Sarah Alexander, senior associate at Dentons, explores the issue of oral contracts within the construction industry
IT is well known that parties can bind themselves by contracts made orally. Following the changes made to the Housing Grants, Construction and Regeneration Act 1996 in late 2011, even “construction contracts” are capable of being formed without the need for writing.
In Scotland, it is generally accepted that the following is required to establish that a contract, whether made orally or in writing, exists: (i) offer; (ii) acceptance; and (iii) an intention to create legal relations. In England, some form of consideration is also required.
A recent English case had cause to consider whether or not an oral contract had been entered into.
On 1 February 2019, the Queen’s Bench Division of the High Court handed down its decision in O’Neill v Avic International Corporation (UK) Limited. The dispute related loosely to the 18MW solar farm in Rolleston, Staffordshire. There had been a failure by the defendant to obtain the proper accreditation from OFGEM. The claimant argued that an oral agreement was made which would entitle him to 2% of the gross development value of the project (said to be £27,000,000) if he could secure the accreditation for the defendant.
During the trial, the claimant sought to rely on some handwritten notes made on the back of an envelope. This was said to have been given to Mr Lou of the defendant, as evidence of the oral contract. The notes, albeit in vague language, did record the term “2% on value”.
The claimant explained that the envelope was given to Mr Lou at a meeting between them where non-disclosure agreements were signed by both parties. Mr Lou told the court that he did not see the envelope at that meeting, and did not know it existed until some nine months later.
The surrounding circumstances can often be helpful when a court is trying to make a decision based on two conflicting accounts of events.
Mr Justice Freedman noted that there was an absence of any document which set out the alleged terms of the oral agreement. The handwritten notes on the envelope were not considered to document any agreement, oral or otherwise, between the parties – the fundamental requirements needed for a contract to be formed just did not exist.
Mr Justice Freedman looked closely at the evidence given by both the claimant and Mr Lou, who was said to have entered into the oral agreement on behalf of the defendant. The credibility of witnesses on both sides was explored. The court had serious doubts about the veracity and reliability of the evidence given by the claimant’s witnesses, ultimately preferring the evidence put forward by the defendant.
In light of the fact that steps had been taken to draft and enter into full non-disclosure agreements, the judge did not believe that the claimant would not also have made efforts to record the alleged agreement in relation to payment for his services in writing.
The burden of proof lies on the party relying upon an oral contract to submit evidence to prove that it does in fact exist. Oral evidence can, of course, be contradicted by other oral evidence, often resulting in the court having to decide which witness appears more credible and reliable.
In the heavily electronic environment of the 21st century, there should be no reason for parties not to attempt to document their agreement, even by text or email, particularly where large sums are involved.
For all the time that it takes to jot something down on a piece of paper accompanied by relevant signatures, or exchange emails even in the briefest terms, it is in the interests of all parties involved to take such steps, instead of having to rely on memories of what was said and done, or leaving a judge to decide which party is more likely to be telling the truth.