In the fast-paced world of business, it’s not uncommon for deals to be made with a handshake, a casual email, or even a conversation over coffee. While this may seem efficient and convenient at the time, informal business agreements can expose individuals and companies to significant legal risks. When things go wrong, and they often do, the absence of a formal written contract can lead to costly disputes, reputational damage, and a lack of legal protection.
In this guide, we’ll explore what informal business agreements are, why they can be problematic, and how you can protect yourself by formalising your arrangements. Whether you’re a start-up founder, business partner, or investor, understanding the legal risks of informal agreements is essential for safeguarding your interests and avoiding future conflicts.
What Is an Informal Business Agreement?
An informal business agreement refers to any arrangement made between parties without a formally written and signed contract. These agreements can be verbal or loosely documented via text messages, emails, or casual communications. While UK law does recognise that verbal contracts can be legally binding in certain situations, proving the existence and terms of such agreements can be extremely difficult if disputes arise.
Common examples include:
- Verbal promises between co-founders
- Agreements to supply goods or services without a written contract
- Informal loans between friends or business associates
- Joint ventures discussed but never formalised
- Agreements based on email threads but not signed contracts
In many cases, both parties enter into informal agreements in good faith, but misunderstandings or changes in circumstances can quickly lead to conflict.
Are Verbal Agreements Legally Binding in the UK?
In theory, yes, verbal agreements can be legally binding in the UK if they meet certain criteria:
- There is an offer
- The offer is accepted
- Consideration is provided (something of value is exchanged)
- There is an intention to create legal relations
However, the real challenge is proving that such an agreement existed, what its terms were, and that both parties agreed to them. Unlike written contracts, verbal agreements lack clear evidence and are open to interpretation, making disputes far more complex and uncertain.
In high-stakes business situations, relying on a verbal agreement or informal promise is rarely advisable.
Key Legal Risks of Informal Business Agreements
1. Unclear Terms and Ambiguity
Informal agreements often lack detail or specificity. This can create major issues when it comes to interpreting the obligations of each party. For example, if someone verbally agrees to “deliver marketing support,” what does that actually include? How many hours, over what timeframe, and at what standard? Ambiguity can lead to unrealistic expectations and eventual disputes.
2. Difficulty Enforcing the Agreement
If a dispute arises and no written agreement exists, you may struggle to enforce your rights. Courts will often require strong evidence, emails, bank transfers, and witness statements, to establish that a contract existed. Without this, your legal position may be significantly weakened.
3. Lack of Legal Protection
Many formal contracts include important legal protections such as:
- Limitation of liability clauses
- Dispute resolution mechanisms
- Confidentiality clauses
- Intellectual property ownership terms
- Termination rights
Informal agreements typically lack these safeguards, leaving parties exposed to a wide range of legal and financial risks.
4. Risk to Business Reputation
Business disputes, especially those involving failed partnerships or unpaid work, can quickly escalate and damage your reputation. Even if you’re in the right, trying to recover what you’re owed without a formal agreement can appear unprofessional and lead to negative PR or broken relationships.
5. Complications with Tax, Investors or Regulators
Investors and regulators expect businesses to have clear governance and documented arrangements. If your business is audited or seeks funding, a history of informal agreements can raise red flags and undermine credibility. Additionally, unclear terms may cause issues with VAT, employment law, or income tax reporting.
Real-World Scenarios
Case Study 1: Informal Co-Founder Deal
Two friends agree to start a business together. One puts in money, the other puts in time. They verbally agree to a 50/50 split of profits. Two years later, the business is worth £500,000, but the investor claims they should now own 70%. There’s no written agreement. The dispute ends up in court, costing both parties thousands in legal fees and damaging their friendship.
Case Study 2: Unwritten Service Agreement
A freelance web developer agrees over email to design a new site for a small retailer. The scope of work isn’t clearly defined. The retailer refuses to pay the full amount, claiming the work is “incomplete.” The freelancer has no signed contract to rely on and struggles to prove what was originally agreed.
How to Protect Your Business
1. Always Use Written Contracts
The best way to avoid disputes is to ensure all key business agreements are documented clearly and signed by both parties. Even if you’re working with friends, family, or long-standing contacts, it’s essential to formalise the relationship.
2. Seek Legal Advice Before Entering into Agreements
A solicitor can help you draft or review agreements to ensure they’re legally sound, fair, and enforceable. At Monarch Solicitors, we regularly assist clients with commercial contracts, joint ventures, shareholder agreements, and more.
3. Put It in Writing – Even If It’s Simple
Even a basic written agreement is better than none. If you don’t have time for a full contract, a signed letter of agreement or short contract summarising key terms can provide vital protection and clarity.
4. Keep a Paper Trail
Save emails, text messages, payment receipts, and any relevant communications that might help evidence the existence and terms of any informal agreement. While not as strong as a signed contract, this can still support your case in the event of a dispute.
5. Review and Update Agreements Regularly
Even signed contracts can become outdated as circumstances change. Make sure to review and update agreements as your business evolves, particularly with business partners, investors, or major clients.
When to Involve a Solicitor
If you’re:
- About to enter into a business arrangement
- Involved in a verbal agreement that’s now in dispute
- Owed money without a formal contract
- Unsure how to formalise a business deal
…it’s time to speak to a commercial law solicitor. Legal input early on can prevent costly issues later.
At Monarch Solicitors, we’ve helped countless businesses and individuals formalise their relationships, resolve disputes from informal agreements, and safeguard their commercial interests.
Why Choose Monarch Solicitors?
With offices in Manchester and London, our experienced commercial law team advises clients across the UK on everything from contract drafting and shareholder agreements to partnership disputes and business litigation. We combine technical legal knowledge with real-world commercial understanding, helping you make smart legal decisions without unnecessary complexity or cost.
Whether you’re a growing startup, a family-run business, or an established company, we can help you protect your legal position and avoid the pitfalls of informal agreements.
Contact Monarch Solicitors Today
If you’re involved in an informal business agreement, or want to avoid future disputes, contact Monarch Solicitors for expert legal guidance.
We can also assist with drafting commercial contracts that clearly define your terms, protect your interests, and minimise legal risk.
Call us now on 0330 127 8888 or email: [email protected]
