Verbal agreements are often seen as convenient, especially in fast-moving business environments. However, the risks associated with these informal arrangements can outweigh the initial ease. Below, we delve into the key risks and how they can significantly impact your business.
1. Lack of Clarity
Verbal agreements often lack the specificity required to avoid misunderstandings. Unlike written contracts, which detail the responsibilities and expectations of all parties involved, verbal agreements leave significant room for ambiguity.
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Example: You agree verbally with a supplier on delivery dates, but no specific deadlines are confirmed. The supplier delivers late, causing delays in your operations, and there’s no documented proof to hold them accountable.
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Impact: Misunderstandings over terms can lead to disputes, operational delays, and financial losses.
A written agreement ensures that all parties are on the same page regarding their obligations and minimises the risk of miscommunication.
2. Difficulties in Enforcement
Even though verbal agreements can be legally binding, proving their existence and terms is challenging in practice. Without written documentation, you’re left relying on indirect evidence, which may not hold up in court.
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Example: A contractor verbally agrees to complete work for a set fee but later claims the agreement included additional payments for materials. Without written evidence, you may struggle to prove your version of the agreement.
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Impact: This can lead to lengthy and costly legal battles, with no guarantee of a favourable outcome.
A written contract eliminates these issues by providing clear, indisputable evidence of the terms agreed upon.
3. Limited Proof of Agreement
In disputes involving verbal agreements, courts require evidence to establish what was agreed. Without a written contract, you may need to rely on alternative forms of proof, which are often insufficient.
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Alternative Evidence: Emails, text messages, or witness testimony may provide some indication of the agreement, but they rarely capture the full scope of the terms.
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Example: You verbally agree to lease equipment for a specific period, but the provider later claims the term was shorter. Without written documentation, it’s your word against theirs.
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Impact: Weak evidence can result in unfavourable outcomes, even if you were in the right.
Documenting agreements, even informally through a follow-up email, provides stronger evidence in case of disputes.
4. Excluded Contracts
Under Australian law, certain types of agreements must be in writing to be enforceable. Verbal agreements for these transactions will not hold up in court, leaving you exposed to significant risks.
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Real Estate Transactions: Agreements involving the sale, lease, or transfer of property must be documented in writing.
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Agreements Not Performable Within a Year: Long-term arrangements require written documentation.
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Consumer Guarantees: Australian Consumer Law mandates written agreements for specific goods and services to provide clarity on rights and obligations.
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Example: A verbal agreement to lease commercial property for two years would be unenforceable, potentially leaving you without recourse if the other party breaches the terms.
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Impact: Failing to document these agreements can leave you with no legal remedy, even if the other party fails to meet their obligations.
5. Strained Business Relationships
Disputes over unclear or contested verbal agreements can damage trust and goodwill between business partners, suppliers, and clients.
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Example: A client verbally agrees to pay for additional services, but later disputes the charges, claiming they were not agreed upon. This could sour the relationship and lead to the loss of future business opportunities.
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Impact: Beyond the financial implications, strained relationships can harm your reputation and limit your ability to build partnerships in the future.
By formalising agreements, you can ensure that all parties understand their commitments, fostering stronger and more reliable business relationships.
How to Avoid the Risks of Verbal Agreements
While verbal agreements may seem quicker and easier, they come with significant risks that can jeopardise your business. To protect your interests:
1. Always Use Written Agreements
A written agreement should be your default. Even for small transactions, a brief document outlining the key terms is far better than relying on a verbal arrangement.
2. Record Key Terms
If a verbal agreement is unavoidable, immediately follow up with an email summarising the discussion. For example:
“Hi [Name], just to confirm, we agreed that [specific terms]. Please let me know if there’s anything I missed.” This simple step can serve as valuable evidence if disputes arise.
3. Include Essential Terms
A good agreement should include:
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Payment Terms: Specify the amount, method, and timing of payments.
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Deliverables: Clearly define what is being provided and the expected standard or quality.
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Timeframes: Include deadlines for deliverables or payments.
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Termination Clauses: Outline how either party can end the agreement and what happens afterward.
4. Seek Legal Advice
When dealing with high-value or complex transactions, consult a solicitor to draft or review your agreements. Professional advice ensures your contracts are comprehensive and enforceable under Australian law.
Final Thoughts
Verbal agreements may seem simple and convenient, but their risks far outweigh their benefits. By taking the time to formalise agreements in writing, you protect your business from misunderstandings, disputes, and potential losses.
If you’re unsure about how to draft a contract or need help addressing an existing agreement, speak to a qualified solicitor. A proactive approach to documenting your business deals can save you time, money, and stress in the long run.