Binding Oral Contracts

While it is obviously more advantageous for the enforceability of a contract to be in writing, an oral contract can be just as valid as written contract if the necessary criteria are met.

In Oswald v. Start Up SRL, 2021 BCCA 352 at para. 34 , the court set out the legal test for the formation of a binding and enforceable contract:

(a) there must be an intention to contract;

(b) the essential terms must be agreed to [by] the parties;

(c) the essential terms must be sufficiently certain;

(d) whether the requirements of a binding contract are met must be determined from the perspective of an objective reasonable bystander, not the subjective intentions of the parties; and

(e) the determination is contextual and must take into account all material facts, including the communications between the parties and the conduct of the parties both before and after the agreement is made.

Part (d) of the Oswald test summarizes “what has been called the objective principle of contract formation”: Summers v. Sawyer, 2005 CanLII 30880, 2005 CarswellOnt 4001 (S.C.) at para. 15 [Summers]. In Summers, the court adopted the following passage from S. M. Waddams, The Law of Contracts, 5th ed. (Toronto: Canada Law Book, 2005) at 103, which elaborates on this principle:

The principle function of the law of contracts is to protect reasonable expectations engendered by promises.

Every definition of contract, whether based on agreement or on promise, includes a consensual element. But the test of whether a promise is made, or of whether assent is manifested to a bargain, does not and should not depend on an inquiry into the actual state of mind of the promisor, but on how the promisor’s conduct would strike a reasonable person in the position of the promisee.

The Summers court also cited the following passage from Smith v. Hughes (1871), L.R. 6 Q.B. 597 at 607, which states the objective principle of contract formation another way:

If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into a contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.
See also Hucul v. GN Ventures Ltd., 2022 BCSC 144 at para. 136.

In Summers, the court concluded there was an oral agreement between the three shareholders of a trucking company that was unable to start a business due to a lack of financing. As a result, the shareholders were each responsible for one-third of the company’s start-up expenses.
Reeves v. Russell, 82 R.P.R. (4th) 137, 2009 CanLII 11437 (Ont. S.C.) Is a good example of a case where a court found an enforceable oral agreement had been formed in the context of the formation of a business.

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