Enforcing a Verbal Contract – The Difficulties

Verbal contracts otherwise known as oral contracts are legally enforceable agreements that arise in communications between parties. 

The casual and informal nature in which these agreements are entered into facilitates great difficulties in proving their existence before a Court with oral contracts often referred to “handshake agreement.”

The challenge in enforcing verbal contracts was highlighted recently in the Supreme Court of New South Wales case Douglas v Mikhael [2023] NSWSC 979. The Plaintiff in the case sought to rely on two separate conversations with the Defendant to claim he was entitled to the profits of multiple businesses operated by the Defendants. These conversations according to the Plaintiff constituted a verbal contract, however the Defendant alleged that they never occurred.

The Court held that the Plaintiff had failed to provide evidence to substantiate the existence of a verbal contract between the parties. Within its judgment the Court delivered the following principles that could assist a party claiming the existence of a verbal contract:

1. a party alleging a verbal contract bears the onus of proving it exists;

2. the relevant conversation must be proved to the reasonable satisfaction of the court who requires “actual persuasion’ of its existence;

3. the court must be satisfied that the contents of the conversation between the parties was capable of forming a binding contract and was intended to be legally binding;

4. the history of the relationship between the parties is relevant; and

5. the conduct of the parties prior to and at the time of entering into the alleged verbal contract, as well as the post-contractual conduct is relevant to the Court’s consideration.

What does this mean?

The informality behind entering into a verbal contract poses significant challenges for the party alleging its occurrence to enforce.  The case of Douglas v Mikhael [2023] emphasises the importance of writing down all agreed upon terms and conditions of a contract that has arisen out of a verbal agreement. By drafting this document, the rights of all parties involved are safeguarded especially those who may have relied upon the oral agreement to their detriment.

If you or your business have relied upon a verbal contract to your detriment and you would like advice in respect of your exercising your rights and obligations, please contact the Dispute Resolution Team at Marsdens for assistance.

The content of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought seperately before taking any action based on this publication.