Doing business with family and friends can be exciting. Because you know and trust the person, it’s easy to assume that you understand where the other party stands on the agreement. As a result, you may not think it’s necessary to formalise the agreement in writing as your relationship alone is enough.
However, life happens, and circumstances change. If the agreement has to end unexpectedly, it is possible – even likely – that conversations about terms are remembered differently, especially if the relationship has broken down. Further, there is usually little to no objective evidence to support positions that are agreed verbally.
We never know when we will have to enforce our rights in the future, and this is why it is essential that any commercial agreement is recorded in writing. The agreement should be prepared once the terms of the agreement are agreed; however, if that is not possible then it should be prepared as soon as possible after that.
The intention to create legal relationship
In law, there is a presumption that when family and friends enter into an agreement they do so out of love and affection, i.e., they do not intend to form a legal relationship. The effect is that agreements between family and friends are considered informal, like a promise.
The way to overcome this presumption is by documenting your agreement. A written agreement is the best way to demonstrate your intention to be legally bound when entering into arrangements with family and friends.
Avoiding the costs of litigation
A written agreement ensures that all parties are clear on the terms and reduces the likelihood that termination of the agreement will end in litigation. If litigation is unavoidable, then a well-prepared agreement makes the process clearer and, therefore, more cost effective. There are a number of different costs associated with litigation.
First, there are financial costs. You will need to engage a solicitor, barrister and potentially expert witnesses, and court fees. If you are unsuccessful and a costs order is made, you may also incur the other party’s legal fees. This alone can make litigation an extremely costly exercise.
Secondly, litigation is labour intensive. It requires a lot of your time as a participant, for example, instructing your solicitor, attending mediations and possibly a trial. This is all time that you are not getting paid for.
Thirdly, the social and emotional costs associated with litigation. For the reasons set out above, litigation has a tendency to consume people’s lives when they go through it. It is not uncommon for relationships to suffer as a result of the process. Most notably, in the context of agreements made between family and friends, you run the risk of losing a relationship with a loved one.
What can you do?
The most effective way to avoid disputes when entering into a legal arrangement with family or friends, is to formalise the agreement in writing as early as possible. These agreements can take many forms and can range in complexity and formality to suit your situation.
If you would like to learn more about the types of agreements that may be relevant to you, please do not hesitate to contact a member of our commercial law team on 5472 1588 or 5434 6666.