"Oral contracts are worth the paper they are written on."
This is an expression that many business people will be familiar with. While not technically true, the expression captures the real risk that parties take by failing to consolidate an agreement to writing.
A recent NSW Supreme Court decision, Hoju Jobs Pty Ltd  NSWSC 302 (Hoju Jobs), the Court decision that gave life to this expression and confirmed the risks involved.
The dispute revolved around a claim for a refund of $300,000 after a failed business deal between the parties. The deal was not in writing and wholly oral. The conversations giving rise to the agreement occurred some 3-4 years prior to the litigation. Unsurprisingly, the parties' evidence showed numerous and irreconcilable differences between their recollection of those conversations and the agreement that was reached.
The existence and terms of an oral contract is a question of fact. At paragraphs 75-79 of the Judgment, Her Honour Justice Williams described the principles applicable to determining the existence and terms of oral contracts in NSW. Principles outlined by Her Honour are summarised below1.
Principles Determining the Existence & Terms of Oral Contracts:
- When looking at the parties conduct and determining whether the elements of a contract are satisfied, the essential question is whether the conduct (including speech, commercial aims and expectations) reveals an understanding or agreement or manifestation of mutual assent which shows an intention to be legally bound by the essential elements of a contract2.
- The subject matter and terms must be inferred from surrounding circumstances (eg. conversations and documents) as a matter of fact, not interpretation3.
- Where there is competing evidence about the conversations giving rise to the oral agreement, the Court recognises that human memory is fallible and recollection is self-serving. Evidence that is not self-serving should be considered more likely to be reliable4.
- When making findings of what was agreed orally, the parties' evidence is to be weighed against the objective surrounding facts that are either undisputed or established by contemporaneous documents and the inherent probabilities5.
- It is necessary to look at the whole relationship, not just what was said and done when the relationship was first formed. New terms will be added which supersede old terms6.
- The Court may have regard to post-contractual material if it is relevant to determining the terms of a contract that is not wholly in writing7.
Five Tips to Help Avoid or Resolve Future Disputes Arising from an Oral Contract:
- Make detailed file notes of conversations, actions, or other factors that give rise to or form part of the agreement, at the time that they occur.
- Ask other parties who were present for the conversations, actions, or other factors to also create file notes and provide them to you.
- Send emails or other correspondence to the other party setting out the terms of the agreement as and when they occur.
- Monitor the performance of the agreement and make notes of anything that constitutes a change to the terms that were agreed.
- Take positive, timely steps if the parties' performance deviates from what was agreed or there has been a breach of the agreement.
So, oral contracts are in fact worth a lot more than the paper they are written on, but it is always in your best interests to, at the very least, keep a record of what was said by who and when.
If you're party to an oral agreement and you anticipate it may lead to trouble down the track, take proactive steps to keep things on track before they derail.
1 Her Honour adopted Sackar J's summary of the principles to be applied when ascertaining the existence and terms of an oral contract in King v Adams  NSWSC 1798 at -, which was cited with approval in Moore v Aubusson NSWSC 1466 at .
2 Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424.
3 County Securities Pty Ltd v Challenger Group Holdings Pty Ltd  NSWCA 193 at .
4 This is derived from the observations of McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 513 at 319.
5 Effem Foods Pty Ltd v Lake Cumbeline Pty Ltd (1999) 161 ALR 599 at ; Fox v Percy (2003) 214 CLR 118 at 129;  HCA 22; Re Hillsea Pty Ltd  NSWSC 1152 at .
6 Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153.
7 Lawrence v Ciantar  NSWCA 89 at 114] (Bathurst CJ, Meagher and Gleeson JJA agreeing).
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.