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Contracts are vital tools for protecting your business from risk, particularly where you act as a supplier of products or services. Entering a written contract offers the strongest form of legal protection. While entering a verbal contract is possible, this approach comes with significant risks. This article will explore the risks of having only a verbal contract with your customers.
Why Are Written Contracts Important?
Contracts are vital documents to protect businesses from risk. Every trading business should prioritise entering into contracts with its customers.
Contracts can offer significant benefits for trading businesses, including:
- setting out clear and unambiguous contractual obligations;
- allowing you routes of action to enforce your legal rights;
- including provisions to help prevent disputes from arising; and
- limiting your liability and financial exposure for breaching the terms of the agreement.
A written contract can also help you comply with your legal obligations. For instance, it can include data processing clauses, which are mandatory under data protection laws in certain circumstances.
Various things could go wrong during a trading relationship with customers. For instance, you could breach your obligations, and the customer could suffer losses as a result. This could escalate into them bringing a costly legal claim against you. Having a robust contract can help prevent and protect against such risks.
What Are the Risks of a Verbal Contract?
A contract does not always need to be documented in writing. Specific laws, such as consumer and data protection, require particular terms in writing. However, a business can generally enter into a verbal agreement unless specific regulations or rules require a written contract. For example, organisations can discuss and agree on the terms of an agreement by ‘shaking hands’.
Despite a verbal customer agreement being possible, it is always best to have robust written contracts in place.
Here are some of the risks you could face when entering verbal contracts:
1. It is Difficult to Pursue Remedies Relying on a Verbal Contract
Written contractual terms will help clearly prove your agreement with your customers. For example, if a customer defaults on their obligations, written terms will offer you the best protection for late or non-payment. Likewise, a written contract will demonstrate their non-compliance if a customer is due to pay your invoices by a particular date. You can use this as leverage to remind your customers as to what they have signed up for contractually.
Without a written agreement, the customer could dispute their late payment. For instance, they could deny you agreed to a particular payment date if there is no evidence of this in writing. If a non-payment dispute escalates into litigation in court, written terms will also help serve as vital evidence to help present your position. Your court claim against a defaulting customer could be unsuccessful without clear evidence showing what was agreed.
2. A Verbal Contract Could Expose You To Unlimited Liability
The key benefit of a written contract is its ability to limit a party’s liability for breaching the terms.
A limitation of liability clause is a contractual term that seeks to limit the losses and financial liability a business will incur for breaching its obligations under an agreement.
Limiting liability is vital for a supplier delivering products or services to customers. Otherwise, the supplier could face unlimited liability, which could mean paying damages far exceeding the contract value it charges its customers.
With a verbal contract, your liability will not be limited in any way, and you could face unlimited financial exposure. This could damage or, in the worst case, bring your business to a standstill.
A limitation of liability clause is one of the most critical forms of contractual protection for any business. As such, entering into a verbal contract is extremely risky, as your liability is uncapped.
3. A Verbal Contract Can Lead to Disputes
A verbal contract can give rise to various risks, such as parties disagreeing about their contractual terms and obligations.
Significantly, the parties could forget or deny what they have agreed. For instance, you may have decided on specific delivery dates with your customer. If the customer cannot recollect the exact dates you agreed, they may claim you are in breach of the agreement. This could lead to:
- customer dissatisfaction;
- misunderstanding;
- mismatched expectations; and
- disputes.
This is why a written contract is a vital chance to clearly document each party’s respective obligations and clarify what you have agreed to deliver. If you can point out written delivery dates in a contract to your customer, this can quickly help clarify any misunderstanding and help maintain your working relationship.
Overall, operating without written contracts comes with significant risks. Whilst a verbal contract is possible, relying on one could significantly limit your remedies, increase your potential liabilities and result in disputes. If you need help with how to prepare a written contract, you can work with a commercial lawyer to support you.
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Key Takeaways
While entering into a verbal contract is a possibility, you should note the various risks associated with this approach. For instance, enforcing your legal rights with a written agreement will be far easier. Further, verbal contracts can lead to mismatched expectations, which could escalate into disputes. As such, it is essential to enter into written agreements to protect your business from risk.
If you need help with a contract, 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.
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