Legal Commentary

Court ruling backs oral contract

By David Canton

For the London Free Press - August 17, 2009

[Note: Due to a technical glitch, this column has not yet been posted on the Free Press or Canoe websites]

VERDICT:  A recent Ontario Court of Appeal decision showed that it?s possible to enforce oral contracts under the right circumstances

Oral contracts can be difficult to enforce. As famed movie producer Samuel Goldwyn once observed: ?An oral contract is as good as the paper it’s written on.? 

The absence of written documentation can make it very difficult to prove in court that an actual agreement was reached. The judge is left to decipher the intent of the parties based upon what they claim the arrangement was. This is often to the disadvantage of the person claiming an agreement existed, who may have a hard time showing sufficient evidence to prove it. 

But a recent Ontario Court of Appeal decision may lend strength to those trying to enforce promises made through an oral contract. In UBS Securities Canada, Inc. v. Sands Brothers Canada, Ltd. the court found that an oral agreement was sufficient to enforce an agreement to buy shares. 

A representative of the plaintiff, UBS Securities, agreed to an oral contract to buy shares from a representative of the defendant?s company, Sands Brothers Canada. The plaintiff then entered into an agreement to sell the shares to a third party, relying on the oral contract. 

The defendant refused to comply with the terms of the oral contract, claiming that the agreement had not been finalized in writing. The shares remained with Sands Brothers Canada and UBS Securities sued for specific performance to receive the shares for which they contracted. 

The trial judge found in the plaintiff?s favour, deciding that there was a binding and enforceable agreement between the parties. UBS Securities was granted specific performance of the contract, entitling them to the 100,000 shares they were promised. 

Sands Brothers argued UBS Securities was under a duty to mitigate (or reduce their losses) by buying replacement shares at the time of the breach of contract. However, the court found that similar shares were not readily available at the date the contract was breached, leaving them unable to mitigate. 

In addition to the judge finding the plaintiff to be a credible witness, two additional considerations swayed the court in reaching its decision.

First, the plaintiff?s case was enhanced by electronic communications made during the course of the negotiation. The plaintiff produced detailed exchanges, made before the oral contract, outlining specifics of the agreement. The e-mails traced the proposed agreement from its origin until it was nearly completed. 

The use of e-mail resulted in more evidence being available. It resulted in creation of a time-stamped record of interactions that could be used to recreate the intention of the parties. 

Second, the appeal court found that it was common practice in the securities industry to make binding agreements orally. The fast-paced nature of the securities trade makes oral contracts necessary for the market to operate efficiently. In the time necessary to reduce the agreement to writing, the impetus to complete the transaction may have passed.

So, in some instances, an oral contract is better than the paper it?s written on.

Full post as published by eLegal Canton on August 27, 2009 (boomark / email).