Can you enforce an unwritten contract?

Contracts can be written, oral or inferred. Where they are not written down the Court has to decide what the terms were.

The Court

Generally in the case of an unwritten agreement, the Court will consider:

• The terms of the contract are those which the parties intended to include in the contract – what a reasonable person would objectively infer from the words and conduct of the parties in relation to the agreement.
• Often the terms of a contract are clear from what the parties say to each other, however sometimes the parties intend to include other terms which they haven’t specifically said to each other.
• A Court can imply a term in the contract.

Business Partnerships

We are often asked to enforce a “hand shake” agreement between friends or colleagues who become business partners. Many times nothing is documented because the parties trust each other. Unfortunately we frequently see this situation going wrong after a few years.

Even if you completely trust your business partner, it is vital to document your agreement properly. This not only focuses all parties at the outset as to the roles and responsibilities of each business partner, it also sets out what should happen and how to value each party’s share of the business if one or both parties wish to leave.

In many cases, however, a written has not been prepared. In certain circumstances, an unwritten contract can be enforced – it all comes down to the evidence.

Loan Agreements

Limitation period – beware loan agreements payable “upon demand”

If the unwritten contract is for a loan, for most cases you have 6 years from when the loan was repayable to bring a claim.

• The Court has held that where A lends money to B with no specific terms regarding repayment, the money is repayable immediately – this can be an issue when 6 years has passed from the money being transferred.
• Even if the money is expressed to be payable “on demand”, Courts have found that the funds are repayable upon the receipt of money.
• An acknowledgement may restart the time period but each fact situation needs to be considered separately.

What you should do if you are lending or borrowing money 

• Any transaction which involves money (even if amongst family and friends) should be documented by a lawyer.
• Each party to the transaction should get their own legal advice and you should avoid all using the same lawyer to document the transaction.
• You should work out whether the funds are a loan or an equity investment and on what basis the funds will be returned

Conclusion

Many decide it is more cost effective to not involve lawyers or for all parties to use the same lawyer to document a transaction. Getting the right advice and documentation upfront minimises the chance of expensive litigation down the track; when there is a dispute the costs are always significantly more than had the transaction been documented properly in the first place.

Do not hesitate to contact Litigation and Disputes Partner Catherine Ballantyne to discuss your own situation.