Douglas v Mikhael [2023] NSWSC 979

A recent decision of the Supreme Court of New South Wales has highlighted the difficulties of enforcing a verbal contract. In this case, the Plaintiff alleged that he had entered into two (2) verbal contracts which entitled him to be paid the profits of businesses operated by the Defendants.

The central issue was whether the conversations (which the Plaintiff said gave rise to the contracts) had actually occurred. The Plaintiff relied on conversations said to have happened in 1999 and 2015. The Defendants denied the conversations ever occurred.

The Plaintiff was ultimately unsuccessful in establishing the existence of the verbal contracts.

Oral contracts – some relevant principles

Justice Richmond, in his reasons for judgment, sets out a number of helpful legal principles relating to verbal contracts. These include:

  1. a person who relies on a verbal contract bears the onus of proving it exists;[1]
  2. the relevant conversation must be proved to the reasonable satisfaction of the court which means the court must feel an ‘actual persuasion’ of its occurrence;[2]
  3. the Court must be satisfied that any consensus reached was capable of forming a binding contract and was intended by the parties to be legally binding;[3]
  4. the history of the relationship between the parties is relevant;[4] and
  5. the conduct of the parties prior to and at the time of the alleged verbal contract, as well as post-contractual conduct, can be considered by the Court.[5]

Potential collusion?

Justice Richmond examined in detail the evidence given by each of the witnesses called at trial. 

Each witness was called to give their account as to whether the alleged conversations had ever occurred. Importantly, His Honour raised serious concerns between the affidavit evidence (filed in advance of trial) of two witnesses called by the Plaintiff. Their affidavit evidence concerned the occurrence and content of the relevant conversations said to give rise to the allege verbal contract. Justice Richmond found the affidavit evidence to ‘correspond exactly’, on occasion using the exact same wording.[6] In rejecting this evidence, Justice Richmond noted that,

‘…affidavit evidence of a witness which is in the same words as affidavit evidence of another witness is highly suggestive either of collusion between the witnesses or that the person drafting the affidavit has not used the actual words of one or both of the deponents. Both possibilities seriously prejudice the value of the evidence and Counsel usually attacks the credit of such witnesses, with good reason.’[7]

The Court’s ultimate findings

Justice Richmond did not accept that the relevant conversations had ever occurred and therefore rejected that a verbal contract had ever been formed. His Honour made a number of important findings which serve as timely reminders for those seeking to rely on verbal contracts:

  1. there was no contemporaneous record of the meeting or what was said at the meeting. The Plaintiff said that a note had been kept of the meeting but was unable to produce any such document (even when called upon to do so);[8]
  2. the Plaintiff gave implausible explanations as to what had happened during the relevant conversations and why certain people (on the Plaintiff’s recollection) were present;[9]
  3. the Plaintiff could not explain how (in the absence of any documentary records) he remembered the specific date of the conversation which had had happened over 20 years ago;[10]
  4. the conduct of the parties after the alleged conversations strongly indicated that no contract had ever been formed;[11]
  5. the terms of the alleged contract were inherently implausible;[12] and
  6. ultimately, His Honour found the Plaintiff’s witnesses to be unreliable, whilst the Defendants witnesses were found to be truthful and accurate.[13]

Key takeaway

Commercial parties should always be extremely wary of relying on verbal or ‘handshake’ contracts or agreements, particularly when significant financial transactions are being negotiated. After the fact, these verbal contracts are very difficult to prove and rely upon. Even if the occurrence of a conversation can be established, the precise terms of any legally-binding agreement can be similarly difficult to conclusively prove. The terms of such an agreement will inevitably result in a “he-said/she-said” dispute and Courts are generally reluctant to accept the existence of legally binding agreement unless the precise terms of the agreement or contract can be demonstrated with precision. This often requires reliable testimony and where possible, contemporaneous documentary records or other satisfactory corroboration. Of course, the preference should always be that agreements that are intended to be legally binding and relied upon are recorded in writing in a formal contract.

[1] Douglas v Mikhael [2023] NSWSC 979 at [18].

[2] John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451.

[3] Ibid.

[4] Ibid.

[5] Colyer Fehr Tallow Pty Ltd v KNZ Australia Pty Ltd [2011] NSWSC 457 at [47] – [50].

[6] Douglas v Mikhael [2023] NSWSC 979 at [43].

[7] Referring to the decision in Macquarie Developments Pty Ltd v Forrester [2005] NSWSC 674 at [90].

[8] Douglas v Mikhael [2023] NSWSC 979 at [72].

[9] Ibid at [73].

[10] Ibid at [74].

[11] Ibid at [78].

[12] Ibid at [79].

[13] Ibid at [80].