the agency will dictate these aspects of the relationship. This can lead to principals being subject to proceedings in unfamiliar far flung jurisdictions and/or agents being able to claim compensation rather than an indemnity.
Equally, in the event that a company wishes to sell its business to a third party, it can expect to receive queries from a potential buyer as to the terms of the contracts that it has with third parties and if these questions cannot be satisfactorily answered then it may impact the value or overall attractiveness of the company.
As such, we recommend that, even if it seems the easiest way forward, parties do not lose sight of getting contracts formalised and executed.
Rachel Cook is an associate in Commerce and Technology Department of Fox Williams and is a member of the agentlaw team.