Verbal Contracts: Not worth the paper they're written on?

There has been a great deal of coverage recently in the national news regarding a claim being pursued in the High Court by a Banker, Jeff Blue, against Sports Direct owner, Mike Ashley.  Although the news articles tend to focus on Mr Ashley's drinking and business habits, the court proceedings themselves are about an alleged verbal contract that was made between them. In a decision made by Mr Justice Leggatt in the High Court today, it appears that Mr Ashley has successfully defended the claim. 

Mr Blue alleges that during the course of a night out, Mr Ashley agreed that, if Mr Blue could double Sports Direct's share price then he would pay Mr Blue £15 million. Mr Ashley is defending the claim, denying an agreement was made. Mr Ashley alleges that discussions they had were 'banter' and that, due to being intoxicated due to alcohol consumption, he lacked the capacity to enter into a contract. In any event, cannot recall having the discussion.

The issue the court had to determine was whether such an agreement had been made. The case highlights some of the problems encountered when there is nothing recording the agreement in writing and you are relying on a verbal contract.

Back to Basics: What do you actually need to form a valid contract?
There are four requirements which must be present in order for a binding contract to be formed. These are:

1. Offer: One party must be offering something to another, for example, a car being advertised for £1,000 would amount to an offer.
2. Acceptance: Once an offer has been made it must be accepted.
3. Consideration: Nothing in life is free, and you cannot get something for anything. In order for a contract to be binding something must be exchanged. The payment of £1,000 is a consideration for the car and vice-versa. If the car was given away, that would be a gift, not a contract. The most common type of consideration is the payment of a sum of money, however, it does not have to be. Consideration could be in the form of doing something, i.e. decorating or gardening, or as is very common with car purchases, part-exchange.
4. Intention to create Legal Relations: Although this is often not at the forefront of the parties mind it is a requirement. In the example above, the legal relationship between the parties would be one of Seller and Purchaser in a transaction.
   
   There is no requirement for contracts to be in writing, so a contract can be legitimately formed verbally. However, it may prove more difficult to enforce.

Problems with Verbal Contracts
If a verbal agreement is reached and everything goes as expected then neither party has any reason to go back and consider what the exact terms of the agreement were. However, when a problem does arise a whole host of issues can present themselves, primarily to do with evidencing the terms reached and enforcing them. For example:

• It can be difficult to actually evidence that a contract was made. In the absence of any documentary evidence, it will just be one party's word against the other. This will mean the court has to consider a number of factors. In the claim against Mr Ashley the court had to consider evidence of other people who were present, Mr Ashley's alcohol consumption, and how he usually conducted his business.
• The parties' recollection of the terms agreed may differ. This is a problem which can be made worse by the passage of time. In the case currently being determined by the High Court, Mr Ashley has said he cannot recall the conversation with Mr Bell, which is alleged to have taken place in January 2013.
• Verbal Agreements rarely cover all terms. Whereas written contracts often include numerous terms which govern how the contract will work, such as deadlines for things to happen, payments to be made, and how it might be terminated, verbal contracts by their nature tend to be more informal. As a result, they do not tend to cover matters in such detail. In those circumstances, it may necessary for terms to be implied in order to make the contract workable.
• The parties' may not have had a mutual understanding. For example, you commission a carpenter to make a shelf, and you provide measurements in inches, but the carpenter works in centimetres. The end result is that the shelf will be too short. Such misunderstandings are reduced if agreements are committed to writing.
• There has to be the required intention to create legal relations. As mentioned above, Mr Ashley is defending the claim by saying that the conversation and comments were just 'banter' and that he never had an intention to create legal relations with Mr Blue. He goes on to say that due to being intoxicated he lacked sufficient capacity to enter into a contract. Proving this one way or other is difficult.

How to avoid problems
First and foremost it is always advisable for any agreements to be recorded in writing, particularly if they are particularly valuable or important. I think most people would find it incredible to think that multi-million-pound agreements, such as those alleged to have been made between Mr Blue and Mr Ashley, could be made without anything being committed to writing.

If a verbal agreement is made then this should be followed up soon after with something in writing (an email at least) confirming what was agreed. I would suggest this is particularly important in circumstances where agreements are made in a pub or any other non-business environment. At the very least, such an email would provide contemporaneous evidence of the terms agreed as well identifying at an early stage whether the agreement is likely to be challenged.

It is important that records are kept as these could provide further evidence. What records are needed will depend on the context of the contract but could include keeping details of payments and receipts, a diary of what was done when by whom, email and text messages, or photographs.

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