The saying “an oral contract is not worth the paper it’s written on”, has some merit but is not correct. An oral contract, just like a written contract, is a contract and enforceable. The difficulty with an oral contract is interpreting its terms. The same applies to a partly oral and partly written contract.

The courts regularly are called upon to interpret oral, or partly oral, contracts. An example of this is in the case of Milicevic & Anor v Ferrari East Pty Ltd & Ors (No 3) [2023] NSWSC 1116, decided on the 14 September 2023.

The legal principles applicable to interpreting an oral contract, or a partly oral and partly written contract, are as follows:

  • establishing the existence and terms of an oral contract is a question of fact.
  • consideration of the surrounding circumstances and post contractual conduct is relevant if there is a dispute about the existence or terms of an oral contract.
  • the subject matter and associated terms must be inferred from a combination of the surrounding circumstances which regularly includes conversations, documents, and conduct.
  • often the issue is not one of interpretation, as there are no words to interpret. The issue then is one of fact: what did the parties agree?
  • in determining what the parties agreed, the Court considers what what the words and conduct of the parties would have caused a reasonable person in the position of the other party (and who had knowledge of all the background circumstances then known and reasonably available to the parties) to believe.
  • in identifying and interpreting the terms of an agreement, the Court strives to give a commercial and business-like interpretation to the agreement.
  • the Court may if necessary to give business efficacy to the agreement, imply one or more term into the agreement. No term will be implied if the agreement is effective without it, and it must not contradict any express term of the agreement.

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