September 2008: Should you rely on a gentleman’s agreement?

Any lawyer will tell you that agreements should be in writing to ensure that you can enforce them if there is a dispute later on but do you really need a written agreement? Can you rely on a handshake and 'my word is my bond'?

The recent case of Yeoman's Row Management Ltd v Cobbe went all the way to the House of Lords on this very issue.

The case concerned an oral agreement between Mr Cobbe, an experienced property developer, and a director of a management company which owned a block of flats. Mr Cobbe agreed to apply for planning permission to demolish the existing block of flats and to build six houses on the site. It was agreed that once planning permission was granted the property would be sold to Mr Cobbe for an initial price of £12 million. Mr Cobbe would then develop the property; sell the six houses; and pay to the management company 50 per cent of the amount, if any, by which the gross proceeds of sale exceeded £24 million.

Planning permission was granted but the management company then tried to renegotiate the deal by demanding an initial price of £20 million in place of the originally agreed £12 million and a 40 per cent share in the proceeds of sale over £40 million.

Mr Cobbe sued the management company to enforce the originally agreed terms on the basis that both parties had regarded themselves as "bound in honour".

Mr Cobbe won the initial court case which ordered that he be paid half of the increase in the value of the property as a result of the planning permission being granted and this was upheld by the Court of Appeal.

The House of Lords, however, decided that although the management company had been unjustly enriched by the obtaining of planning permission at Mr Cobbe's expense, Mr Cobbe should only be awarded a sum (to be determined but undoubtedly much lower than half the increase in value of the property) to reflect his time and expense in obtaining planning permission.

Their Lordships reiterated the view commonly held by the Courts that when business people negotiate commercial transactions they are assumed to have taken proper advice. This means that the Court is usually unwilling to come to the rescue of a business person who didn't have the foresight to instruct a lawyer to negotiate a formal written agreement.

In short, although honour may not be completely dead in business, the Courts consider it foolhardy for business people to rely on honour alone. Make sure business agreements are made in writing, preferably in a properly worded legal contract, especially when there are millions of pounds at stake!

For help with contract drafting contact Cousins Business Law on 0845 003 5639 or email us here.

The Government is considering reducing the time limit for debt collection from 6 years to 3 years.

At the moment, firms have 6 years in which to issue court proceedings to collect debts. This is set to change and an announcement is expected to be made in the Queen's speech to Parliament in December.

Whilst it is true that the older a debt is, the harder it is to collect, there are often good reasons that a firm would delay issuing proceedings, including:

1. trying other means of collection first, such as persuasion, negotiation, mediation (if there is a dispute);
2. waiting for the debtor to come through some cash-flow problems - sometimes it might be worth waiting (and preferably charging interest) rather than making a court claim straight away and incurring the costs and time that that involves;
3. waiting to see whether a dispute materialises at all - sometimes the debtor might claim that you've done something wrong and that this might cost them but, after waiting a while, it becomes clear that this came to nothing;
4. waiting for your own cash-flow position to improve before pursuing a large debt and incurring the costs that that would involve.

We fail to see the need for this reform. It is generally argued that limitation dates are necessary as people's memories of all the details fail over time. However, debt collection is usually based on documentary evidence (invoices, statements, computer and bank records) and these records need to be retained far longer for tax reasons in any event.

If the time limit is shortened, then we predict a massive increase in court cases brought, as firms rush into issuing proceedings so as not to miss the 3-year time limit. Clearly, this would put even more pressure on an over-burdened court system and lead to more court delays as well as putting more pressure on businesses, which are under enough strain as it is at the moment.

As we said in last month's ezine, as the economy is slowing down, we can expect more business disputes than ever. Business disputes are bad for business due to the costs involved and the time that management must take in dealing with them.

So what can you do to try to minimise the effect of disputes?

1. Plan ahead in negotiations. Whenever negotiating a new project or contract, try to think of what could go wrong and make sure you address this, both in the contract and in your working systems - to try to prevent this from happening.
2. Put it in writing before problems occur. For large projects, make sure you have a written contract. For all projects and contracts, make sure that you have a written version of exactly what was agreed and try, as far as possible, to state who would be responsible for the problems you foresaw in 1 above. As was explained in our Feature article you can’t rely on a gentleman’s agreement.
   Whatever you do in business, you should try to ensure that the people you are contracting with do so in accordance with your terms of business. Make sure you have in place a good set of terms and conditions and ensure that you agree that they apply to all your dealings.
3. Put it in writing as soon as problems do occur.. If someone has got something wrong or you are not happy with the way they are performing, send them a letter or email stating this. This will solve many issues as to what exactly happened should the dispute later escalate.
4. Read our article on the Steps to Handling Business Disputes and follow the advice given.
5. Take legal advice as soon as possible when a dispute arises as, usually, the sooner action is taken, the better will be the overall result.

For advice on any business or commercial dispute you are experiencing contact Gary Cousins – who offers a free initial half hour telephone assessment.

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