By Imroz Ali
While it is best practice for a contract to be recorded in writing, parties still enter into contractual relations via oral agreements and handshake deals. An oral contract, just like its written counterpart, is generally a valid and legally enforceable contract as long as the required elements of a contract are present. The necessary elements to give rise to a contract are:
- the parties have capacity to enter into a contract;
- consideration (an exchange of something of value by both parties);
- certainty of terms; and
- legality of purpose.
The enforcement of an oral contract is often more difficult than one that is distilled into writing. A recent decision from the Ontario Court of Appeal in Downey v Arey, 2022 ONCA 673 [Downey], which concerned an oral agreement for the purchase and sale of real property between a father and daughter, provides a cautionary tale to individuals who rely on oral agreements to conduct any part of their business.
The Downey decision is a reminder that an agreement that does not have “certainty of terms” will be unenforceable, and that it is more difficult to have certainty of terms where the agreement is oral.
Ms. Downey and her partner, Mr. Marchese (the “Purchasers”), brought an action against Ms. Downey’s father, Mr. Arey (the “Vendor”), seeking enforcement of an alleged oral agreement to sell to them the Arey family home (the “Home”) located in Mississauga, Ontario.
The Vendor orally agreed to sell the Home to the Purchasers for the sum of $850,000 with a closing date of August 31, 2016. This is where the parties agreement as to the terms of their oral contract ends.
The Purchasers alleged that they and the Vendor orally agreed to extend the sale’s closing date to May 31, 2017. The Vendor denied that he agreed to such an extension. The parties also disagreed over a discount to the purchase price. The Purchasers alleged that just before closing, the Vendor agreed he would apply a “family discount” of $100,000 to the purchase price. The Vendor denied that he agreed to such a discount and asserted he had already reduced the purchase price by $100,000 to reach the agreed price of $850,000. In April 2017, the Vendor refused to close, which sparked the Purchasers’ lawsuit.
Trial and Court of Appeal’s Decision
The trial judge dismissed the Purchasers’ action because he found there was no enforceable agreement to transfer the Home because of one fundamental term – the price – was not agreed to.
The trial judge found that the parties disagreed over when and how the $100,000 family discount was to apply. He considered whether an objective, reasonable bystander would conclude, in all the circumstances, that the parties agreed on the issue of price, and held:
I accept that each of the parties honestly believed their version of the price of the home. Thus, I find that an objective, reasonable bystander would conclude that, in all the circumstances, the parties were not agreed on price, a fundamental term to any contract.
The Court of Appeal fully agreed with the trial judge’s findings and held that the parties disagreement over the $100,000 price difference was material and that on an objective basis, the parties did not agree to the purchase price of the Home.
The Court of Appeal dismissed the Purchasers appeal and upheld the trial judge’s findings that there was no enforceable agreement for the purchase and sale of the Home.
The parties mutual agreement to the same terms in an essential element of a valid contract. When the contract respects purchase and sale of real estate, the terms must also clearly describe the “3 Ps” (parties, property and price). The parties in Downey failed to reach a mutual understanding on the purchase price of the Home, which rendered the entire oral agreement unenforceable.
It is more difficult to determine whether the parties mutually agreed to the same terms of a contract where the contract is oral, because when a dispute arises concerning an oral contract, the words of the agreement will be often contested.
In the course of operating a business, there are times where it may be more convenient to enter into contractual relations via an oral agreement and handshake deal. An oral agreement may also be more prevalent where the parties have a history of positive business dealings. However, businesspeople should be cautious about entering into such agreements due to the added difficulty regarding their enforcement.