Construction: Oral Contracts – Legal but Risky

Tim prepared this article for the Summer 2015 issue of Alberta Construction Magazine.

Oral contracts can be legal, binding and enforceable.

Deals get done all the time over the phone, over lunch, or over the hoods of pickups. Millions change hands every­day on stock markets, on trading floors and at auctions with just waves and nods. People get hired, goods get ordered and buildings get built with nothing more than spoken words and handshakes. The law unhesitatingly allows for and enforces all sorts of oral contracts. And yet, on a very practical level, they are risky things.

We sometimes call them verbal contracts. Verbal comes from the Latin verbalis and verbum, which mean word. The primary definition for verbal in many dictionaries is along the lines of “relating to or consisting of words.” So, in the strictest sense, a nice thick and juicy written contract, which is expressed in written words, is a ver­bal contract. (I know this because a judge once called me out on it.) So, to avoid ambiguity and uncertainty (and persnickety judges), it’s safer to call unwritten agreements oral or spoken contracts.

Uncertainty is the blight that gnaws at and ultimately destroys many oral contracts.

Legally binding oral contracts begin with clear under­standings and firm commitments. Through their spoken words, the parties agree on what they are to do and what they are to receive in return. In legal terms, one side makes an offer, the other side accepts and together they agree to exchange value. At that moment, although there is nothing in writing, there is no doubt about their intention to be legally bound. In other words, they have a deal which the law may very well enforce.

However, over time memories can fade, understand­ings unravel and intentions change. What was clear when the parties shook hands is now, months or years later, murky and muddled. Was it the whole roof or just the flat part? Did it include flashing? Was the price fixed or just a target? Was the completion date guaranteed?

Worse yet, by their very nature oral contracts are short and concise. The parties have nailed the essential terms—who, what and how much—but it’s unlikely that they have dug deep into the details and struggled through the subtleties. How to apply for payment? What does the warranty cover? Who is taking the risk for weather delays?

So, when disputes erupt with oral contracts, the prob­lem is proving the terms. Honestly or not, the parties might well tell different stories of the deal. They might disagree over the terms that affect their position and their interests. Sometimes they might even disagree over whether there were such terms. The risk, then, is that a judge or arbitrator, without a written document to guide him or her and instead left with only the con­flicting memories of the parties, will choose the wrong version of the deal.

There is an even bigger risk. If the judge or arbitra­tor can’t decide what the terms of the agreement were, he might decide that there was no deal. Simply put, the law requires that contracts be certain; without certainty on the essential terms, there is no contract.

This uncertainty with oral contracts is not a new problem. In the Middle Ages, those who alleged oral contracts could march a dozen oath-helpers—often paid—into court who would swear they thought the fellow was a decent chap and believed his claim. This practice, called a wager of law, continued for centuries.

Over time, however, some exceptions have emerged to the general rule that contracts need not be in writ­ing. For example, for several centuries now English law, which also applies to Canada, has required writ­ing for an agreement for the sale of an interest in land. Similarly, contracts that cannot be performed within a year must have some written evidence. And there are others. The problem is that the exceptions are a hodge-podge—some are arcane and others obscure. There is an additional risk in making an oral contract: one might unwittingly agree orally to something that must be written to be enforceable.

To repeat, the law will enforce oral contracts, if they can be proven—unless there is an exception. But it’s a risky business, and just because we can do something, doesn’t mean we should.

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