It’s natural for people to want to collaborate with their friends, and getting involved in a business together might seem like an easy way to extend a friendship. Unfortunately, while it’s easy to get into business with a friend, doing so without a formal contract can lead to expensive problems down the road. A recent decision from the Court of Queen’s Bench of Alberta illustrates just how important it is to have proper contracts in place in order to avoid disputes in the future.

A friendly agreement over coffee

The plaintiff and the defendant had been friends long before the matter before the court started in 2011. It was at this time that the parties were having a beverage at a coffee shop when the plaintiff agreed to lend the defendant $250,000 to help the defendant’s business. Rather than paying the plaintiff back, the defendant provided him with $250,000 worth of shares in his company.

Problems arose when over a series of meetings in 2014 and 2015, the plaintiff alleged the defendant had agreed to buy back the shares for $300,000. Again, there was no written contract. The defendant disputed the plaintiff’s position, leaving the court to determine whether there was an oral contract.

The plaintiff, though upset with how things transpired, agreed that the original loan of $250,000 was satisfied by the granting of shares in the company. However, he also suggests that an oral contract was agreed to in 2014/15 when the parties agreed to exchange property (the shares) for consideration ($300,00). The defendant, however, argues there was no agreement, simply the potential for one.

The 2014/2015 agreement

The plaintiff’s position is that an oral contract was finalized on March 20, 2015. In the year leading up to that meeting, the plaintiff testified that he approached the defendant about getting his money back, with interest, stating “Let’s just call it $300,000.” The plaintiff stated the defendant told him he would never lose the $300,000.

The defendant’s testimony indicated the plaintiff did not believe that his shares in the company were worth enough money to satisfy the amount owed to him. At this time, the defendant claimed to have said that if he could, he would purchase the shares back, but that he stopped short of offering to do so, or promise the plaintiff that he would not lose money.

On March 18, 2014, the plaintiff wrote the defendant a letter, stating “as you are aware we agreed to the conversion from loan to shares because you assured that it would be completed within weeks…I appreciate your gesture to personally guarantee that I would not lose my $300,000 investment.” The defendant stated the “gesture” referenced in the letter was simply his comment that he would buy the shares back if he could.

A series of communications took place between the parties leading up to a meeting at a coffee shop on March 20, 2015. At this time the plaintiff testified he asked for payment of $300,000, and that in exchange for that, the defendant would get his shares in the company back. He claims that at this point, the defendant asked for terms, and they agreed the money would be paid back over 12 months. While the plaintiff testified this constituted an agreement, the defendant testified he was unsure at that time whether he could, or wanted to, purchase them back. Four days after this meeting, the defendant wrote to the plaintiff, stating his “

What is an oral contract?

The court explained the general rule of contract is that for an agreement to become binding, the parties must intend to enter into an agreement, and that they agree on all essential terms, as opposed on only some essential terms. What exactly qualifies as an essential term is contextual, and is based on the nature of the transaction.

In this case, it was the plaintiff who had the burden of proof to establish, on a balance of probabilities, that the parties reached an agreement. The court was careful to point out that hidden intentions or feeling were irrelevant, writing “What matters is not what the parties were thinking, planning, anticipating, or hoping; rather, courts look to how parties conducted themselves in the eyes of a reasonable, objective observer.”

Was there an oral contract in this case?

The court approached the situation as a reasonable bystander would. After looking at what the plaintiff presented as the contract (exchange of shares for money), the court was satisfied that the essential terms of the agreement were agreed upon. While the parties had differing opinions about what was said at the meetings, and what was intended, the court chose to believe the testimony of the plaintiff. The court also stated that a promise to pay money when able to do so could be sufficient in situations when there is a lack of clarity as to when that might occur.

It’s important to recall that even if you or another party in a contract have inner thoughts about what is being discussed, the courts may not take that into consideration when determining whether a contract has been agreed to.

At HMC Lawyers we understand that business disputes hurt relationships and wallets. We work to resolve issues as quickly as possible, while always getting ready for trial. We recognize the value of alternative dispute resolution, and strive to find efficient and cost-effective solutions for our clients, including pursuing mediation or negotiated settlements wherever feasible. Please call us at 403.269.7220 or reach us online to discuss your issue today.