As a business owner, entering into written contracts is essential so both parties understand their rights and obligations in the commercial arrangement. In contract law, if a dispute arises between the parties, one of the first steps will be determining the terms of the contract, including its meaning and effect. Unfortunately, determining what terms a party has contracted to is not always straightforward, particularly when the contract consists of oral terms in a written contract. In this article, we unpack whether you can include oral terms in a written contract and provide some practical tips for entering into commercial contracts.
What is a Contract?
A contract is a promise between two or more parties where both parties intend to form legal relations. You can enter contracts for various reasons, ranging from a business supplying goods or services to other businesses to a business employing workers.
For a contract to be binding and enforceable, you must meet all of the elements in the table below.
| Intention | There needs to be an intention between the parties to be bound by the agreement. |
| Offer and acceptance | There needs to be a clear offer by one party that the other accepts. |
| Consideration | Some value passes between the parties, usually money in exchange for goods or services. Consideration can also take the form of benefits, offers, services, opportunities, and other effects of value. |
| Capacity | The parties need to have the capacity to enter into the contract; for example, they must not be minors or intoxicated. |
| Certainty | The terms of the agreement need to be sufficiently clear. |
Furthermore, a contract does not need to be in writing to be binding and enforceable. A contract can be:
- in writing – this is your typical written contract;
- an oral contract, meaning you make it via speech with another party;
- implied, for instance, through conduct; or
- a combination of the above.
Pre-Contractual Statements
Commonly, parties will enter discussions and negotiate several ideas before committing to a deal and drafting a written contract. Sometimes, such ‘pre-contractual statements’ can cause a dispute between the parties. This is because what one party might believe to be open communication and negotiation, the other party might take the statement as a term of the contract.
Some of the most common types of pre-contractual statements include:
| Mere puff | These are statements not intended to be taken seriously or ‘sales talk’. A classic example of mere puff is a used car salesperson describing a car as ‘an absolute bargain’. You cannot interpret these types of comments to form an oral agreement as part of the contract. |
| Representations | This is a factual statement by one party to induce another party into entering into the contract. For example, you can show someone reviews on your website. Often, these are not intended to be binding or a promise and do not form part of the contract. However, the Australian Consumer Law sets out specific rules around misleading and deceptive conduct that businesses should be mindful of when selling their products or services. |
| Collateral contract | When parties are discussing a contract, they may enter into a separate, secondary agreement that exists alongside the main contract. This independent agreement contains additional promises or obligations related to the main contract, often made by one party to induce the other to enter the primary agreement. For example, a car dealer might sell a used car to a buyer, through a written sale agreement, but the dealer verbally promises the buyer that they will replace the car’s tyres within the next month. The agreement to replace the car’s tyres would be considered a collateral contract. |
| Terms | Sometimes, when parties discuss a contract, they may orally discuss terms they intend to form part of the contract. If you want to include oral terms as part of the written contract, it must be clear that the parties intend such terms to be promissory in nature. |
Practical Example – Written and Oral Terms in the same contract
Let’s say there’s a written contract between a supplier and a retailer for the supply of goods. The written contract includes terms such as the:
- type and quantity of goods to be supplied;
- pricing;
- delivery times;
- payment terms;
- warranties; and
- liability provisions.
During the contract negotiations, the supplier verbally agrees to provide the retailer with an exclusive 20% discount off the standard pricing for the first year of the contract. This is meant to help you establish the product in the market. However, the final written contract does not include this verbal agreement.
Enforcing Oral Terms of a Contract
To enforce an oral term of a contract, you generally need to prove that you agreed upon the oral terms and intended to enforce them. This can be more challenging than relying on a clearly drafted written agreement.
Typically, you should demonstrate that the relevant conversation occurred and that both parties intended any agreement reached to be legally binding. For example, you can provide evidence through a record of a meeting or a summary of what was discussed at the meeting.
Additionally, the history of the relationship between both parties is relevant. The conduct of both parties before and at the time of the verbal contract, as well as their conduct after the agreement is made, is also relevant.
Entirely Written Contracts
Where parties to a contract have reduced the contract to writing, there is generally an assumption that the written document is a ‘binding record of the contract’. Therefore, the parties cannot orally alter or vary the contract terms.
Of course, there are exceptions to this presumption, which include:
- to provide evidence that there was a mistake in the contract (for example, a typo in the price);
- where a party has tainted a contract by fraud;
- where it is clear in the contract there was an intention only to address one aspect of a broader arrangement; or
- to provide evidence to explain the meaning of a term in the contract.
Key Tips for Entering Into Contracts
When entering a commercial deal with another business, it is essential to have a clear understanding of the arrangement to avoid misunderstandings and minimise the chance of a dispute arising.
Here are some tips for ensuring your arrangements are clear and easily understood:
- ensure that every contract you enter into is in writing;
- if the other side has made some oral representations, include these representations in writing in the contract;
- when negotiating a contract, particularly if you are selling your goods or services, do not engage in any conduct that is likely to mislead or deceive. Courts may consider this a breach of the Australian Consumer Law; and
- if you and the other side agree to some changes to a contract, be sure to vary the contract in writing in accordance with the agreed changes. Usually, there will be a clause allowing the parties to amend the contract in writing.
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Key Takeaways
There are situations where you can include oral terms in a written contract. However, it is best practice to put the entire contract into writing so that it is easy to interpret each party’s intention. If parties to a contract dispute whether an oral term is part of the written contract, you should focus on their intentions to determine if they intended the oral term to be binding. Of course, oral terms are very difficult to prove, so it is best practice to have a lawyer assist you in these situations.
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Frequently Asked Questions
For an agreement to be binding, there must be intention to form legal relations, offer and acceptance, consideration, capacity to enter into a contract, and certainty.
A common oral term a business will want to include as part of a written contract is a pre-contractual statement. These are statements that parties make before they enter into a contract. The most common types of pre-contractual statements are mere puff, representations, and terms. Often, only the last category will count as a contract term, but this is a contextual assessment.
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