Oral agreements can be legally binding contracts

United Kingdom

Comment

The recent case of DMA Financial Solutions Limited v BaaN UK Limited [2000] All ER (D) 411 is a salutary reminder that contracts (other than those relating to the sale or other disposition of an interest in land) do not have to be in writing to be legally binding. Therefore, unless you intend otherwise, always ensure that your negotiations are conducted “subject to contract”.

Facts

B owned rights in computer software designed for use in financial accounting systems. B wanted to outsource its education and training in relation to the software and entered into detailed negotiations with D for this purpose. Agreement was reached as to terms and D began recruiting staff and expanding its premises in order to provide the service. It was agreed that B would draw up the written contract, but this was never finalised and B later pulled out.

Held

The court held that, notwithstanding the absence of a written contract, there was a legally binding agreement between B & D for D to provide the service.

Relevant factors in deciding whether an oral agreement amounts to a binding contract are as follows:

1. Were the negotiations conducted “subject to contract”? If so, there can be no binding contract because both parties have agreed that the negotiations are still subject to agreeing the legal documentation.

2. If the negotiations were not conducted “subject to contract”, the following two questions apply:

(a) is there any matter which has not been agreed? In other words, have sufficient details been agreed for the contract to work?

(b) have all matters which were raised in negotiations either been agreed or been dropped by the time that the relevant party is claiming the contract was formed?

If the answers to both these questions is yes, a legally-binding contract will have been formed.

If you would like any further information about this case summary, please contact Inga West, solicitor in Corporate Recovery on Tel: 020 7367 3478 or e-mail: [email protected]