What is the difference between written and oral agreement? Understanding the Legal Framework

Introduction

Verbal agreements are an integral part of our daily lives, shaping our interactions with friends, family, colleagues, and even in business. These agreements are often made casually, without any written documentation. While verbal agreements are convenient and common, they can raise questions about their legal standing and enforceability. Below, we will explore the world of verbal agreements in Canada to help you understand the importance of knowing whether the difference between a verbal and a written agreement.

What Constitutes a Verbal Agreement?

Before delving into the legality of verbal agreements, it is essential to define what they are and identify their key elements. A verbal agreement, also known as an oral contract or verbal contract, is an agreement reached through spoken words and mutual understanding, without any formal written documentation. Key elements of a verbal agreement typically include:

1. Offer and Acceptance: One party makes an offer, while the other party accepts it, creating a mutual understanding.
2. Intention to Create Legal Relations: Both parties must intend for the agreement to be legally binding.
3. Consideration: There must be something of value exchanged between the parties, which can be a promise, goods, or services.
4. Certainty and Specificity: The terms and conditions within the agreement should be well-defined and unambiguous.
5. Legal Capacity: Verbal contracts, like written ones, require that the parties involved possess the legal capacity to enter into such agreements. This means that they must be in a sound state of mind, of the appropriate legal age, and not influenced by substances that could impair their judgment.
6. Legal Purpose: The purpose of a verbal contract must align with legal norms and principles. Agreements that involve activities prohibited by law or contravene public policy are typically not enforceable.

Distinction between Verbal and Written Agreements

Verbal agreements are distinguishable from written agreements primarily in their form. A written agreement is documented on paper or in electronic format, providing a clear, tangible record of the parties’ intentions and terms. In contrast, a verbal agreement relies solely on spoken words, making it more challenging to prove and enforce.

Legal Standing of Verbal Agreements in Canada

Canada has a well-established legal framework that recognizes the validity of verbal agreements. Let us take a closer look at the legal standing of verbal agreements in Canada and, more specifically, in Alberta.

In Canada, verbal agreements are generally enforceable, provided they meet the key elements mentioned earlier. Courts recognize verbal contracts as legally binding, but their enforcement may be subject to certain conditions.

Canada follows the principles of common law, which means that verbal agreements are generally valid and legally binding. However, the key challenge lies in proving the existence and terms of the verbal agreement, as there is no written record to rely upon.

Are Verbal Agreements Legally Binding?

The legality of a verbal agreement depends on several factors, and it is not a straightforward answer. Verbal agreements can be legally binding under specific circumstances:

1. Clear and Unambiguous Terms: To be enforceable, a verbal agreement must have clear and unambiguous terms. The absence of written documentation can lead to disputes regarding the exact terms of the agreement.
2. Intent to Create Legal Relations: Both parties must demonstrate their intention to create legal relations, indicating that the agreement is more than just a casual understanding.
3. Consideration: The agreement must involve a consideration, such as a promise, goods, or services exchanged.
4. Witness and Evidence: The presence of witnesses or other supporting evidence can strengthen the case for the enforceability of a verbal agreement.

It is important to note that under certain circumstances, a verbal contract is not permitted because a written one is legally required. Common law developed a legal principle called the Statute of Fraud that requires certain contracts to be in writing and signed by the parties. These contracts include:

1. Contracts for selling real estate, such as a Real Estate Purchase Agreement, Mortgage Agreement, or Contract for Deed;
2. Contracts for selling securities (i.e., stocks or bonds), such as a Stock Purchase Agreement;
3. Contracts for selling goods over a certain value, which varies by jurisdiction. In Alberta, goods of value of $50 or more must be in writing (Sale of Goods Act, RSA 2000, c S-2, section 6(1)(b));
4. Contracts where marriage is the consideration in a contract , such as a Prenuptial or Postnuptial Agreement;
5. Contracts that cannot be performed within one year from the date of the agreement (e.g., copyright); and
6. Contracts in which one party agrees to pay someone else’s debt.

Verbal Agreement vs. Oral Contract: Understanding the Terminology

It is important to clarify the terminology surrounding verbal agreements, as there are variations in usage that can have legal implications. In Canada, the terms “verbal agreement,” “oral contract,” and “verbal contract” are often used interchangeably. However, understanding the legal implications of these terms is crucial:

1. Verbal Agreement: A general term that refers to an agreement made through spoken words. While it may be legally binding, its enforceability can vary.
2. Oral Contract: Another term for a verbal agreement, emphasizing the spoken nature of the agreement. The same legal principles apply.
3. Verbal Contract: Similar to an oral contract, it signifies a legally binding agreement reached through spoken words.

Case Studies and Precedents

Establishing the existence of an oral agreement can be a challenging and fact-dependent task for a plaintiff, especially when there is no objective circumstantial evidence to support the plaintiff’s account of the events they want the court to accept.

For instance, the case of Saville Drilling Services Inc v Alpha Construction Inc, 2021 ABPC 125, serves as a cautionary example of the drawbacks of verbal contracts. In this case, a general contractor hired by the Town of Fox Creek was involved in a dispute over a verbal agreement to upgrade the town’s water treatment plant. The court emphasized that all contracts require offer, acceptance, consideration, and clear terms, with the party seeking to enforce the verbal contract needing to establish contract certainty elements, including the parties, subject matter, and price. While the court inferred the existence of a verbal contract, the plaintiff’s inability to recover in full was due to incorrect invoicing and a misinterpretation of each part’s liability, which could have been avoided with a written contract. Additionally, conflicting interpretations of a “fair price” could have been resolved more easily with a written agreement, highlighting the advantages of formal documentation in contract disputes.

In the BC Supreme Court case of Chiu v. Lam, 2016 BCSC 299, Justice Verhoeven examined the legal aspects of oral agreements. Ms. Chiu claimed to have lent $45,000 to her cousin, Ms. Lam, with $30,000 in 2007 and an additional $15,000 in 2008, claiming that the agreement was oral and lacked repayment terms or interest. Ms. Lam disputed the existence of a repayment agreement, suggesting that if any agreement existed, it was made with her husband, Mr. Lam, who had passed away in April 2009, leaving no records. Ms. Lam began repaying the loan at a rate of $100 per month from January 2010 to December 2015. With both parties as the sole witnesses, it was Ms. Chiu’s responsibility to prove the oral agreement’s existence. Justice Verhoeven determined that Ms. Chiu’s evidence lacked credibility, and though he did not fully accept Ms. Lam’s account, he found that Ms. Chiu had not met the burden of proving the oral agreement.

Best Practices for Verbal Agreements

Given the potential challenges in enforcing verbal agreements, it is wise to follow some best practices to ensure clarity and enforceability:

1. Document Agreements in Writing: Whenever possible, consider converting a verbal agreement into a written contract. This not only provides a clear record of the terms but also reinforces the parties’ commitment to the agreement.
2. Confirm Key Terms in Writing: In cases where a written contract is not feasible, consider sending an email or a text message confirming the key terms discussed verbally. This can serve as a record of the agreement.
3. Seek Legal Advice: If you are unsure about the legal implications of a verbal agreement, consult with a legal professional who can provide guidance and help draft a written contract if necessary.
4. Be Mindful of Witnesses: When making verbal agreements, involve witnesses whenever possible. Their testimony can be invaluable in case of a dispute.
5. Keep Detailed Records: Maintain thorough records of any communication related to the verbal agreement, including meeting notes, emails, and text messages.

When to Opt for a Written Contract over a Verbal Agreement

While verbal agreements have their place, there are situations where a written contract is the better choice. It is advisable to opt for a written contract in the following circumstances:

1. High Stakes and Complexity: For complex transactions or agreements with significant financial implications, a written contract offers more protection and clarity.
2. Legal Requirements: As mentioned above, certain agreements, such as real estate transactions or contracts lasting more than a year, require written documentation to be legally enforceable.
3. Risk of Dispute: If you anticipate that the agreement may lead to disputes, a written contract with clear terms can provide a solid foundation for resolution.

Conclusion

In Canada, verbal agreements can indeed be legally binding, provided they meet the necessary legal criteria. While they are common and often used in various aspects of life, understanding the legal framework surrounding verbal agreements is crucial. The distinction between a verbal agreement and a written contract lies in their form and the challenges they pose in terms of enforceability and evidence.

For those considering entering into a verbal agreement, it is important to be aware of the potential difficulties in proving the existence and terms of the agreement. Best practices, such as documenting agreements in writing and seeking legal advice when necessary, can help mitigate these challenges. The expert lawyers at Forum Law are here to provide you with the guidance needed to navigate the complex world of contracts. Contact us today for a personalized consultation.