Are Verbal Contracts Legally Binding in Ontario? Understanding Your Rights

In Ontario, verbal contracts are legally binding under specific conditions, yet they pose significant challenges in terms of enforceability. While these agreements can be convenient, the absence of written documentation increases the risk of misunderstandings, disputes, and legal complications. Certain agreements, such as real estate transactions or guarantees, require written contracts under the Statute of Frauds. Courts may enforce verbal agreements based on evidence like witness testimonies, emails, or conduct of the parties, but proving the terms of such contracts remains a major hurdle. Given these complexities, legal guidance is crucial to navigating verbal contract disputes and ensuring agreements are enforceable. This article explores the validity, risks, and legal nuances of verbal contracts in Ontario, offering clarity on how individuals and businesses can protect their rights.

Understanding Contracts

Contracts form the backbone of legal and business transactions, offering a framework for mutual agreement and accountability. In Ontario, contracts do not always have to be written to be legally enforceable. Verbal contracts, often referred to as oral agreements, are a common yet misunderstood aspect of contract law. While they may appear informal, verbal contracts can be legally binding under specific conditions. However, navigating their enforceability requires a solid understanding of Ontario’s contract laws.

 

This article explores the nature of verbal contracts, their legal standing in Ontario, associated risks, situations requiring written contracts, challenges in enforcing oral agreements, and the vital role lawyers play in disputes involving verbal agreements.

What Is a Verbal Contract?

A verbal contract is an agreement between two or more parties made through spoken words rather than a written document. These agreements can be as simple as promising to pay someone for a service or as complex as agreeing on the terms of a business partnership. For a verbal contract to be valid under Ontario law, it must meet the essential elements of any legally binding contract:

1. Offer and Acceptance: One party makes an offer, and the other party accepts it.
2. Intention to Create Legal Relations: Both parties must intend for the agreement to have legal consequences.
3. Consideration: There must be something of value exchanged between the parties (e.g., money, goods, or services).
4. Capacity: The parties must have the legal capacity to enter into a contract, meaning they are of sound mind and of the age of majority.
5. Legality: The purpose of the agreement must be legal.

Although verbal agreements can satisfy these criteria, proving their existence and terms is a significant hurdle.

Examples of Verbal Contracts in Daily Life

Verbal contracts are more common than many realize and often occur in everyday scenarios, such as:

• Hiring someone to complete a home repair or renovation project.
• Borrowing or lending money among friends or family.
• Agreeing to purchase or sell goods or services without formal documentation.
• Hiring freelancers or consultants for short-term projects.

While these agreements are typically informal, they can become contentious if one party fails to fulfill their obligations, highlighting the importance of understanding their legal implications.

Are Verbal Contracts Legally Binding in Ontario?

In Ontario, verbal contracts are legally binding as long as they fulfill the above-mentioned elements of a valid contract. The Ontario Court of Justice recognizes oral agreements, provided there is sufficient evidence to prove their existence and terms. However, there are exceptions where written contracts are mandatory under the Statute of Frauds. This law requires certain types of agreements to be in writing to be enforceable, such as:

• Contracts involving the sale of land or real estate.
• Agreements that cannot be performed within one year.
• Guarantees and indemnities.

If your verbal contract does not fall within these exceptions, it can still be legally binding. However, the lack of written documentation increases the risk of disputes and difficulties in enforcement.

The Statute of Frauds and Its Implications

The Statute of Frauds, originally enacted in England in 1677, is designed to reduce fraudulent claims and misunderstandings by requiring specific types of contracts to be documented in writing. In Ontario, this statute is enshrined in the Statute of Frauds Act. Some scenarios explicitly covered include:

1. Real Estate Transactions: Any agreement involving the sale, lease, or transfer of land must be written to be valid.
2. Contracts Extending Beyond One Year: Agreements that cannot be completed within 12 months from the date they were made require written documentation.
3. Promises to Pay Another’s Debt: Guarantees or indemnities must be formalized in writing.
4. Marriage Contracts: Agreements made in consideration of marriage, such as prenuptial agreements, must also be documented.

Failure to comply with these requirements renders the agreement unenforceable, even if the parties intended to form a binding contract.

 

The statute remains in force in numerous jurisdictions to “prevent fraudulent dealings based on perjured evidence” (Erie Sand and Gravel Limited v. Tri-B Acres Inc., 2009 ONCA 709 at para 49.). The statute, in its various iterations, stipulates that contracts for the sale of land, wills, and “to answer for a debt” must be in writing and signed by the parties (for example, Statute of Frauds, R.S.O. 1990, c. S.19, s. 4. The statute is used in its original form (1677 (U.K.), 29 Car. 2, c. 3) in Alberta. In B.C., a less restrictive writing requirement is incorporated in the Law and Equity Act, R.S.B.C. 1996, c. 263, s. 59)

 

However, to ensure that the statute does not itself become “an engine of fraud”, courts have established numerous exceptions to its application. First, courts will invoke the doctrine of part performance as exception to the writing requirement. The doctrine provides that a party acting on the oral contract to its detriment is evidence of the contract’s existence (Hill v. Nova Scotia (Attorney General), [1997] 1 S.C.R. 69. At paras 5 and 10-14).

Risks of Verbal Contracts

While verbal contracts offer convenience and flexibility, they come with inherent risks. Understanding these risks can help you make informed decisions and avoid potential pitfalls.

1. Lack of Evidence: Proving the terms and existence of a verbal agreement often relies on the credibility of the parties involved, which can lead to a “he-said-she-said” scenario.
2. Ambiguity: Without written terms, misunderstandings or differing interpretations of the agreement can arise. For example, one party may believe they are entitled to additional compensation, while the other may disagree.
3. Limited Enforceability: Courts may be hesitant to enforce verbal contracts if there is insufficient evidence or if the terms are too vague.
4. No Record of Modifications: Changes to verbal agreements can be challenging to track or prove. If parties agree to amend the terms, documenting these changes becomes almost impossible without a written record.
5. Fraud and Misrepresentation: Verbal agreements are more susceptible to disputes arising from dishonesty or misrepresentation. One party may deny the existence of the agreement altogether.

For these reasons, it is advisable to document agreements in writing whenever possible, especially for significant transactions or commitments.

Real-World Consequences of Verbal Contract Disputes

Disputes over verbal contracts can lead to financial losses, damaged relationships, and legal battles. Consider the following hypothetical scenario:

A homeowner hires a contractor to renovate their kitchen based on a verbal agreement. The contractor claims they were promised $10,000 for the work, while the homeowner insists the agreed price was $7,000. Without written documentation, resolving this dispute in court becomes a lengthy and expensive process.

This example underscores the importance of clear communication and documentation in contractual agreements.

When a Written Contract Is Mandatory

As mentioned earlier, the Statute of Frauds outlines specific scenarios where written contracts are required in Ontario. These include:

1. Real Estate Transactions: The sale, lease, or transfer of land must be documented in writing.
2. Long-Term Agreements: Contracts that cannot be completed within one year from the date of formation.
3. Guarantees: Agreements where one party guarantees the debt or obligations of another must be in writing to be enforceable.
4. Marriage Contracts: Agreements made in consideration of marriage, such as prenuptial agreements, require written documentation.

Failing to meet these requirements renders the contract unenforceable, regardless of verbal agreements or intentions.

Exceptions to the Written Contract Requirement

While the Statute of Frauds mandates written contracts in specific cases, there are exceptions. For instance, partial performance of a contract may serve as evidence of an agreement. If one party has already fulfilled their part of the bargain, courts may recognize the contract despite its verbal nature.

Challenges in Enforcing Verbal Contracts

Enforcing a verbal contract in Ontario can be a complex and time-consuming process. The primary challenge lies in proving that a contract exists and establishing its terms. Key obstacles include:

1. Lack of Documentation: Unlike written agreements, verbal contracts leave no tangible record, making it difficult to demonstrate the specifics of the agreement.
2. Reliance on Witnesses: If witnesses were present during the formation of the agreement, their testimony could support your claim. However, witness accounts may be unreliable or unavailable.
3. Vague or Ambiguous Terms: Courts require clear and definite terms to enforce a contract. If the agreement’s terms are too vague, enforcement becomes unlikely.
4. Disputes Over Intentions: Proving that both parties intended to create legal relations can be contentious.
5. Time and Expense: Pursuing legal action to enforce a verbal contract can be costly and time-intensive, often outweighing the value of the agreement itself.

How Courts Approach Verbal Contract Disputes

Ontario courts evaluate verbal contract disputes on a case-by-case basis. Judges consider the following factors:

• Credibility of Parties: The court assesses the reliability of each party’s testimony.
• Supporting Evidence: Emails, text messages, invoices, or other documents referencing the agreement can strengthen your case.
• Conduct of the Parties: Actions taken by the parties, such as partial performance, can indicate the existence of a contract.

Role of Lawyers in Verbal Contract Disputes

When disputes arise over verbal agreements, consulting a lawyer is crucial. Legal professionals can:

1. Evaluate the Validity of the Contract: Lawyers can assess whether your verbal agreement meets the requirements of a legally binding contract under Ontario law.
2. Gather Evidence: They can help collect supporting evidence, such as witness statements, emails, text messages, or other communications that reference the agreement.
3. Negotiate Settlements: Lawyers can mediate disputes to reach a resolution without resorting to litigation.
4. Represent You in Court: If enforcement requires legal action, a lawyer can represent your interests and present a strong case.
5. Draft Written Agreements: To prevent future disputes, lawyers can help draft clear and comprehensive written contracts that accurately reflect the parties’ intentions.

Why Hiring a Lawyer is Essential?

Given the complexities of contract law, hiring a lawyer ensures that your interests are protected. Whether you are entering into a new agreement or resolving a dispute, legal expertise can help you avoid costly mistakes and secure favorable outcomes.

Conclusion

While verbal contracts are legally binding in Ontario, their enforceability depends on meeting the essential elements of a valid contract and providing sufficient evidence. The risks and challenges associated with verbal agreements highlight the importance of documenting agreements in writing whenever possible. For transactions or commitments involving significant value or complexity, consulting a contract lawyer can help you navigate potential pitfalls and safeguard your interests.

 

Understanding your rights and obligations under Ontario contract law is essential for making informed decisions. Whether you’re entering into a verbal agreement or resolving a dispute, a proactive approach and professional legal guidance can ensure your interests are well-protected.

 

If you would like to set up a consultation with our Toronto business lawyers, do contact us for a consultation.

CASE LAWS:

1750738 Ontario Inc. c. 1750714 Ontario Inc., 2020 ONCA 836;

Ruparell v. J.H. Cochrane Investments Inc. et al., 2020 ONSC 7466

Courts also regularly find an oral agreement sufficient to create a binding contract despite formal documentation never being signed, and despite an absence of agreement on all terms. If the essential terms are agreed, the agreement is enforceable, the essential terms to create a binding contract can be minimal. The Ontario Court of Appeal upheld an oral contract with just two terms. The plaintiff’s principal agreed to fund a subdivision development on an equal basis with its other investors. In exchange, a company affiliated with the plaintiff would get the right to build houses on a number of lots equal to its share in the project. All other terms—the total number of available lots, the price of the lots, the nature of the lots, the locations of the lots, the duration of the agreement, and the identity of the other investors—were unknown.

Wilson v. Graydon Hall Pizza & Catering

The Ontario Court (General Division) upheld an oral contract whose terms were limited to purchase price and forgiveness of prior debts. The formal written agreement—which the defendant refused to sign—included terms relating to product supply and non-competition. The trial judge held these additional terms were not essential to the parties’ bargain. The Ontario Court of Appeal affirmed the trial judgment.

West Edmonton Mall Ltd v. Clock Gallery Ltd, 1993 CarswellAlta 266 (Master).

The Alberta Court of Queen’s Bench rejected claims of an oral agreement to reduce rents in the face of a NOM clause. The court noted that NOM clauses allow “parties to protect themselves from uncertainty (and the litigation that too often goes with uncertainty) by agreeing to provisions that only that which is in writing is to have legal efficacy.