Put it in writing

The use of contracts and the implications of contract law are fundamental to the operation of commerce and business relationships big and small.

A binding contract or agreement can be in writing or spoken (oral), however, certain contracts must be in writing such as:

• Consumer credit contracts;

• Door to door sales contracts;

• Guarantees;

• Contracts for the purchase of motor vehicles from a dealer; and

• Agreements for sale and purchase of property.

Fundamentals of a binding contract

To prove that a binding contract has been formed under the general principles of contract law, the parties must establish the following elements:

• the parties intended to create legal relations when they entered into the agreement;

• one party to the contract made an offer;

• the other party or parties accepted that offer;

• the promises contained in the contract were made for valuable consideration; and

• the terms of the contract must be certain.

Examples of case law on oral contracts

There are numerous examples of oral contracts in New Zealand, which have been uncertain and have resulted in disputes and litigation arising. Some cases have related to business situations such as:

• One party not providing a reasonable notice period pursuant to an oral contract, which had been in operation for over 20 years for the export of waste paper. The cancelling party was required to pay damages for a 12 month reasonable notice period, instead of being entitled to cancel the contract immediately or on a shorter notice;

• An oral agreement between friends that they were to become “equal shareholders” in a refrigeration and air-conditioning business in consideration of one of the parties being employed in the business, which was not performing well financially. This resulted in the owner having to pay damages in relation to the value of a 50% shareholding in the company;

• An oral agreement between maize growers (“W”) and a poultry company (“T”) where T asserted that the price payable to W per tonne of dry matter for maize was $290 for the 2008/09 season, but a previous oral agreement was for T to pay $465 per tonne to W. It was held that W and T had orally agreed to the price of $465 per tonne and damages were payable by T;

• An architectural design company undertaking significant house design concept plan work for a Japan based property owner. There was no written agreement as to the amounts to be paid for the work. Only oral discussions occurred at a meeting in Japan, and various email correspondence with no written agreement as to payments. It was held that the architectural design company was due 2% of the estimated building value ($10 million) - $200k, whereas the property owner considered that only $35k was payable;

Summary

The above cases demonstrate that even the simplest business arrangements and comments between parties may be construed as binding oral agreements.

The decisions above also demonstrate the dangers of relying on conversations and unsigned agreements.

This approach by business people to contract can result in parties having to spend unnecessary time and money in court proceedings to establish what the terms of an agreement or contract were.

The message is that in an oral contract, conversations and exchanges are able to be interpreted in different ways, and certainty is rare. Written agreements are more robust and provide better legal protection and certainty in business dealings.

The well-known quote of Sam Goldwyn that: “A verbal contract isn't worth the paper it's written on” still rings true today in all business dealings. Always exercise caution, use your lawyer and remember to put it in writing.