Oral Contracts: How much does your understanding matter?

In the recent case of Richards v Harvey [2021] EWHC 21 (Ch) the High Court in England re-examined the role that subjective understanding should play in establishing the existence of an oral contract.

Background

The claimant brought an action for damages alleging that he had entered into a contract with the defendant during a meeting on 4 February 2014. The defendant in this matter contented that while an understanding had been reached on this date, no binding or legal agreement had come into effect.

The question before the court was therefore whether whatever was said at the 4 February meeting had resulted, in law, in a binding contract between the parties.

The issue was approached in two stages:

• First considering what had been said at the meeting; and
• Secondly whether that had been sufficient to result in a binding agreement.

As the alleged agreement had been entirely oral, the court considered all admissible evidence, including oral evidence to make their decision.

Decision

Previously, the courts have used a purely objective approach when establishing the parties’ intentions to create legal relations as set out in RTS v Molkerei Alois Muller [2010] UKSC 14:

"Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations."

However, in this case, we see a departure from this strict test with HHJ David Cooke also giving weight to each of the parties’ own subjective understanding of events.

"However, although the question is not whether the parties subjectively considered they had made a contract, in evaluating what has been communicated by words or conduct, the court may have regard to evidence of the parties' own subjective understanding of events."

After assessing a wide a range of factors including the circumstances of the meeting, the parties’ actions before and after the meeting and the parties’ subjective understanding of the events, the court concluded that that neither party had understood that the meeting on 4 February 2014 had the effect of reaching a binding agreement and this claim was dismissed.

While oral contracts have equal weight under the law, it is easy to see the vulnerabilities of such agreements. A simple email following a successful meeting between parties can have a significant impact on a party’s ability to assert their rights.

Should you have any questions regarding the enforceability of oral contracts, please do not hesitate to get in touch with our Litigation and Dispute Resolution team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.