Australia: Verbal contracts – Worth the paper they are written on?

Last Updated: 26 October 2018
Article by James Hamilton

Can a verbal promise from a good friend be a binding contract?

It depends:

"... not every promise, however sincerely made, is legally enforceable": per Campbell J in the recent Supreme Court of NSW case of Winter v Nemet. This case considered such an issue over a three day hearing and then on appeal. Substantial legal costs would have been incurred. The facts below are somewhat truncated.

The plaintiff had assisted her old friend (the defendant), by doing substantial voluntary clerical work in a Family Court litigation in which the defendant was involved. The plaintiff then introduced the defendant to a litigation funder who thought they could achieve a result of $30 million. The plaintiff alleged that in January 2010, after doing that work and agreeing to do further work, the defendant verbally promised to provide her with funds to buy a small cottage in Double Bay after the proceedings had ended. The defendant denied that she gave the promise. The plaintiff sued her for damages for breach of contract.

His Honour referred to a passage in the well-known case of Watson v Foxman, in which McLelland CJ in Eq said:

" Human memory of what was said in conversations is fallible and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions of self-interest as well as conscious consideration of what should have been said or could have been said...".

In light of there being one person's word against another, said a long time ago, Campbell J. thought that his reasoning should be based:

"as far as possible, on the basis of contemporary materials, objectively established facts and the apparent logic of events " : quoting from Fox v Percy (2003) 2014 CLR 118.

The friends trusted each other and were very close at one point. The defendant thought of the plaintiff as a "big sister". They went shopping together, went on a Thailand holiday at the defendant's expense, and ate at restaurants together. At one point the defendant gave the plaintiff a power of attorney.

The friendship ended however, when the defendant sued the litigation funder for the Family Court litigation in acrimonious and costly litigation, with the plaintiff being a witness for the funder.

After a long lapse of time from the events and this "bitter history", the trial judge found that the oral promise had been made by the defendant, as alleged, but in the context of the plaintiff and defendant receiving very bullish assertions from the litigation funder, that a substantial win of $30 million was likely for the defendant in her Family Court litigation. The judge felt that the promise depended on the large case win and not on the future clerical acts of the plaintiff.

The judge held that the promise was not contractual. It was both unsupported by consideration and there was also no intention to enter into legal relations.

The language of the promise was held to be:

"...consistent only with a statement of intention to make a very substantial gift to the plaintiff as a trusted and valued friend if things go well in the Family court proceedings ".

Some of the key legal principles applied by the Court included:

  • The Court examines what a reasonable person would have understood by the language in which the parties expressed their agreement;
  • The intention to create legal relations similarly requires an objective approach, looking at what was said or done: "having regard to the circumstances in which the statements or actions happened";
  • The circumstances may show that the parties cannot be regarded as intending the agreement to be legally binding;
  • The social relationship between the parties is a relevant objective surrounding circumstance;
  • Prescriptive rules do not exist.

The Court of Appeal agreed with the first instance decision. It delivered a joint one page "short form" judgment.

As this case indicates, enforcing verbal arrangements between friends concerning large obligations are likely to be fraught with difficulties. To have the best chance of achieving a legally enforceable promise in clear terms, each party should see their own lawyer, obtain legal advice and have the promise formalised into a deed or agreement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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James Hamilton
 
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