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It doesn’t count if it isn’t in writing…right?

business contracts

It’s a common misconception that spoken words don’t hold as much weight as the written word.

This is simply not the case as illustrated by the following decision of Yulema Pty Ltd & Anor v Simmons & Anor [2015] NSWSC 640 where the Supreme Court of New South Wales confirmed that the defendant owed the plaintiff $347,632.67 (plus interest & costs) based on obligations imposed from a verbal agreement (despite one of the parties having since passed away).

Take home points

1. Verbal arrangements and representations can be just as enforceable as written arrangements and representations;

2. If the contract cannot be a signed written contract follow up the verbal agreement with confirmation of the verbal terms in writing as you understand them with the other party – this reduces the risk for disputes occurring years down the track;

3. For complex or high value transactions, ensure that you have a written contract;

4. Should you decide to make a verbal agreement, ensure that:

a. you are very clear on the terms of the agreement;

b. you take notes of your conversation(s) with the other party;

c. you have reliable witnesses.

Summary

The issue for determination in this case was whether a verbal “side agreement” negotiated during an intra-group buy out of the remaining interests in a group of companies known as “ADC/EDC Group” (Group) was enforceable. One member of the group (Party A) owed another member of the group (Party B) $1.04 million (the Debt). In order to finalise and enter into the buy-out agreement (Buy Out Agreement) for the Group, a third member of the group (Party C) agreed that it would reimburse Party A one-third of any repayments made by Party A to Party B, if Party A was ever required to repay any part of the Debt to Party B. Party C and Party C’s solicitor had both passed away at the time this matter was litigated and Party C’s executors disputed the validity of this “side contract”.

The Court heard evidence from Party C’s accountant who was present throughout the negotiations and the solicitor for Party A. The Court was ultimately satisfied that the operation of the “side agreement” was not contingent on the continued operation and eventual settlement of the Buy Out Agreement as argued by Party C’s executors.

Rather, it held that the terms of the “side agreement” were, that in exchange for entering into the side agreement Party C would pay to Party A one third of any repayment of the Debt it made to Party B.

Party A fully repaid the Debt to Party B; Party C’s executors were ordered to make payment of the one third of the Debt (being $347,632.47) to Party A with interest and costs.

By Belinda Pinnow, Solicitor – Commercial