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Agreements over the phone

A recent court case between Bear Stearns Bank and Forum Global Equity, two financial institutions, has brought oral contracts back into the news. 

“This recent judgment confirms the age-old rule that an oral contract is as binding as a written one”, says Ed Bailey, a commercial solicitor at Barr Ellison, "So be wary how much you commit to when doing business over the phone." 

The case arose after a dispute as to whether an agreement to buy debt, which was made by telephone, constituted a legal contract or whether it was merely a non binding agreement, which would not become a contract until the lawyers had finalized the legal documents. 

In court, the judge decided that the telephone agreement was legally binding. 

Mr Bailey has some advice for those who are not sure if they are entering (or indeed want to enter) into a contract when doing business verbally. 

“In the case of Bear Stearns Bank and Forum Global Equity one of the arguments put forward by lawyers arguing that no contract had been agreed was that the finer points of the deal had yet to be finalized. However, if there is an intention to create a legal relationship and key terms of that relationship are clear, a contract is likely to come into being, so be careful how much detail you enter into when discussing or preparing to enter into a deal.

 “The strongest means of protecting yourself against entering into a legally binding contract over the phone is to ensure that discussions and negotiations are made 'subject to contract’. This should mean that no contract will exist until a written agreement is signed.

“In addition, for a contract to exist, there has to be an offer and an acceptance of that offer. If either is missing, there can be no legally binding agreement. Again, unless you’re absolutely certain that you want to proceed, err on the side of caution when it comes to making or accepting offers, and avoid using language that could be understood as closing a deal. 

“As a rule of thumb, always be wary over how much you commit to over the phone. It could come back to haunt you.”

For further information contact Ed Bailey .

The information given in this article is of a general nature only and should not be considered as advice applicable to any particular situation for which specific request should be made to us.