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The pitfalls of unwritten contracts – Part 1

“There is a name for people who do not get things in writing; we call them litigants.”
(Loosely quoted from Judge Marilyn Milian, in episodes of the popular television show, The People’s Court).

contract05This is not to suggest that written contracts provide perfect inoculation against lawsuits—litigants often misunderstand the obvious; written information may be open to multiple interpretations; and people sue even when they have no case. Two important considerations when making an agreement that you wish to be legally binding and enforceable in a court of law, are:

  1. Get it in writing. If it’s not in writing it may not exist, or it may not exist in the way you think it does.
  2. Ensure that what is written, is clear, complete, legally enforceable and effectively captures the contracting parties’ intent.

Unwritten contracts may be legally enforceable, but are often ill-advised

In many instances contracts do not have to be in a particular form and do not have to be complicated, but they do require certain basic elements to be legally enforceable, including:

    • an offer;
    • the acceptance of the offer;
    • an exchange of something of value (that is, consideration);

and,

  • an intention to create a legally binding promise or agreement.

A contract may be created orally, and in fact may even be inferred from the behaviour of the parties involved.

Thus, generally speaking, with certain exceptions, contracts do not have to be written (although it is usually best if they are), and need not be in a specific form.

Beware of the Statute of Frauds and other legislation

Statutes of Frauds or other legislation may prescribe stringent requirements, including a requirement to be evidenced in writing, in order for certain contracts to be legally enforceable. Contracts for certain guarantees (that is, where someone agrees to accept responsibility for someone else’s debt or responsibilities in the event the individual defaults) and for the sale or disposition of land are two examples of contracts which may have special writing requirements. Insurance contracts and contracts for the sale of securities are two other examples.

Although the applicable legislation may require that certain contracts be in a particular form or be evidenced in writing and signed by the person being held to the contract, this may not necessarily mean that there needs to be a single, signed contract document. For example, courts have in some instances interpreted the requirements to mean that there must be some written evidence of the contract, which may be achieved by combining several different documents, including emails.

Provincial law varies, and form, writing and other requirements may be included in Statutes of Frauds, insurance, securities, family law or other legislation. The original Statute of Frauds was enacted in England in the 17th century. As its name suggests, it was intended to prevent fraud and forgeries, particularly with land, marriage and other enumerated transactions. Similar principles underlie the legal requirement and best practice of putting agreements in writing—preventing or reducing fraud, forgeries and the likelihood that each party to a contract has a completely different understanding of what was agreed to—all perfect fodder for a lawsuit.

All common law provinces except for British Columbia and Manitoba have a version of the Statute of Frauds. Some Canadian provinces have retained the Statute of Frauds enacted in 17th century England, while other provinces have enacted their own versions of the Statute of Frauds. For example, see Ontario’s Statute of Frauds (RSO 1990, c S.19), which includes writing requirements for contracts related to certain guarantees and land transactions. Manitoba repealed its Statute of Frauds in 1985. However, the statute may still apply to contracts made before the statute was repealed. British Columbia has also repealed its Statute of Frauds, but elements of the statute survive in other legislation. For example, section 59 of British Columbia’s Law and Equity Act (RSBC 1996, c 253) includes writing requirements for certain guarantees and the sale or disposition of land.

Courts have repeatedly explained why written contracts are advisable

The following quote from Manitoba’s Court of Appeal explains the importance of getting contracts in writing and the scepticism towards unwritten contracts:

The Statute of Frauds came into being to prevent disputes where an alleged contract had not been reduced into writing.  The requirement to put the agreement into written form in turn requires that the parties be reasonably certain as to the terms of the contract.  For policy reasons the British Parliament concluded that it should not be left to the court to weight conflicting claims based on oral evidence, and then attempting to restructure a contract on a foundation of conflicting testimony.  While the Statute of Frauds has been repealed in this jurisdiction, the idea lying behind it remains valid.  The courts should be reluctant to impose binding contracts on parties based upon conversations, particularly where the usual practice has been to reduce such contract into writing.  In spite of the repeal of The Statute of Frauds, the practice in dealing with the purchase and sale of land is to have the contracts in written form…”(Megill-Stephenson Co. v. Woo [1989] M.J. No. 271)

Terms to consider including in written contracts

If properly drafted, written contracts add more clarity and certainty to business relationships. Among the terms that parties can clarify in a written contract are basic terms, for example, price, compensation, duration, effective date and the goods or services to be provided. Parties may also add clauses; limiting liability in the event of certain events; setting out choice of law (which jurisdiction’s law apply in the event of a dispute); setting out choice of forum (where the parties must litigate any dispute); providing for arbitration as opposed to litigation in the event of a dispute; and covering any other issues the parties deem necessary.

Organizations should determine whether they have any unwritten contracts

Organizations should have written contracts governing relationships with business partners, suppliers, customers, employees and others. All organizations should assess their business relationships and determine whether they have written contracts in place. If there are unwritten contracts it may be best to consult with a lawyer, as there are legal and business implications to implementing written contracts retrospectively.

Stay tuned for more on contracts

Stay tuned to the Inside Internal Controls Blog for a follow up post which examines the pitfalls that can arise with unwritten contracts in employment relationships. Then, stay tuned for an additional post which illustrates that a written contract is not a perfect inoculation against a lawsuit, because of interpretation issues—in this case in the non-profit and employment context.

Apolone Gentles, JD, CPA,CGA, FCCA, Bsc (Hons)

Apolone Gentles is a CPA,CGA and Ontario lawyer and editor with over 20 years of business experience. She has held senior leadership roles in non-profit organizations, leading finance, human resources, information technology and facilities teams. She has also held senior roles in audit and assurance services at a “Big Four” audit firm. Apolone has also lectured in Auditing, Economics and Business at post-secondary schools. Read more here
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