Don’t “Talk the Talk” If You Won’t “Walk the Walk”: Oral Agreements May Constitute Binding Contracts

CCN No. 2024-11-19

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Key Takeaway 

Oral agreements between parties are enforceable if the legal requirements for a “contract” are met.

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Application to Your Organization

While it is strongly recommended that all agreements affecting your organization (including amendments to agreements) are recorded in writing, readers should be aware that in any instance where the following criteria are met courts will find a legally binding “contract” and enforce the oral agreement (i.e., the “handshake deal”) between the parties.

An oral agreement will constitute an enforceable and binding contract if it meets the following criteria:

1. an offer with terms is made by one of the parties;
2. the other party accepts the terms of the offer (or an amended offer based on negotiation between the parties);
3. there is certainty with respect to the essential terms of the agreement;
4. there is evidence demonstrating that the parties intend to create a legal relationship (e.g., the start of performance of their respective obligations); and
5. there is consideration flowing between the parties (e.g., something of value, such as a promise, money, an act, or object, that one party receives from the other).

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What Happened?

In Sjostrom Sheet Metal Ltd. v. Geo A. Kelson Company Limited,¹ a mechanical subcontractor (Mechanical Subcontractor) was retained by a general contractor (Construction Co) to perform certain mechanical work (the Mechanical Works) for the construction of the UHN Centre for Cell & Vector Production in Toronto (the Project).

The Mechanical Subcontractor, in turn, retained a sub-subcontractor (“Sub-Subcontractor”) to perform all sheet metal work in respect of the Mechanical Works (the Sheet Metal Works). The Sub-Subcontractor, subsequently, and without advising the Mechanical Subcontractor, supplemented its workforce with labourers to perform the Sheet Metal Works (Labourers).

Several months into the Project, the Labourers walked off the job due to non-payment by the Sub-Subcontractor. To resolve this issue, and to induce the Labourers to return to the Project site, the Mechanical Subcontractor and the Labourers reached an oral agreement whereby the Mechanical Subcontractor would make direct payments to the Labourers (the Oral Agreement).

The Labourers returned to the Project; however, the Mechanical Subcontractor refused to make direct payment to the Labourers. The Mechanical Subcontractor alleged that any payment dispute of the Labourers could only be between the Sub-Subcontractor and the Labourers pursuant to their written sub-subcontract.

After completing its work on the Project, the Labourers preserved a lien for unpaid invoices that were issued to the Mechanical Subcontractor pursuant to the Oral Agreement.

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Question Considered by the Court

Did the Oral Agreement constitute a binding and enforceable contract between the Mechanical Subcontractor and the Labourers?

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What Did the Court Say?

Yes, the Oral Agreement was a legally binding and enforceable contract between the Mechanical Subcontractor and the Labourers, and the Mechanical Subcontractor was liable for the unpaid invoices.

To determine whether a contract was formed by the Oral Agreement, the Court considered the following:

1. whether all the elements of a “contract” are present, including: offer, acceptance, consideration, certainty of essential terms, and an intention to create a legal relationship (i.e., items # 1 to #5 set out above);
2. using an objective standard whether the facts and conduct of the parties would lead a reasonable person to conclude that the parties intended to be bound by the Oral Agreement; and
3. whether there was a “meeting of the minds” on all essential terms of the relationship.

In this case, the Court ultimately found that:

• the Mechanical Subcontractor admitted in its statement of defence that there was a direct contract with the Labourers;
• the evidence presented by the Labourers supported the formation of a legal contract, namely, that the Labourers would supply all remaining sheet metal labour for payment on an hourly basis. These essential terms were clearly known by all parties, as evidenced in emails sent between the parties; and
• the Oral Agreement made between the Mechanical Subcontractor and the Labourers, which, despite having been made verbally, was an offer capable of being accepted, and which was accepted by the Labourers.

Accordingly, all of the elements required to form a “contract” were present.

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Learn More

Sjostrom Sheet Metal Ltd. v. Geo A. Kelson Company Limited, 2023 ONSC 4959

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¹ 2023 ONSC 4959 (Sjostrom).