The importance of contracts in commercial and goodwill relationships

Why do I need a contract?

A contract may be far from your mind when things are running well but relying on goodwill alone can leave you vulnerable to exploitation when there is no record of the verbal agreement, particularly if the relationship turns sour.

We recently supported a co‑operative buying group that had negotiated favourable petrol prices on behalf of its members. However, there was no written contract and no evidence that such discussions took place. As a result, there was no way to enforce the pricing mechanism or to prevent the supplier from dealing with its members’ direct – significantly reducing the co‑operative’s ability to benefit from the arrangement.

A well‑written contract can be the solid foundation on which the parties can establish and maintain a successful, long‑term relationship. Without one, you may find yourself exposed without the ability to hold the other side accountable for the promises they once made.

Do I need a written contract?

Contracts can come into existence, even when the agreement isn’t written down: a contract can be created through a telephone conversation or a simple exchange of emails.  Nevertheless, if something goes wrong, you will need to evidence what was agreed and where the relationship has gone off‑track. This process can become very costly if you are relying on a trail of correspondence or multiple documents which have not been stored together. Where you are trying to prove that a verbal agreement exists, this can often result in an antagonistic exchange of ‘he said’ – ‘she said’ as oral evidence can always be contradicted by other oral evidence.

Where you have a well‑established, goodwill relationship, the individuals managing the contract will have built up a wealth of knowledge concerning the contract and the parties’ past dealings. Without a written contract in place, there is very little evidence to show that the parties have agreed to take on any responsibilities or that either party can control the other’s actions. In the case of the co‑operative buying group, there was no written record of the conversations between the two organisations. The supplier’s new account manager did not share the same history or sense of ‘partnership’ and seized the opportunity to re-design their relationship.

Regardless of deadlines or the excitement to get a project rolling, you should always take the time to make a written record of key terms so that an independent reader can easily understand what each side has promised to do. This does not need to be a lengthy set of terms and conditions, but you should get some written acknowledgement from the other side that your written record accurately reflects what has been agreed.

What needs to be included?

A properly drafted document should enable anyone, who comes to the contract with fresh eyes, to understand how the parties are expected to work with each other and identify any areas of discretion within the relationship. If a dispute arises, this is the process that will be undertaken by a Judge, Mediator or Arbitrator, who will need to establish the rights and obligations of each party. Without a contract in place, you run the risk of contributing resources to a project with no remedy available if things don’t go as planned.

When considering the details to be recorded, are you both clear about who is delivering what, by when, where and for how much? Have you agreed any special terms or been offered any preferential treatment compared with the normal way of working? Are you agreed on the way forward or are you still working out important details?

If you have relied on any quality assurances, these should be clearly and accurately recorded otherwise you run the risk that they become empty promises. Similarly, if there is information which is commercially sensitive or can only be used for certain purposes, these restrictions should be clearly set out if you want to impose such controls on the other party.

Fair dealings and establishing trust

All contractual relationships come with some risk attached to them and it is important you understand the terms you are signing up to and the repercussions if either you or your partner organisation fail to deliver on their promises. Contracts should not cause suspicion in the other side; instead they should be embraced as an opportunity to accurately record the conclusion of any negotiation process. Legal relationships benefit from a strong foundation and are easier to navigate where there is a clear, written agreement which confirms what is expected of each party and the extent to which each will be held accountable for failing to deliver on their promises.

Long‑term relationships can be enhanced by written contracts which fairly and properly apportion risk and enable both parties to identify what needs to be achieved. A ‘gentleman’s agreement’ is not binding and often results in one party being misled about the other’s commitment to the arrangement, whereas a written agreement will help to evidence that each party is treating the other fairly and honestly. Even the best relationships can change over time and disagreements can occur when expectations are not met.

If you have not done so already, it is worth using a basic ‘Heads of Terms’ template to record key details, such as:

• Start and end dates
• Price and payment frequency
• Description of the goods or services to be delivered
• Right to exit
• Any key milestones or quality requirements.