Paper Trails and Written Contracts—why bother ?

I would like to discuss a couple of points which have come out of several real situations where I have advised various companies on these issues. They are related points and as I hope you will see, should lead you to the same conclusion, that it’s partly about paper trails and written agreements. But it’s also about knowing your client / your customer and their businesses as well as you can.

I have written before about “paper trails” – suggesting you make sure you keep notes of important conversations and/or decisions and why I believe this is useful from a business- as well as a legal- point of view. So, to repeat, because it can’t be over-emphasized...

Each time you agree to do, or agree not to do something, make a note. So if you agree to buy, sell, rent, hire, employ, enter into any sort of arrangement, change or cancel an arrangement, keep a note. So easy to say and do, but so many of us don't. Why bother? Because a very large number of legal problems which will cost you a lot in time /money and aggravation could so easily be avoided if you do as I suggest. It is sometimes even the case that when you and I think we have done a deal, we have each actually agreed different things and don't realize it until much later on.

There are so many examples of why you should make notes; here is a couple for you to think about—both true. Company X lent Company Y £1 million, but there are no proper loan documents, none. So nothing was written down regarding the arrangements for the loan, except how much interest is payable (but not when and how it is payable). Nothing about when the loan itself is repayable, what the events of default might be and so on. What happened – big litigation fees happened.

Next one. A and B each owned half of the shares in a very small start-up company which was involved in manufacturing in the fashion industry. They fell out big time- they each wanted the name of the brand (which actually turned out to be pretty valuable). It cost them at least £12,500 each in fees to get it sorted. At that stage, the “value" of the company, excluding the brand name, was less than £10,000. There was nothing to show who should have the name as well as what they should do if they fell out. At the end, after about six months we went to mediation and the mediator was so annoyed he wouldn't leave the building until they had done a deal.

So scribble a note, put something down on your iPad or phone, or if it is really important to get someone to prepare a simple agreement. If you can't afford to do so, write something down yourself and ask someone else to look at it for you. The costs of doing so will repay the effort, really. If possible get some sort of acknowledgment from the other party as to what you have agreed. Remember that an exchange of e-mails can create a binding contract.

In the same way, I suggest that although most contracts don’t need to be in written form, there are many benefits in writing them down and many possible disasters in not doing so. This is just a continuation of the paper trail point above – a contract is really just a formalization of a paper trail. Even since writing this short note, further examples have come up – a company with a senior manager who has no employment contract is not only a breach of employment law but is caused so many difficulties if she suddenly walks out of a small business, as I have just seen. Another one, Mr. B “ lending/giving “, (who knows), £50,00 to his mate Mr. C to keep C’s business going without any paperwork and then C deciding he won’t pay that money back- well why should he?

Writing down even the most basic terms of a contract will, hopefully, deal with some or all of these:-

    1. Avoid confusion and, if well written ( which is another point entirely), make clear to each party not what they think they have agreed, but what they have actually agreed. So, for example, key points might be; who is meant to do what, by when for what amount of money and what happens if one of the parties doesn't comply;
    1. Set out other matters which the parties ( and, where relevant, their advisors ) think are important and encourage the parties to consider properly what is important to them and what isn’t ;
    1. Set out a process for dealing with possible disputes;
    1. Show, even as perhaps a smaller business, you are treating the matter seriously; and
    1. Offer some protection should the other party try and sue you for breach of contract

You can see several of these points try and deal with matters of clarity and communication. A contract may also have a “value or benefit ”, in acting as a moral as well as a legal deterrent to each party not to break it. That is how I wish it always worked, but let's look at one form of reality.

You are a UK fashion manufacturer.. you make pieces ranging from £500 to £1,000.. you have been asked to show them ( and perhaps sell them ) at a shop in Rome, invited to do so by people there you know well. You have agreed a very short set of written terms and conditions with the owners of the shop. This includes normal things such as insurance/payment terms / no passing of ownership until you are paid / safekeeping of items etc.

Your pieces have a total value of about £12,000. You have little money to get this project properly checked out, but you really want to do it as these opportunities are rare.

You ask the following:

  • What are my legal risks?
  • What are my commercial risks?
  • How, if at all, can I improve my position?
  • Can I rely on my contract if it all goes wrong?
  • Can I sue?
  • Would it be worthwhile?

……………..what is the real value of a contract in this case? Without writing a book for an answer, perhaps we should consider the following.

Many companies and people still work on a handshake or similar basis of trust, although I am not sure how much that works in practice today ... as society gets more litigious. It is also the case that when money is tight people argue more about everything and trust tends to break down.

The costs of enforcing most small ( whatever that means in the particular circumstances ) claims is prohibitive, particularly in the example I have given. So if someone breaches a contract particularly outside the UK the other person has some hard thinking to do. There will be many steps to take from finding out there is actually a breach, to bringing a claim somewhere and getting what is, or might, be due to you.

Other than for the absolutely simplest of claims ( so maybe for non-payment for goods), even the UK court system is very hard for most people to cope with, in terms of both time and fees. It is also worth remembering the time you need to spend in sorting out these sorts of disputes will be the time you aren't spending dealing with other things which might make you money.

Although it seems as if most people use lawyers etc., to draft or review their contracts actually the converse is true and very few do. Why? Costs are often prohibitive, it would take too much time and many people just don’t like going to lawyers! Most people and companies just get on with it and hope for the best. Alternatively, they have a go at preparing a first draft and then ask their advisors to review and point out key issues, rather than rewrite the whole contract.

Returning to my specific facts, I would suggest realistically it would be almost impossible for my UK manufacturer to successfully claim against the owners of the Rome shop, if something went wrong . I suggest that they might have a legal remedy but not at a price they could afford, in the context of this particular arrangement . They could think about obtaining some insurance cover but, again, the cost may be prohibitive.

My most useful piece of practical advice regarding agreements is always tried and make sure you know your contractual counter-party. Like many legal issues and so-called problems, it is actually often about people and their relationships. Don't make any assumptions; don't assume anyone is actually out to get you, but equally don't assume, friend or not, that they will necessarily roll over if it comes to an argument. Written terms can, in fact, be particularly useful where there is a personal relationship between the parties to prevent any misunderstanding which could later jeopardize that relationship.

All that said, it is still, I think, better to have a contract or something written down; just be aware of the limits of its legal effectiveness.

Nick Gould

Gunnercooke LLP

October 2018