Informal Oral Contract Costs Construction Company Almost £7 Million
15th December 2017Back to articles
Informal oral contracts remain sadly commonplace despite any number of examples of them leading to costly disputes.
In one case, a construction company that allowed another to use its name in tendering for jobs ended up losing almost £7 million.
One of the company's senior employees was an acquaintance of the founder of a start-up business. On the company's behalf, he orally agreed that it would take a 30 per cent stake in the business for £3,000 and would advance the latter a 10-year, interest-free loan of £147,000. It was also agreed that, at least initially, the fledgling business would be permitted to enter into contracts in the company's name.
One such project involved the business constructing industrial/warehouse units, some of which later suffered from subsidence. The company, in whose name the design and build contract had been entered into, eventually had to settle claims brought by owners of the affected units for £6,975,000.
With a view to recovering its loss, the company launched proceedings against the business, which had since prospered mightily, employing 620 staff and having a turnover of £480 million.
The company argued that, as part of the oral agreement, the business had agreed to indemnify it against any losses that might arise from construction projects that were carried out in its name.
The absence of a written contract meant that the High Court was constrained to rely on other documentary and oral evidence as to what had been in the parties' minds when the agreement was reached in 2001. In dismissing the company's claim, the Court ruled that it had not been established on the balance of probabilities that the business had agreed to provide an indemnity.
Getting legal agreements properly formulated from the outset is always sound advice. Failing to do so has proved to be expensive on countless occasions.
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