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Despite warnings against doing business on the strength of a handshake, the building industry continues to favour the oral contract over its more time-consuming written counterpart, writes Kim Franklin. An oral contract is not necessarily a recipe for disaster.

But when you consider the number of column inches devoted to disputes about what a written contract means, you can appreciate the problem that you have if you have to establish what was agreed at the outset. The somewhat philosophical interplay between deciding what the parties agreed on the one hand, and what their agreement meant on the other, was explored in the recent case of Maggs v Marsh (Judgment 07.07.06).

Marsh was a retired jeweller from Bath. He engaged Maggs, a local builder of considerable experience, to refurbish his townhouse. Marsh accepted Magg's 'budget estimate' of £36,000, including the 'omission of certain items discussed'. Additional items were instructed during the contract, for which no estimates were provided. Needless to say, the parties fell out over what was supposed to be done and at what cost. Maggs claimed a total contract value of £69,000.

When things became contentious, Maggs engaged a surveyor who valued the work at £126,000. At trial, the central issue was what was included in the original quote.

Strictly, when working out what a troublesome contract means, you puzzle over the written words, put them into the context of the whole agreement and decide what was agreed. What people thought they meant, at the time or subsequently, is neither here nor there. Similarly, what anyone did afterwards on the strength of what they thought they had agreed is also irrelevant. The test is objective.

But this does not stop witnesses and experts alike opining on what they think the contract means. Their views are entertained by the lawyers because, you never know, they may be right. But this case highlighted a particular problem with oral contracts - there are no written words to puzzle over.

Marsh asked the judge to consider what had transpired between the parties after the contract was agreed, to throw light on what they believed the original scope of works to be.

Maggs argued that the question was not what they thought or intended, but what they actually agreed. The judge held that subsequent conduct was irrelevant and would prove a 'double-edged sword' for Marsh.

Undeterred, Marsh appealed. The Court of Appeal saw things differently and found that establishing the terms of an oral contract was a question of fact. Facts could be decided by testing the witnesses' recollections of what they agreed at the time against what they did subsequently. The case was sent back to the judge.

Two points arise from this case. One is that some would say it applies only where the actual terms of the oral contract are in dispute, not their meaning. The other is that an awful lot of trouble could have been avoided had Maggs and Marsh plumped for a written contract.

Kim Franklin is a barrister and chartered arbitrator at Crown Office Chambers in London. Visit www.crownofficechambers. com

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