Oral Contracts Not Worth The Paper They Are Written On Or Are They?

A contract is a promise or set of promises, the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a parties’ obligation. It is an agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law.

In this fast paced world of doing business, parties sometimes disregard the formalities of a written contract, and conduct business with a handshake, or oral contract. Generally, these oral contracts are enforceable! Obviously not every statement made between parties can be considered as a promise, agreement or contract, however, it is important to identify when a valid contract can be said to have been formed.

For a contract to exist the following must be present; offer, acceptance, consideration, intention to create legal relations and capacity to contract. It is also a fundamental principle of contact that there must be a meeting of minds, the parties must agree on certain terms before there can be a valid, legal and enforceable contract. Where the parties say different things at different times, there is no meeting of minds, they are not in agreement on specific terms and so cannot be said to have a created a contract between them.

An offer is an unequivocal expression of readiness to contract on terms specified by the offeror (person making the offering) which if accepted by the offeree (person to whom the offer is made) will give rise to a binding contract. Thus, it is by acceptance that an offer becomes converted to a contract.

Acceptance is an unconditional (without conditions or limitations) approval communicated by the offeree to the offeror. It must be unqualified and on the terms of the offer before acceptance can create a binding contract. When acceptance is qualified or varies from the terms of the offer, it becomes a counter-offer and no longer an acceptance that can lead to a valid contract.

Another essential element of a valid contract is consideration, (except where the agreement is under seal). Consideration has been defined as the inducement to contract; the cause, motive, price or impelling influence which induces a contracting party to enter into a contract; the reason or material cause for a contract; some right, interest or profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.

In order for consideration to qualify as an ingredient of a valid contract, it must be valuable in the eyes of the law and must flow from the offeree to the offeror. However, consideration need not be adequate so long as parties have agreed that it constitutes sufficient price or motive for the formation of a contract.

Parties to a contract cannot be said to have a legally binding agreement between them where either or both parties lack the capacity to contract. Capacity in this regard refers to the competence of a party in the eye of the law to be able to enter into a contract. In this regard, some classes of persons are incompetent in law or have a limited capacity to enter into contractual relations. They include minors, lunatics, illiterates or intoxicated persons.

Before a valid contract can be said to have been created, there must be an intention by the parties to the contract to create legal relations. This means that even where other ingredients are present, parties may not have intended to create a legally enforceable agreement and this can be inferred from the nature of the contract.

Generally, a contract could be oral or written. It could also be express – clearly stated or implied – deduced from conduct of the parties. Oral contracts are very common in everyday activities. Indeed, it would be almost impossible to require that all contracts, no matter their level of significance should be written.

It is a fundamental principle of the law of evidence that he who asserts must prove. Therefore, the person who alleges that there was a contract has the burden of proving the
assertion to the satisfaction of the determining body.

How do you do this? First you need to give oral evidence of what transpired and what the understanding between the parties to the agreement was. In doing this, there will be need to state the terms and conditions that formed the contract and also highlight the understanding between the parties.

A party who seeks to prove the existence of an oral contract should go a step further and call a witness or witnesses to buttress his claim. In addition, where there are supporting documents such as emails, memos, receipts, faxes, photographs, recordings etc; Cheques or payment vouchers and bank statements could also be used as evidence of the existence of a contract. Documentary evidence generally is more reliable and
usually serves as an aid in assessing the veracity of oral testimony or evidence.

Whilst for many years the misreported quote of Samuel Goldwyn or Metro, Goldwyn, Meyer fame, of “an oral contract is not worth the paper it’s written on” has formed the basis of the view that oral contracts are unenforceable, this myth is dangerous.

Goldwyn’s actual quote, was praising a colleague and was in fact “His verbal contract is worth more than the paper it’s written on” it was meant to praise the honour and integrity of his colleague. In modern business where emails, telephone calls and conversation rule, and time is often of the essence both to secure the work and confirm the contract great care should be taken that an enforceable contract is not created by accident.

Acknowledgements: Teingo Inko-Tariah / Thomson reuters online legal resource Practical Law Company / Olender Feldman LLP

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org