At law there is no such thing as a Gentleman’s agreement

You cannot rely on a verbal agreement

Contract terms must be recorded in writing:

In the recent House of Lords case of Chartbrook Limited v Persimmon Homes Limited [2009] UKHL 38 the court considered the interpretation of contract terms. The question for the court was whether reference to pre-contract negotiations, i.e. verbal discussions, should be admissible in helping to interpret what the parties intended.

The general rule is that the courts, in seeking to interpret the terms that the parties have agreed, will not admit evidence of pre-contract discussions.

The House of Lords confirmed that the principles by which a contract should be interpreted are well known. The issue is "what a reasonable person, having all background knowledge which would have been available to the parties, would have understood the language of the contract to mean."

The problem in admitting evidence in relation to pre-contract discussions is that each party may wish to put forward their own view of what the words were intended to mean.

The Court stated that, if a term was to mean anything different from the normal definition of that word, then this should be recorded in the agreement accordingly

The House of Lords stated that the courts "Will not easily accept that people have made linguistic mistakes, particularly in formal documents." Words in the contract will be given their plain and ordinary meaning and any unusual use of a word should be plainly set out in the contract itself.

The case underlines the importance, in all areas where legal issues may later arise, of having a carefully drawn legal document prepared to record what the parties have agreed.

Frequently, the need for a formal document is seen as unimportant in the "honeymoon" phase of an agreement. Later, if problems arise, the benefits will be apparent.

The moral is that a little time and cost spent setting out written terms of agreement at the outset will limit the scope for disagreement later on and will assist the courts in dealing with matters fairly and with certainty.

Contact us first, for advice on any negotiations you may be contemplating.