No Paper, No Problem (Hopefully): The Role of Credibility in Oral Contract Disputes

Oral contracts, agreements made through spoken words, are valid in Australian courts. However, proving their terms and enforceability can be tricky. This article explores the challenges faced in proving an oral contract and considers the recent case in the New South Wales Court of Appeal in Douglas v Mikhael.^[1]

The Basics of Oral Contracts

To enforce a contract, you must establish several key factors, which apply the same to both oral and written contracts. First, there must be agreement between the parties, which includes an offer made by one party and acceptance by the other.

Next, there needs to be consideration—this is something of value that is exchanged between the parties. For instance, if one party promises to provide a service, the other must offer something in return, such as money or another service.

Another essential element is an intention to create legal relations. Both parties must intend for the agreement to be legally binding. In informal situations, say an oral agreement between friends, it can be more challenging to demonstrate this intention compared to a situation where an oral agreement is said to arise in a more formal commercial setting.

The parties involved must also have the capacity to enter into a contract, meaning they must be of sound mind and not under duress or undue influence. Lastly, while most oral contracts don’t need to be in writing, some situations—such as property sales—require written agreements.

In written contracts, these elements are usually clearly identified, making them easier to prove. However, with oral contracts, the evidence presented by the parties becomes crucial, and this is where credibility comes into play.

Why Credibility Matters

When disputes arise over oral contracts, one party typically claims the contract exists, while the other denies it or disputes the terms of the oral agreement. In these situations, both sides present evidence that can either support or rebut each other’s position.

In New South Wales, the Evidence Act 1995 provides guidelines on how to handle issues of credibility. While evidence solely about a witness’s credibility is generally not allowed, there are exceptions. To be admissible in court, evidence must be relevant to the existence or terms of the contract. Simply accusing someone of lying won’t help if those lies have nothing to do with whether the contract actually existed.

Several factors can impact a witness’s credibility in court. For example, inconsistent statements are particularly damaging. If a party has made conflicting statements about the agreement, it raises doubts about their evidence. For instance, if they initially acknowledge an element of the contract but later deny it, the court may find this inconsistency significant.

Case Example: Douglas v Mikhael

The case of Douglas v Mikhael illustrates these principles well. It involved a dispute over an alleged oral contract from 1999. Mr. Douglas claimed that under an oral contract, he had paid $75,000 to the respondents (family members) to acquire a business, which would be held on trust for himself and the respondent family members.

Initially, the judge dismissed Mr. Douglas’s claim that the 1999 oral contract existed, stating he had not sufficiently established the claim. Upon appeal, the Court of Appeal upheld this decision for several reasons:

• there was no documentation of a meeting that was said to have taken place on November 6, 1999. The Court found it implausible that Mr. Douglas could accurately recall a conversation from over 20 years ago.
• The trial judge noted contradictions between Mr. Douglas’s affidavit and his statements during cross-examination, which weakened his credibility.
• Douglas failed to provide a credible explanation for his specific recollection of the meeting’s date, and there was no supporting documentation.
• there was no evidence showing that Mr. Douglas acted in a way that supported the existence of the alleged contract after the fact. For example, he did not make any demands asserting the existence of the contract.
• The trial judge found the terms of the alleged contract to be inherently implausible.
• The trial judge concluded that the respondents and their witnesses were truthful and reliable, further undermining Mr. Douglas’s case.

The Court of Appeal upheld these findings, emphasizing the critical role of credibility in determining the outcome of disputes over oral contracts.

Key Takeaways and Practical Steps

While it’s always best to have agreements in writing, that isn’t always feasible. In order to establish the existence of an oral contract and manage its terms, the following practical steps should be considered:

• Keep detailed records of any communications related to the agreement—such as emails, texts, or notes—as these records can serve as important evidence of an oral agreement.
• If there were any witnesses who were present during the discussions, make sure that you ask them to record what they heard. This can help corroborate your version of events.
• ensure that your actions support the terms of the oral contract. If you behave in a way that contradicts the agreement, it can weaken your credibility.
• document any payments or actions taken under the terms of the oral agreement.
• obtain when navigating disputes over oral contracts. Legal advice can help you understand potential risks and ensure that your agreement is enforceable if disputes arise.

Oral contracts are inherently uncertain, making it essential to maintain thorough written records and other supporting evidence. By preparing carefully, you can safeguard your interests and improve your chances of a positive outcome in disputes. Credibility is a decisive factor in court, so ensure your case is backed by strong evidence.