Is a gentleman’s agreement legally binding?

A member recently needed advice about a pre-lockdown conversation with another trader, where they discussed the potential purchase of a vehicle in part exchange for an engine the other party already had in their possession and a cash payment. Nothing was written down, and no solid agreement was reached to the mind of our member, but the other party proceeded to sell the engine and is now of the view they had a ‘gentlemen’s agreement’.

So what is a ‘gentleman’s agreement’ and can it be legally binding?

The answer is yes, potentially. A contract does not need to be in writing for it to be legally binding. A legal contract is formed whenever the following are present:

  • An offer is made by one party, which is accepted by another. This creates an agreement. 
  • There is intention to create legal relations between the parties.
  • There is “consideration” (the parties each exchange something in value, such as payment of money (or promise of payment of money), in exchange for a promise to perform services).
Without each of these elements, no legally binding contract will have formed.

Oral contracts or so called “gentleman’s agreements” do therefore, have the potential to be legally binding. However, proving that each of the essential ingredients are present in an oral contract will often be difficult.

Historically, the Court’s approach to establishing agreement was to look for consensus ad idem – or a meeting of minds – between the parties. This was problematic as it focussed upon what the parties themselves actually thought at the time of entering the contract and the Courts are not mind readers. Nowadays Courts don’t seek to plumb the depths of the parties minds - they focus on whether the parties acted as if they agreed, by their words or conduct and by looking at the outward appearance of the situation by trying to find offer from one party which was accepted by the other.  

Generally, a gentlemen's agreement is an informal, unwritten agreement or transaction backed only by the integrity of the parties to abide by the terms. They were traditionally made between business owners and a violation could have a negative effect on business relationships if one party reneged on their promise. To some extent they remain this way without the expectation of the parties to be legally bound and when they are reneged upon neither party seeks legal recourse. However, legal recourse can be an option if there is an argument as valid contract was in place, despite a lack of documentation and so to avoid the problems and misunderstandings which can arise, it is always advisable to have clearly written contract terms where there it is the intention of the parties to create legal relations.  

 

Authors: Polly Davies

Published: 31 Aug 2020

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