We had a contract! We did?

The news that a millionaire has taken his son to the High Court in an attempt to sue him for around £300,000 after having lent him the money to renovate his Surrey home, shines a spotlight on the wider issue of contractual agreements - how can someone rely on an oral agreement, for example, when money is lent?

The lender has not received any of the money back following an alleged oral agreement that his son would commence repayment of the loan, once the construction and renovation works were completed.

A contract is a formal agreement between parties that confers an obligation on one party in exchange for a thing of value (the consideration). The consideration must be capable of having some value, which is estimable in money terms. Therefore a contract formed for friendship will fail on the basis of invalid consideration.

The essence of a contract is that one party makes an offer, which the second party accepts. Those parties must have a settled intention to create a legally binding relationship. The acceptance must be unequivocal and not form the basis of another offer. For example, offer followed by counter offer does not make a contract unless one of the offers is accepted.

Written contract

Commonly a contract will be in writing with certain terms. Where there is doubt, the court will interpret those terms to give them proper effect (known as construction). A contract can come into being a number of different ways. The most obvious is for the parties to agree a written contract which sets out the specific contractual terms agreed between them. This is by far in a way the safest way of creating sustainable contractual relationships.

However a contract can also come into being by virtue of the way that individuals behave towards each other, and as a result of oral representations made between them. The evidence the court will consider is how the parties have interacted with each other, and whether that interaction evidences an intention to form a contractual dealing.

Clearly with written contractual terms, there is less room for debate. The parties will have committed themselves to specific terms which set out precisely (and perhaps with the benefit of legal advice) the terms that will bind them. There may be arguments in relation to how the contract was performed, but that of course is an entirely different matter.

Oral contract

In an oral contract, the obvious problem is that there can be differences as to recollection as to precisely what was agreed. The terms cannot be certain as they are not recorded anywhere. One party may think their obligations differ to those of the other party, and of course, memories can fade over time.

Where the court is asked to decide if an oral agreement is of contractual effect, a great deal will depend upon how the witnesses present their evidence in court, and how the witnesses respond to cross examination from the opposing counsel. Ultimately the court will grant judgment in favour of who advances the most credible case.

Family cases

Cases involving families are, by their nature, distressing for those concerned and add an extra layer of complexity; was it a formal business arrangement made in a family setting, or one family member helping out another out of natural love and affection?

Other fascinating and often quite sad examples occur where children have worked, for example on the family farm for years, and at a low wage in expectation and reliance upon assurances from their parents that, 'one day all this will be yours'. There have been several cases relating to that scenario brought by disappointed children.

The expectation and reliance cases are claims where the disappointed party could bring an action alleging an estoppel. An estoppel arises where one party makes an assertion and another relies on it to their detriment.

For example where one party seeks a loan based on a promise to pay (the assertion) and the other person advances the loan (the detrimental reliance), the borrower will be estopped from claiming that the loan did not exist. Clearly the lender would have to advance cogent evidence around the advance of the loan (such as banking records showing the payment).

The burden of proof

Powerful evidence will be the key to succeeding in either a claim for breach of contract or for a claim alleging an estoppel. The claimant will need to show the way in which the parties interacted with each other and evidence of the discharge of the obligation, if they are to have any prospect of succeeding in the claim.

Finalising a contract on oral terms is therefore extremely imprecise, and is not to be advised. To create certainty in relation to contractual dealings, the parties should always conclude them with a written contract.

If the obligations are carefully reduced to writing with the benefit of good legal advice, there is less scope for uncertainty and hopefully, in a family scenario, family harmony can be maintained.

Peter Brewer is an associate in the commercial dispute resolution team at law firm Weightmans