Determining The Terms Of An Oral Contract Introduction Contracts do not always exist as formal documents detailed in written word. In informal commercial contexts, contracts sometimes arise through spoken word, without ever being committed to paper. The undocumented nature of oral contracts often creates uncertainty as to exactly what terms the parties have agreed to. In Colyer Fehr Tallow Pty Ltd v KNZ Australia Pty Ltd [2011] NSWSC 457, the Australian Supreme Court discussed the principles to be applied when determining the terms of an oral contract. The Plaintiff entered into an oral contract to buy tallow for the Defendant. The Defendant alleged that the Plaintiff had breached the agreement by acquiring tallow for other customers, and thus purported to terminate the contact on 2 weeks notice. The Plaintiff claimed that a reasonable notice of termination of 6 to 12 months was required, and that the repudiation was wrongful. The Court thus had to determine the terms of the agreement, and whether they had been breached by either party. The Court s judgment provided a guide as to how it would determine the words spoken and the intention of the parties. The Court stated that it would look to the surrounding circumstances, which includes the history of the relationship between the parties and the conduct of the parties, both before and after the time of contract. It would also look to the parties presumed or imputed intention. After examining the factors listed above, it was held that the contract did not prohibit the Plaintiff from acquiring tallow for others. The Defendant was required to give reasonable notice before terminating the contract, but 2 weeks was found to be sufficient. Therefore, both the claim and crossclaim were dismissed. Brief Facts (1) The Plaintiff ( Colyer ) and the Defendant ( KNZA ) had an arrangement whereby Colyer would be the exclusive supplier of tallow for KNZA, and would be free to continue its own export and domestic supply business. 1 Rajah & Tann LLP
(2) This arrangement changed in 1993 when the parties entered into a new oral agreement. Colyer would continue to supply KNZA with tallow, but it was unclear exactly what limitations on purchase and supply of tallow were agreed to. (3) This arrangement carried on for about 13 years. During this time, Colyer provided KNZA with tallow at a commission of $5 per tonne, and also provided additional processing and transport services at an additional fee. (4) However, Colyer also acquired tallow for entities other than KNZA, including domestic customers. In 2003, KNZA also began to acquire some tallow from another supplier. (5) In 2006, Colyer entered into and announced a tallow purchasing agreement with BP. KNZA alleged that this was a breach of their contract, and purported to terminate their agreement on 14 days notice. (6) Colyer alleged that this was a wrongful repudiation of the contract, and sought to claim damages. KNZA maintained that it was entitled to terminate the contract, and cross claimed on Colyer s acquisition of tallow for other customers. Issues The Court s main task was to determine the terms of the 1993 oral contract between Colyer and KNZA. It had to question, inter alia: Whether Colyer was allowed to purchase tallow on behalf of any principal other than KNZA; and Whether the agreement was terminable only on reasonable notice, and if so, what constituted reasonable notice. These terms would then determine whether either party was in breach of the contract. Holding Of The Supreme Court It was held that neither party had breached their obligations under the oral agreement. Colyer was allowed to acquire tallow for other principals, and KNZA was entitled to terminate the agreement upon 2 weeks notice. General Law The Court first discussed the legal principles applicable in determining the terms of an oral contract. 2 Rajah & Tann LLP
The surrounding circumstances may be used as an aid. Where the words exchanged can be determined, their meaning can be ascertained in light of the circumstances. Where the words cannot be determined, the circumstances can be used to find what in substance the parties agreed to. The relevant surrounding circumstances include the history of the relationship between the parties and their conduct prior to and at the time of contract. a. The parties conduct may itself be the means by which the parties manifested their agreement. b. Even in the absence of clear offer and acceptance, the Court will recognise a contract if it can be shown that by a certain point the parties mutually assented to a sufficiently clear regime which was intended to be binding. (iii) (iv) The Court stated that subsequent conduct could also be taken into account. Subsequent conduct may go to the course of dealings between the parties, which is relevant to determining the terms where a contract is not reduced in writing. Such course of dealing will not normally occur until after the commencement of the contract evidenced by it. The Court may also imply terms in a contract based on the parties presumed or imputed intention. Where the contract is not in writing, implied terms must be necessary for the reasonable or effective operation of the contract. Colyer s Acquisition Of Tallow After considering the surrounding circumstances, the Court found that the oral agreement did not prohibit Colyer from acquiring tallow for principals other than KNZA. (iii) KNZA alleged that Colyer agreed not to act in a major way for any other party. However, before 1993, Colyer had bought tallow for other customers at a time when it was also buying tallow for KNZA. Based on this previous relationship, it could not be interpreted that Colyer would only acquire tallow for KNZA. The term also could not be implied from the circumstances. If the implied restriction was not necessary to give the previous arrangement a reasonable or effective operation, it is unlikely to be necessary in the new oral contract. Further, Colyer had breached the alleged implied term in many instances throughout the life of the contract. KNZA only complained after the announcement of the BP contract in 2006. 3 Rajah & Tann LLP
Termination Of The Contract The Court found an implied term that KNZA was required to buy all its tallow from Colyer. This could be implied from the course of dealings between the parties. KNZA had bought tallow directly from another supplier on a few occasions, and on these occasions, it paid commission to Colyer. Further, KNZA thought it necessary to give Colyer notice of termination of the agreement. This suggests that KNZA thought it was bound to acquire tallow through Colyer. The term was also necessary to give effect to the arrangements between the parties. Colyer provided ancillary services in connection with the acquisition of tallow, and the parties could not have intended that KNZA would be free to buy tallow elsewhere but that Colyer would still provide ancillary services in respect of that tallow. The Court then determined that there was an implied term requiring KNZA to give reasonable notice before terminating the contract. KNZA was required to buy all its tallow through Colyer, which would in turn place bids on KNZA s behalf and provide delivery and storage facilities. It was thus necessary for the reasonable operation of the contract that there be a period of time for the orderly transfer of the management of outstanding deliveries from Colyer to KNZA. However, the Court held that 2 weeks notice was not unreasonable in the circumstances. It gave the parties enough time to wind up their existing relationship in an orderly fashion. Breach Of Terms Since Colyer was not required to acquire tallow solely on behalf of KNZA, it had not breach the oral contract by acquiring tallow for other principals. Similarly, since there was no requirement for more than 2 weeks notice before termination, KNZA had not wrongfully terminated the oral contract. Therefore, both Colyer s claim and KNZA s cross claim were dismissed. Concluding Words It is not uncommon to come across oral contracts in business relations. While these arrangements may be convenient and workable when the relationship is flowing smoothly, they are a source of great uncertainty once disputes begin to emerge. It is thus advisable for parties to settle the exact terms of their respective obligations and commit them to writing before embarking on the performance of their arrangement. Nonetheless, this judgment provides an insight as to how the Court assesses and determines the terms of a contract that has not been committed to writing. Clearly, the approach is different from that taken when interpreting and determining implied and express terms in written contracts. The agreement is not based on written words, but on some 4 Rajah & Tann LLP
manifested mutual assent and intention. The Court thus looks more towards the history of the relationship between the parties, and particularly at the conduct of the parties. Notably, this includes the conduct of parties subsequent to the time of contract, which is usually of questionable application when interpreting written contracts. Since it is sometimes impossible to make a finding on the particular words used in an oral contract, the conduct of the parties after commencement of the contract is sometimes the only source of insight as to their mutual intention and what they view as their obligations. Contacts Mark Cheng Partner D (65) 6232 0446 F (65) 64282009 mark.cheng@rajahtann.com Kelvin Poon Partner D (65) 6232 0403 F (65) 64282007 kelvin.poon@rajahtann.com Please feel free to also contact the Knowledge and Risk Management Group at eoasis@rajahtann.com Rajah & Tann LLP is one of the largest law firms in Singapore and Asia, with representative offices in Shanghai, Vientiane, Ho Chi Minh City and Bangkok, as well as an associate office (Kamilah & Chong) in Kuala Lumpur. As a full service regional law firm, our knowledge, resources and insight can be your business advantage. Rajah & Tann LLP is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealing with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The contents of this Update are owned by Rajah & Tann LLP and subject to copyright protection under the laws of Singapore and, through international treaties, other countries. No part of this Update may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed, broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of Rajah & Tann LLP. Please note also that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as such information may not suit your specific business and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann LLP or e-mail the Knowledge & Risk Management Group at eoasis@rajahtann.com. 5 Rajah & Tann LLP