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.