If asked to consider what is a contract, it is likely that most people would immediately begin to think of a written agreement. It is important to remember that contracts are not confined to written form. Rather, contracts may be written, oral or a combination of both.

Although not as common as written agreements, oral agreements can still give rise to contractual relationships. This has the potential to cause a lot of angst for those parties who believe that a document in writing is required to give effect to an agreement. This can lead to some parties being forced into a particular arrangement on unfavourable or uncertain terms.

When considering whether an oral contract has been formed, it is important to determine whether or not the fundamental elements of a contract have been satisfied. If the elements are satisfied, a party will have a difficult task in trying to disprove the existence of a contractual relationship.

Essential Elements of a Contract

The creation of a binding contract requires the contracting parties to meet a number of requirements that are prescribed by common law. These requirements are referred to as the elements of a valid contract and consist of the following:

1. Offer

An offer is an expression of readiness to contract on the terms specified by the offeror which, if accepted by the offeree, will give rise to a binding contract. It is by acceptance that an offer becomes a contract.

2. Acceptance

Acceptance is an unconditional agreement communicated by the offeree to the offeror. It must be unqualified and absolute on the terms of the offer before acceptance can give rise to a binding contract. Where acceptance varies from the terms of the original offer, it then becomes a counter-offer and is no longer taken to be valid acceptance that can lead to a contractual relationship.

3. Consideration

Consideration is the motive, price or impelling influence which induces a party to enter into a contractual arrangement. Consideration does not need to be adequate so long as the parties have agreed that it constitutes a sufficient price/motive for the formation of a contractual relationship. Whatever the parties agree upon with respect to consideration will be binding on them; a court will not amend a contract freely entered into by parties to it.

4. Intention to create Legal Relations

Before a valid contract can be said to have been created, there must be a clear intention by the parties to create legal relations. Generally, there is a presumption that commercial agreements are intended to create a legally enforceable contract and that social and domestic agreements are not.

5. Capacity to Contract

Finally, parties cannot contract where either or both of the parties lack the capacity to do so. The underlying rationale for this exclusion hinges on the fact that persons of inadequate mental capacity cannot fully appreciate the extent and nature of their actions and are consequently in no position to enter into a contractual relationship.

Proving the Existence of an Oral Contract

If an oral agreement becomes the subject of legal proceedings a court is unlikely to uphold that agreement if the essential elements are not satisfied. Although it may seem abundantly clear that these elements are sufficiently certain, the real problem is overcoming the burden of proof. Where a person alleges the existence of an oral contract, that party has the burden of proving the assertion to the satisfaction of the court. This can be incredibly difficult where the only record is something along the lines of phone call and/or notes of the call.

So how do you do this? First and foremost, the disputing party will need to give oral evidence of what transpired and what was agreed to. In doing so, there will be an onus to highlight the key terms of the contract and to prove the existence of the essential elements. However, oral evidence alone will not be sufficient and will need to be supported through other means.

Where there are substantiating means of proof that show some form of agreement between the parties, these can be furnished such as emails, text messages, receipts, photographs etc. Documentary evidence is generally more reliable as it does not have to be wary of hearsay claims.

Consequence of Breach

Where a party fails to perform their obligations under the contract (written or otherwise) without a lawful excuse, there is said to have been a breach of contract. Where this occurs, this innocent party is entitled to either terminate the contract or sue to defaulting party for damages of contract.

Key Takeaways

It is important not to assume that a contract exists only upon execution of a document. Satisfaction of the essential elements of a contract and proof of their substantive existence is more than sufficient in enforcing the terms of a contract. As such, it is essential that those prospective parties in the preliminary stages of contracting ensure that things such as key terms, payment and a time period are not discussed or finalised until documented in a formal written agreement. Otherwise, parties may leave themselves open to being contracted on unfavourable terms. Conversely, parties who want to enforce an oral agreement must take measures to document the existence of an oral agreement in the event the other party decided to not uphold their obligations.