Oral Contracts

22 May 12

A recent Court of Appeal decision highlights the dangers of having oral contracts. Below, Lesley Brook examines the decision.

Company L ordered products every month from the manufacturer, company N.  N had no other clients.  L also distributed products from company T.  L had no written contract with N or with T.  Then N and T entered into a joint venture, cutting out L.

L sued N and T for breach of contract.  N and T both disputed that they had any ongoing contract with L.  Because it was an oral contract L had to prove the existence of the contract first, in order to sue for breach.  The High Court was satisfied that long term contracts did exist, for the exclusive manufacture of N’s products for L, and the exclusive distribution in New Zealand of T’s products by L.

N and T both failed to give reasonable notice of termination of contract.  Lack of a written contract meant no one knew how much notice needed to be given.  The High Court held N should have given 6 months’ notice and T 3 months’ notice.

L also claimed that certain individuals induced N and T to breach their contracts with L.  Did those individuals have actual knowledge of the relevant contract?  Or did they at least know that a contract was highly likely to exist and avoid finding out for sure?  And did they then intend to persuade the contracting party to breach the contract?  The absence of a written contract was relevant to the state of mind of N’s director.

N’s director naively but honestly believed that N and L had no legally binding agreement but an order by order arrangement.  He was alerted to the possibility that a long term relationship might exist and failed to take advice about that, but he avoided liability because the test is subjective (what did he actually believe) not objective (what should have been obvious to him).  Others who relied on what N’s director told them about N’s relationship with L also avoided personal liability.

Prepared by Lesley Brook