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Proving the existence of an oral agreement can be hard (and dear) – get it in writing

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15/10/2014

A recent High Court decision, (Grizzly v Stena), is a timely reminder that agreements do not have to be set down in writing to be a binding contract. However, it can be difficult to prove oral agreements and their terms. Those who regularly discuss and agree terms by telephone or in meetings should consider confirming their agreements in writing. We give some tips on how to deal with oral agreements which can help to avoid future argument – and expensive court action.

Why oral agreements are not ideal
Organisations that frequently do business together often develop a strong relationship based on trust. That trust can create a sense of security which might lead to a more casual approach to contracting – like agreeing terms and conditions for their deals on the telephone. Despite strong relationships, there is always the chance of a breakdown in communication – and that makes it hard when the parties realise they have different views on what they agreed in discussions.

The facts of the case
In Grizzly Business Ltd v (1) Stena Drilling Ltd (2) Stena Drillmax I Ltd[1] the claimant (the consultant) made an oral agreement by telephone with the defendants who were owners of a drilling vessel (the owner). In essence, if the consultant helped the owner to successfully negotiate a charter agreement with Shell, the consultant would be paid a substantial success fee.

Unfortunately, despite a history of successful business dealings between the consultant and the owner, the relationship soured a little towards the end of the charter negotiation. When the consultant reminded the owner of the agreement to pay the success fee, the owner denied there had been an agreement – or even that the fee had been discussed in their conversation. The disagreement went to court and the key issue was what had been agreed in the telephone discussion. Those involved in that discussion gave conflicting evidence about what had been said.

In these situations, the burden is on the claimant to show – on the balance of probabilities – that there was an agreement. The court had to consider whether, “having regard to the context in which that [telephone] call took place, to the surrounding circumstances and to the contemporaneous documents, it is more likely than not…[2] that the consultant’s version of the discussion was correct.

The court’s review in this case was an onerous task and involved consideration of the evidence on not only the telephone discussion itself but also on the parties’ past commercial dealings, the negotiations on the charter agreement and even the effect of the highs and lows of those negotiations on the emotions and actions of those involved in the discussion.

The decision
The court concluded that the consultant’s evidence was the more credible: in the circumstances a binding contract had been entered into in their telephone discussion. The fact that the consultant had not sent later written confirmation of that agreement to the owner was irrelevant.

None of this expensive court review would have been necessary if the consultant had sent that written confirmation. Of course, on receipt, the owner might well have disputed the terms but the parties could have been sorted that out fairly quickly. In the event, the owner was found liable for the success fee – a considerable sum.

Those who frequently reach agreements orally could learn a few lessons from the experiences of the owner and consultant in this case.

Some tips if you frequently make oral agreements

  • always follow up agreements you have reached in oral discussions with an email or a letter setting out what you have agreed
  • your written confirmation should follow as soon as possible after the oral agreement is reached while it is still fresh in your and the other party’s mind
  • if you keep a diary or a notebook, you might consider using it at the time of the discussion to record who you met and the key terms agreed (but still send written confirmation to the other party)
  • if agreement to certain terms was hard won, do not be reticent about confirming your strength of feeling about particular terms. For example, “As you know, it was crucial that we agree a payment date of []… because []”. You might also want to thank them for their compromise – or point out your own compromise
  • if the other party disputes your written confirmation of what has been agreed orally, take time to clarify the agreement and ensure you agree on all points with the other party. Ensure the clarification is also recorded in writing
  • your circumstances when forming an oral agreement can be significant. For example, if you agree something outside your normal business practice in a meeting or by telephone, it is especially important to record that agreement in writing
  • frequently entering or amending agreements by telephone or in meetings, can lead to expectations that you will behave in a similar way in the future. If you are discussing terms, always state clearly whether you regard the discussion as binding or just a preliminary or exploratory discussion. Alternatively, change your practice – start to confirm all oral agreements in writing. Better still – contract only in writing
  • remember that the above tips also apply where you agree orally to make changes to a pre-existing written agreement
  • try to ensure that you agree the terms of your agreement before you or the other party start work. Negotiating your fee or pay after you’ve done some work is harder – especially if your relationship with the other party deteriorates in the meantime.

[1] [2014] EWHC 1920 (Comm)

[2] Paragraph 8 of the judgment

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