Deemed Contracts: Legal Implications for Small Businesses

Not every agreement in a business requires a signature. The law recognises that binding contracts can exist even without formal documentation, known as deemed contracts. This article explores how understanding these unwritten agreements can help protect business interests.

Understanding Deemed Contracts

A deemed contract forms when circumstances and behaviour indicate that parties intend to create binding obligations. These situations commonly arise when services continue after formal agreements expire or when business relationships develop through consistent patterns of dealing rather than explicit agreements.

These contracts typically emerge in ongoing business relationships where parties establish regular trading patterns. For instance, if a supplier has delivered goods at set prices for years without formal documentation, the law may recognise a deemed contract based on this established practice.

Legal Foundation

For a deemed contract to be legally binding, the arrangement must demonstrate several key elements. First, there needs to be clear conduct showing both parties’ intention to be bound by legal relations, such as regular ordering and payment patterns. Second, one party must provide something of value, and the other must accept this benefit with a reasonable expectation of payment. The context should be commercial in nature, typically involving professional relationships and regular interactions.

Protecting Your Business

Businesses should actively manage their contractual relationships rather than relying on the implied terms of a deemed contract. If necessary, document significant arrangements in writing, even through email confirmations. 

Communicate clearly about terms, pricing, and service expectations. Review and update your arrangements regularly to ensure they reflect current business practices.

Managing Risk

Deemed contracts carry specific risks that businesses need to address. Without clear documentation, disputes can arise over fundamental terms like pricing, service levels, and contract duration. Without written evidence of the parties’ intentions, it can be challenging to resolve these disagreements.

When Disputes Arise

If a dispute involves a deemed contract, focus on gathering evidence of the business relationship. 

This might include:

• invoices and payment records; 
• email correspondence showing the course of dealing;
• witness statements from staff involved in the relationship; and
• documentation of industry-standard practices.

However, by having comprehensive written terms in place, you can avoid costly and lengthy litigation in the future. 

Example 

Consider Digital Edge, a marketing agency that initially created a one-off social media campaign for Fashion First Ltd. 

After positive results, Fashion First’s director sent an email saying, “Keep posting content for us – great work!” Without signing formal terms, Digital Edge continued managing Fashion First’s social media, sending monthly invoices of £2,000, which Fashion First paid regularly for 18 months.

Supplier Contracts Checklist

Use this checklist to ensure your supplier contracts contain all necessary terms.

Download Now

When Fashion First later disputed a payment claiming there was “no formal agreement,” a deemed contract likely existed because:

1. Digital Edge consistently provided marketing services;
2. Fashion First approved and used the content;
3. regular monthly payments were made at an agreed rate;
4. both parties behaved as if a contract was in place; and
5. the initial email showed the intention to continue services.

Even without written terms, Digital Edge could likely enforce payment as:

1. they delivered professional services expecting payment;
2. Fashion First knowingly accepted these services;
3. the relationship followed a clear pattern; and 
4. both parties acted on the understanding of an ongoing agreement.

Practical Guidance

To minimise risks associated with deemed contracts, your business should:

1. review your business relationships regularly to identify where formal agreements might be needed;
2. document key terms even in informal arrangements;
3. keep comprehensive records of all significant business dealings;
4. maintain clear communication about expectations and terms;
5. seek legal advice when uncertain about rights and obligations; and
6. seek the assistance of legal advisors to draw up comprehensive agreements.

The Next Steps

While deemed contracts may be legally enforceable, they create unnecessary uncertainty and risk. Take time to review your business relationships and identify where you need to formalise arrangements. Consider seeking legal advice to develop appropriate documentation for your most important business relationships.

Key Takeaways

Deemed contracts are legally binding even without formal documentation.  They arise from consistent behaviour and mutual understanding.  The law recognises these agreements based on the parties’ conduct and business practices.  Written documentation remains your best protection, and a regular review of business relationships helps identify potential issues.  

If you need help regarding deemed contracts, our experienced contract lawyers can assist as part of our LegalVision membership.  For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents.  Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions