Regular Business Advice contributor David Walker, founder of commercial law firm Grid Law, returns to explain everything a small business owner needs to be aware of should a contract remain unsigned by a client.
After reading my series of articles on contract law, one of my clients (we’ll call him John) asked a question about a situation he was in. John asked:
“I agreed to do a piece of work for a new client and sent them my terms and conditions, but they haven’t sent a signed copy back. Time was tight so we started work and now it is pretty much done. I don’t know if I’ve got a written contract, verbal contract or no contract at all! What happens if we get into problems, for example, if he doesn’t pay?”
After asking around, I’ve found that this is an extremely common situation for many businesses. So, hopefully this article will help you understand what to do if this happens to you, so you can reduce the risk of problems occurring in the future.
When you’re trying to work out whether or not you have a contract, the starting point is always going back to basics. If you remember from my article “Does a handshake form a legally binding contract” you need five essential elements to be present for a contract to be legally binding.
- An offer
- Acceptance of that offer
- Consideration (i.e. payment)
- An intention to be legally bound
If you can show that these five elements are present, there’s a good chance you have a verbal agreement even if your terms and conditions haven’t been signed by your client. However, every situation is different. To be sure, we need to look at the facts. We then need to look at what evidence we have to support those facts and understand what the parties’ intentions were.
For John, the facts were quite clear. Both parties knew exactly what was expected of them. Sending his terms and conditions was the final stage of the contract process after preparing a proposal and having several discussions with his client.
But what if the facts weren’t as clear?
Let’s say John had sent his terms and conditions, thinking that signing them off was just a formality, and then he started work.
For his client, it may not have been a formality. What if the client still needed details clarified? After thinking about it for a week or so, the client may have emailed John back to say there were some issues with the “small print” that he wanted to discuss.
Being so busy, John’s reply (another week later) could be along the lines of:
“OK, we’re just about finished with this project. Let’s have a review meeting so you can see what we’ve done and we can sort out the final details of the contract at the same time.”
Does this situation sound familiar?
In this situation, some of the facts may be clear. For example, the services John was providing and the price, but standard terms and conditions contain many other important details to protect your business. For a review of these, see my previous article “Standard terms and conditions: Why they’re the unsung saviours for your business”.
If the review meeting happens and no agreement is reached on the changes to the terms and conditions, it is clear that there is no written agreement between John and his client. So, we need to look at the evidence to see if there is a verbal agreement and what the intentions of the parties were.
In this situation, there probably is a verbal agreement, around the basic terms. John’s client hadn’t questioned the price, or the services John was providing so there is probably sufficient certainty for a contract to be formed.
But what happens if, for example, problems were found later on?
What if John was writing a piece of software and there were bugs in it? Would he be obliged to fix them as part of the original price or not? It depends what was agreed (if anything).
What if John’s client withheld some of the fees as a lever to force John into making changes to his terms and conditions, say to extend a warranty period?
This is where John would be exposing himself to unnecessary risk by starting work before the terms and conditions are signed off.
An even riskier situation is where John sends his terms and conditions and there is a clause in them that says something along the lines of: “No legally binding contract is formed until a copy has been signed by both parties”.
In this situation, it’s clear (from the contract at least) that John’s intention is not to be bound by a contract until his client has signed it. Therefore, if he starts work before getting the signed contract back, he is at serious risk of there not being a legally binding contract between them. Then, if his client refused to pay he would have great difficulties trying to enforce it.
Protecting your business
So, what can you do to avoid putting your business at risk when a client doesn’t send a signed contract back?
Obviously, the first thing you can do is not start work until you have a signed contract but when time pressures are tight, this might not be possible.
Therefore, you need to understand why you’re not getting your contracts back signed. For example, is this an admin issue? If so, you just need to be more organised in chasing to get them back.
Or, is there some other roadblock in the system? Your terms and conditions should make the process of entering into contract simpler, but if they contain clauses that are always being objected to, perhaps they need reviewing?
Do you know what your terms and conditions say? Do you have a clause which says “No legally binding contract is formed until a copy has been signed by both parties”?
It’s a common clause, included so that there is certainty about when a contract is formed. But if you’re not sticking to your own terms and conditions – and starting work before getting a signed contract back – you could be putting your business at unnecessary risk by doing so.
Ultimately, many business owners will start work before getting signed terms and conditions back from their clients, because they want to deliver the best service they can.
In a competitive industry, they won’t want to give the impression that formalities are getting in the way of the service they’re providing. However, if you do this, make sure you’re not putting your business at risk by including clauses such as the one above.
If you have a question for David Walker, send an email to email@example.com and he will be happy to respond.
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