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The $350,000 question: When is a conversation considered a verbal, binding contract?

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On 27 May 2015, the New South Wales Supreme Court confirmed the court’s willingness to give effect to contractual obligations arising from verbal contracts.

Facts

Yulema Pty Ltd (“Yulema“) owed a debt of approximately $1.04 million to Paltara Pty Ltd, which belonged to a larger controlled group of companies called the ADC/EDC Group (“the Group“). The Group was owned in unequal parcels by the siblings of the Roche family.

One of the siblings attempted to buy-out each of the other shareholdings in the Group. However, as the parcels were not divided equally, negotiations hit a road block.

To facilitate the completion of the buy-out David Roche (“Roche“) orally agreed to reimburse Yulema in part if it was required to pay any part of the debt.

The terms of the verbal contract were that:

  1. if the buy-out agreement was executed; and
  2. the debt was satisfied in whole, or in part; then
  3. David Roche would pay Yulema one third of the amount of the debt repaid.

Judgment

Like almost every dispute over verbal contracts, this dispute revolved around an alleged term of the verbal contract.  Central to this dispute was an allegation by the defendants that the verbal contract contained a particular term (either express or implied), namely, that the verbal contract was subject to settlement of the buy-out transaction settling.

An unusual complication to this case was that not only did Roche pass away before the hearing but Roche’s solicitor involved in the negotiations did too. That meant that two of the principal characters involved in the negotiations were not able to give evidence in court.

Based on the evidence provided by Roche’s accountant and one of the plaintiffs who were present during the negotiation, Justice Slattery concluded that the verbal agreement did not contain the term alleged by the defendants.

The verbal contract was held to be effective without the implied term, and the proposed implied term, as suggested by the defendants, was “replete with ambiguity”, and therefore neither obvious nor capable of clear expression.

After concluding that the buy-out had been executed (point 1 above), and the debt owed by Yulema to have been entirely discharged (point 2 above), Justice Slattery ordered the defendants pay to Yulema one third of the discharged debt ($347,632.67) plus interest and costs of the proceedings.

Lessons for business

When a dispute arises in relation to a verbal contract, it is extremely difficult to prove what was said (or not said), or whether a term has been implied.

Those who are prudent should ensure that when an agreement has been reached, it is converted to writing expediently, with as much clarity as is possible. This can be done by the making of contemporaneous notes of the negotiation (and keeping them), sending correspondence to the other party outlining the terms agreed upon, and taking note of any witnesses to the agreement.

Notwithstanding that, arguably the best way to deal with verbal contracts is to avoid making them in the first place, and committing any agreement in writing.

For more information or to assist you with negotiating your next agreement, please contact our Corporate Advisory team by email corporate@mst.com.au or by telephone +61 8540 0200.