Beware of verbal contracts: The conversation that cost $350,000

People often wonder whether verbal contracts hold much, if any, weight.

The recent decision of the NSW Supreme Court in Yulema Pty Ltd & Anor v Simmons & Anor is a reminder that spoken words can be worth just as much as their written counterparts.

However, the road to proving what was said, implied or intended is one which is much more difficult to travel.

In Yulema, Justice Michael Slattery upheld the contractual obligations imposed by a verbal agreement made in October 2009, despite circumstances where one of the parties to the contract and one of the people involved in its negotiation were unable to give evidence because they had passed away. The outcome of the decision was that the defendant owed the plaintiff approximately $350,000, plus interest on that amount from May 2011.

Background

The issue in these proceedings arose out of a side agreement made on 25 October 2009 during negotiations in relation to an intra-group buy-out by one interest of all other interests in the group of companies known as the ADC/EDC Group. The key facts are as follows:

• In October 2009, the first plaintiff, Yulema Pty Limited owed one of the Group’s subsidiary companies, Paltara Pty Ltd, a debt of approximately $1.04 million. As Yulema was owned by some but not all of the interests in the ASC/EDC Group, one of the contentious issues during the negotiation of the Buy Out Agreement related to the post-completion effect of the enforceability of the debt.
• To get the Buy Out Agreement signed, Mr David Roche (one of the interests with no control of Yulema) agreed to partly reimburse Yulema if Yulema were required to repay any part of the debt (Side Agreement). The Side Agreement was a classic collateral contract, the consideration for which was entry into the Buy Out Agreement itself.
• The Side Agreement was oral and made between Yulema and Mr Roche. Mr Guy Reynolds (representing the Yulema interests) and Mr David Munt (a solicitor representing Mr Roche) agreed on the terms of the Side Agreement as follows:
  • if the Buy Out Agreement were executed; and
  •  if the Debt was satisfied, either in whole or in part; then,
  • David Roche would pay Yulema one third of the amount of the Debt so satisfied.
  • Yulema asserted that it satisfied the Debt on 6 May 2011 and, pursuant to the Side Agreement, that it was entitled to be repaid one third of the Debt from Mr Roche.
  • The dispute concerned another alleged term of the Side Agreement. The defendants (David Roche’s executors), argued (and the plaintiffs disputed) that it was an express, or in the alternative an implied, term of the Side Agreement that the payment of one third of the Debt was subject to settlement occurring pursuant to the Buy Out Agreement. In particular, the defendants contended that Mr Roche expressly agreed to repay one third of the Debt to enable the Buy Out Agreement to be signed “and proceeded with”.
  • Both Mr Roche and Mr Munt had passed away by the date of the hearing. The only person available to provide evidence for Mr Roche’s side of the transaction was Mr Roche’s accountant, Mr Michael Shearer, who was present during the Buy Out Agreement negotiations. Mr Reynolds gave evidence on behalf of the plaintiffs.

The decision

The Court ruled that the Side Agreement:

• did exist;
• was enforceable;
• did not contain the phrase “and proceeded with” as an express term. Justice Slattery noted that such an expression would be brimming with uncertainty and accepted Mr Reynolds’ evidence that he would have sought further clarification if that phrase had been used; and
• did not contain an implied term to the effect that Mr Roche’s obligations were “subject to settlement occurring pursuant to the Buy Out Agreement”, as such a term was:
  • neither reasonable or equitable (as it would ultimately place the obligation to make payment within the control of the payer (Mr Roche));
  • not necessary to give business efficacy to the Side Agreement (as the Side Agreement would be perfectly effective without it); and
  • neither obvious nor capable of clear expression. Justice Slattery observed that such an expression was “replete with ambiguity” and that a term of that sort “would be more a source of debate than clarity”.

Having found that the Debt was wholly satisfied in accordance with the Side Agreement by May 2011, the court ordered the defendants to pay Yulema $347,632.67 (being one third of the Debt), interest on that amount from 6 May 2011 and Yulema’s costs of the proceedings.

Lessons for business

This case contains some important lessons for all businesses.

• Verbal agreements can be just as enforceable as written agreements.
• Where possible, avoid making verbal agreements or representations in business discussions and ensure that your employees and agents are aware of this.
• Best practice is to ensure that your agreement is in writing. For example, if your contract is of special importance, involves a large sum of money, or if there is a possibility of a dispute in the future, it is advisable to have a written agreement to rely on.
• If you do make a verbal agreement:
  • give as much clarity to the terms as possible in order to avoid uncertainty;
  • take file notes of the conversation; and
  • ensure that there are suitable witnesses to the making of the verbal agreement.
  • Do not rely on the passage of time to water down verbal contractual obligations.
  • Note that some contracts are legally required to be in writing, including contracts for the sale of land, credit contracts and consumer leases, contracts for the performance of domestic building work, contracts for the sale of second hand motor vehicles and unsolicited consumer agreements.

Nadine Domalewski is a senior associate at Holding Redlich.