Spirit of the agreement and the letter of the agreement (2024)

The letter of the agreement versus the spirit of the agreement can be seen as two opposites or poles that are divergent nature.Interestingly there are a number of views thatindicate that when one obeys the letter of the agreement but fails to obey the spirit of the agreement, one is obeying the literal interpretation of the words (the "letter") of the agreements but not necessarily the intent of those who wrote the agreement. This brings about an interesting dynamic when dealing with agreements that have broken down and highlight the importance of both the spirit and the letter of the agreement.

I was recently approached by a group of young entrepreneurs who were in a position to start a business venture seeking advice.As I always like to take my time when engaging with these young stars; I was interested to hear about the product, the customers, the value chain, the business model, and the value that the product will add to these consumers.Based on our previous engagements, these young stars were expecting that these questions will arise and therefore came prepared.There were some good responses, and some response needed more work.

I was quite curious on the vehicle they had chosen for their business and the structure thereof. The venture they were interested in was, a propriety limited with all the mates holding an equal share. I proceeded probe and ask a few questions around the vehicle:

• The directors – who will be appointed as directors and who will not and why not?
• Dis-agreements – how will they deal with split decisions and disagreements?
• Authority – who will sign on behalf of the entity and who will not and why not?
• Contributions – who will contribute and in what form of contribution?
• Restrictions – can shareholders / directors be involved in other ventures?
• Financing – how will the business capital be raised?

I was stunned to find out that these were not addressed, and these young entrepreneurs were not interested in defining these contractual obligations as they were good mates and did not foresee any problems could arise in their business relationship. This naturally made me ponder about the romantic idea of starting a business versus the reality of making a business venture work and the understanding that it all starts with agreements. Agreements are the foundation on which we build relationships. It all starts with spirit of the agreements and the letter of the agreements between the founding partners

Recently, I have also been privileged to be among a group of intelligent people who were able to breakdown this phenomenon.One of the best definitions I heard was, the spirit of the agreement is really about what the purpose of the venture or the agreement, the aim of the venture and while the letter is about the tools that we will use in the venture or the agreement (the nuts and bolts).Both are important to adequately define and ensure that each party is explicitly clear in what they are committing to.The above would questions fall more in the letter of the agreement but the spirit of the agreement needs to be expressly clear to ensure that there are no uncertainties between the partners.

It is further recommended that the spirit of the agreement is defined first and used as the introduction of the agreement to outline the overarching vision of the agreement. This becomes crucial as it is virtually impossible to think of every scenario that can go wrong and document actions that deal with each scenario. The parties need to define the spirit of the agreement themselves and then ask a legal expert to assist with the letter of the agreement.When problems arise that are not explicit in the letter of the agreement, the parties will then measure action against the spirit of the agreement and decide as to whether the action is in line with the spirit of the agreement or not.If the action is not in line with the spirit of the agreement, then there was a breach in the agreement.

One needs to realise that it is virtually impossible to document every possible scenario in the letter of the agreement. Human beings will find a loopholes that meet the letter of the agreement but break the spirit of the agreement, this should not be allowed to happen.

It is therefore important to define and document the “why” the spirit of the agreement and ensure that all parties are aligned and remain aligned to the spirit of the agreement before engaging on the letter of the agreement.