The status of oral contracts

10 June, 2011

It is sometimes claimed that a contract cannot exist because “there is nothing in writing” but this is incorrect.

Except for certain types of contracts, such as contracts for the sale of land and guarantees, there does not need to be anything in writing for a contract to exist provided the following general requirements are satisfied:

i)  there is a common agreement between the parties;
ii)  the parties intended to form a legal relationship; and
iii)  each party provides some form of consideration, whether by agreeing to pay money or by committing to some other obligation.

Contracts can also be partly in writing and partly oral.

In business transactions, oral contracts are best avoided as, in the event of a dispute, it can be difficult to establish what was agreed if there are no clear written terms to provide evidence. However, the conduct of the parties alone can create a contract, particularly where there have been regular dealings between the parties in the past. If the conduct reasonably demonstrates that the parties had a common understanding, a court can find that a contract exists, even if the parties never expressly stated, orally or in writing, their intention to enter into a formal contract. Similarly, if a written contract was prepared but was never signed and the parties started working together in accordance with the terms of the unsigned contract, a court could infer that a contract exists on those terms.

It is even possible for conduct to alter the terms of a written contract if there are regular dealings between the parties which are inconsistent with the terms of the contract and which can be shown to provide evidence of a common intention of the parties to vary the written terms. In view of this, it is important for the parties to ensure that a written contract is drawn up and signed before the parties commence performance of the contract and, if a change of circumstances occurs which necessitates a change to the terms of the contract, this change should be clearly documented in writing and signed by the parties in accordance with the change control/variation procedures set out in the contract.

 

Reviewed in 2015