Recording Verbal Agreements in Writing

13 Mar 13

A written contract is commonly prepared only after agreement has been reached verbally on key issues. Sometimes those key issues are not accurately recorded in the written contract. This could be a mistake, or because there has been some movement on those issues during negotiation, or perhaps there was no verbal agreement after all….

In Hanover Group Holdings Ltd v Chartis Insurance New Zealand Ltd [2012] NZHC 3585, Hanover sought rectification of a written contract of insurance with Chartis (trading as AIG) which it claimed did not reflect the terms that had been agreed verbally during negotiations. The claim was that Hanover’s insurance broker and AIG’s representative had agreed on 25 October 2007 that Hanover’s renewed Directors’ and Officers’ Insurance would cover prospectus documents issued after the policy commenced on 1 November 2007.

Up to $20 million is at stake. The directors of Hanover want recourse to the policy for the various charges and civil claims they face from the Financial Markets Authority relating to the prospectus issued in December 2007.

The written terms of insurance were issued on 14 December 2007. They did not cover prospectus documents issued after 1 November 2007. No objection was made by Hanover at the time.

The critical email from the insurer’s representative Mr Barker on 25 October 2007 referred to inclusion of the “latest” prospectus. He meant the current prospectus that had been most recently issued. Hanover’s broker, Mr Dawson, wrongly assumed at the time that Mr Barker meant that future prospectuses would automatically be covered when they were issued.

The Decision
The High Court concluded that there was no common intention – the parties did not in fact agree that future prospectuses would be covered by the policy. Therefore Hanover’s claim to rectify the contract to reflect a verbal agreement had to fail. An alternative claim that Mr Barker misled Mr Dawson also failed.

The High Court commented that it was remarkable that neither Hanover nor its broker checked the written terms at the time they were received in December 2007. If Hanover had immediately asked for amendment of the terms to reflect the claimed verbal agreement, the difference in intention would have been discovered at that time, and Hanover would have had the opportunity to seek cover for its new prospectus, issued on 7 December 2007.

The decision is under appeal, but whatever the final result this is a timely reminder of the care required when recording a verbal agreement in writing.

What this means for you
If you are presented with a written contract recording a verbal agreement, make sure you read the contract and check that it accurately records your understanding of what has been agreed. If it doesn’t, say so promptly and ask for it to be amended accordingly. If you just sign it, or perform it, you are likely to be bound by what it says.

Prepared by Lesley Brook.