Summary
- Verbal contracts are legally binding in England and Wales, but they are difficult to prove and enforce without supporting evidence.
- Without a written contract, businesses face unlimited liability exposure and weaker grounds to recover unpaid invoices or terminate for breach.
- Certain contracts, including land sales and guarantees, must be in writing under UK law to be enforceable at all.
- This guide explains the risks of verbal contracts for UK business owners trading with customers.
- LegalVision’s business lawyers specialise in advising clients on commercial contracts and contract disputes.
Tips for Businesses
Document customer agreements in writing before trading begins. Include a limitation of liability clause, clear payment terms and delivery obligations. Keep emails, invoices and meeting notes that record what was agreed verbally. Review contracts regularly so they reflect current arrangements and UK law.
Verbal contracts are legally binding in England and Wales when they contain offer, acceptance, consideration and an intention to create legal relations. The risk is not validity but enforceability. Without a written record, the contract becomes one party’s word against the other, which makes proving payment terms, delivery dates and obligations difficult in court. Certain agreements, including the sale of land under the Law of Property (Miscellaneous Provisions) Act 1989 and guarantees under the Statute of Frauds 1677, must be in writing to be enforceable. For most other commercial dealings, a written contract is not legally required, but relying on a handshake exposes your business to disputes, unlimited liability and lost revenue.
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.
Which Contracts Must Be in Writing Under UK Law?
While most commercial agreements can be verbal, English law requires certain contracts to be in writing to be enforceable. These include:
- Sale of land and property interests: Contracts for the sale of land or transfers of an interest in land must be in writing under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. This includes long leases over three years.
- Guarantees: A promise to answer for the debts or obligations of another party must be evidenced in writing under the Statute of Frauds 1677. Verbal guarantees are rarely enforced by the courts.
- Assignments of intellectual property: Transferring ownership of a trade mark, copyright or patent requires a signed written assignment.
- Consumer contracts at a distance: The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 require certain pre-contract information to be provided in writing.
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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.
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Frequently Asked Questions
How do I prove a verbal contract in court?
You can support a verbal agreement using emails, text messages, invoices, witness testimony and evidence of conduct such as performance or part payment. Judges treat the parties’ actions after the deal as evidence of the terms agreed. Strong supporting evidence makes enforcement realistic but never certain.
Which contracts must be in writing under English law?
Under English and Welsh law, contracts for the sale of land, equitable mortgages, intellectual property assignments, deeds, share transfers and guarantees must be in writing to be valid. Most other commercial contracts can be verbal, but writing is strongly advised for evidential and enforcement reasons.
Can a verbal contract be enforced if the other party denies it exists?
Yes, if you can prove the essential elements of offer, acceptance, consideration and intention to create legal relations. Without written evidence, the case often becomes one party’s word against the other, so courts rely heavily on supporting evidence and the conduct of both parties.
Can a verbal contract protect against customer non-payment?
No. Without written payment terms, customers can dispute agreed dates, significantly weakening your ability to recover outstanding amounts.
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