Is An Oral Contract Binding?

Except where the law requires a contract to be in writing, the parties may contract orally, and in fact, even informal negotiations can result in a contract being found to exist (despite the parties not explicitly saying so).

The case of Medjed v. 1007323 Ontario Inc., 2004 CarswellOnt 4775 at paras 66-67, notes:

Oral negotiations can create a binding contract. When the parties agree on all of the essential terms, their intention to create a contract is evident: see Williston v. Lawson (1891), 19 S.C.R. 673 (S.C.C.); Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1991), 79 D.L.R. (4th) 97 (Ont. C.A.) While these terms must be expressed with sufficiently reasonable certainty to allow a court to give them practical meaning and bind the parties, that the parties fail to reach agreement on collateral or subsidiary aspects of their proposed arrangement is not fatal to its enforcement: see Aga Heat (Canada) Ltd. v. Brockville Hotel Co., [1945] S.C.R. 184 (S.C.C.); Rapatax (1987) Inc. v. Cantax Corp. (1997), 49 Alta. L.R. (3d) 375 (Alta. C.A.); Toronto Truck Centre Ltd. v. Volvo Trucks Canada Inc./Camions Volvo Canada Inc. (1998), 45 B.L.R. (2d) 96 (Ont. Gen. Div.)

The parties’ conduct in carrying out their informal agreement is a strong indication that a formal document was not needed. As well, conduct after a dispute as to whether or not an agreement was ever reached can assist in determining the issue…

The above rules apply even if the parties explicitly agreed to reduce their agreement to writing. In other words, even before the agreement is reduced to writing as the parties agreed, the oral contract will be of binding force in the meanwhile, provided all essential terms have been agreed upon.

In a case called Klemke Mining Corporation v. Shell Canada Limited the court noted: “The distinction arises in the function of the anticipated formal contract. If the execution of a future formal arrangement merely reflects the parties’ prior agreement then the earlier oral or informal contract will be binding. If, on the other hand, there are outstanding essential terms to be determined then the future formal contract will not be seen as a memorialization of the prior agreement but as the formation of the contract itself.”

The court noted further:

“An agreement is not incomplete simply because it calls for some further agreement between the parties or because it provides for the execution of a further formal document. The question is whether the further agreement or documentation is a condition of the bargain or whether it is simply an indication or expression of desire as to the manner in which the contract already made will be implemented.”

In the present matter, applying the above, it seems clear that in general oral contracts and even informal discussions which are later intended to be reduced to writing may – on their own, provide evidence of a binding oral contract.

It is important to note that there are several contracts in Alberta that are required to be in writing. If you need legal advice on contracts or other legal matters contact Don Scott McMurray Law Office at 780-750-9888 or see us on the web at www.donscottlaw.ca