Is an oral agreement binding? Workplace lawyers provide insight

Learn if an oral or verbal agreement is legally binding under Canadian laws, and what can employers and employees do to address the risk of verbal agreements

Is an oral agreement binding? Workplace lawyers provide insight

Updated 04 Apr 2024

A handshake, a simple nod, or some other words or gesture may seal a contract between parties.

However, can this also mean that the verbal agreement is legally binding? When things go wrong, is it enforceable among the parties?

This article answers these questions about verbal agreements and more, especially in the context of Canadian labour and employment law.

Lawyers may use this article as an educational piece for their clients, such as employers, hiring managers, and HR departments. Employees and applicants can also use this article to learn how to be cautious when negotiating with their employers.

Is a verbal agreement legally binding in Canada?

Yes, a verbal agreement is a legally binding contract in Canada. Common law says that a verbal agreement is still a contract, even if it’s not in writing.

There are certain considerations that make a verbal agreement legally binding. This includes looking at the elements of a contract if it’s present in the case, as provided in Canada’s contracts law.

Common law on verbal agreements

In the case of Shete, Lada, and Chung v. Bombardier Inc., 2019 ONSC 4083, the Ontario Superior Court of Justice reinforced the principle that verbal agreements are legally binding.

In this employee severance case, the Court held that the mutual agreement of parties on the oral contract’s essential terms will make a settlement binding.

As a background, the case stemmed from the termination of employees in November 2015, who were the plaintiffs in this case. They were initially offered a termination package by Bombardier – their employer – in exchange for a release. This was rejected by the terminated employees.

A new offer was made by Bombardier on 18 December 2015, which now included an allocation for legal fees.

The employees replied, through their counsel, that they are prepared to accept the new offer, for an additional $2,500 for their legal costs.

Bombardier then agreed, through a letter sent to the dismissed employees on 11 April 2016. Bombardier also required them to sign and return the termination package documents. However, the employees failed to do so.

The issue resolved by the Court is whether the parties reached a settlement agreement, even though the employees had not signed or returned the termination package documents.

Initially, the motions judge dismissed Bombardier’s motions for summary judgment, finding that the April 2016 letters were new offers by Bombardier and not an acceptance of offers made by the employees.

However, on appeal, the Divisional Court found that Bombardier’s revision of its termination package did not constitute a “new offer”. The Court held that it was simply an acceptance of the offer which the employees had agreed.

More importantly, the Court ruled that Bombardier and the employees agreed on all the essential terms of the settlement. As such, the April 2016 letters are enforceable between the parties on Bombardier’s terms of the employees’ termination.

Lessons from the Bombardier case

Aside from learning that verbal contracts do hold up in Canadian courts, there are other lessons from the Bombardier case, as explained by workplace lawyers.

“The general principle that we see in the Bombardier case is consistent with settlement agreements in general and contracts in general,” says Liam Ledgerwood, a labour and employment lawyer in Ontario

“Just like any other contract, a settlement agreement which is agreed to orally will be binding.” Yet a key lesson from the decision is the need for caution, Ledgerwood says. “Employers have to be careful not to evidence an agreement to a settlement before they’re actually ready to be bound by the terms.”

Although in this case it was an employer-friendly decision, “that doesn't mean that it couldn’t equally go the other way if the context were right.”

“You may not be able to backtrack on a deal just because you haven’t signed the papers. And that’s an important principle both for employers and employees to recognize,” says Ledgerwood.

Michael Sherrard of Sherrard Kuzz LLP in Toronto also notes that the Bombardier decision was “consistent in a line of cases.”

The motions judge in the Bombardier case referred to the case of Ferron v. Avotus Corp., [2005] O.J. No. 3511 (Ont. S.C.) for the “proposition that a settlement will be enforced where the parties have agreed on all essential terms,” says Sherrard.

Although the motions judge in Bombardier concluded that this had not occurred in this case, the Divisional Court concluded otherwise.

How is a valid oral agreement created?

Ledgerwood says that perhaps the main takeaway from the Bombardier decision is that, for a contract to be binding, all that is needed are:

  • an offer
  • an acceptance of that offer
  • an exchange of value (either actual or promised)

Signing or executing a contract only goes to proof of the agreement and is not actually a necessity to form an agreement, he adds.

“On TV, it’s always about signing the deal,” Ledgerwood says. “But, in reality, signing the deal is maybe the least important thing that we do to make it binding. As long as we agree on the essential terms of the deal, you have an enforceable contract, and that's what this case suggests,” he explains.

Contracts law of Canada

Aside from common law, such as the Bombardier decision, the validity of verbal agreements can also be viewed from the lens of Canadian contracts law.

Under the law on contracts, the following elements must be present to have a legally binding agreement:

  • consent: parties must voluntarily consent to the contract’s terms, and intend to be bound by it; a party cannot be forced to agree into a contract
  • capacity: parties must have the legal capacity to enter a contract (e.g., must be of legal age in most cases; must be of sound mind, etc.)
  • object: there must be a specific object (e.g., service or goods) that is the subject matter of the contract; it must also be a legal object
  • cause or consideration: the “why” of the contract, which is the promise of one party to other as the contract’s result
  • offer and acceptance: one party makes a valid offer, and the other party accepts such offer to be bound by the contract; there is no contract unless it's accepted

That is why regardless of the form (i.e., verbal or written), when these elements are present, a legally binding contract is entered by the parties.

However, as discussed further below, there are instances where the law specifies that a contract must be in writing. Otherwise, it is unenforceable between its parties.

Where verbal agreement is allowed

Verbal agreements are legally binding only for certain transactions, such as when:

  • hiring employees, such as for shorter and informal works
  • loaning small amounts of money
  • renting or leasing a property for a shorter period

Where an agreement must be in writing

In some cases, the law requires that certain contracts must be in writing to be enforceable. This is to prevent fraud between any of the parties or deny the contract's existence.

It is also based on the rule of court procedures which discourages the presentation of oral evidence to prove a contract which should have been written.

Although the Statute of Frauds is also a common law doctrine, some provinces have enacted it into a law, such as Ontario’s Statute of Frauds. For example, this statute says that transactions which create estates or interests on lands must be put into writing.

This does not mean that the written agreement should be in a “formal” document. If the elements of a valid contract are present in the document, this is legally binding and may be upheld by the court.

What are the issues and risks of verbal agreements?

Although verbal agreements are legally binding between parties, there are some added risks:

  • lack of clarity: parties may be confused on what they agreed because there’s no written agreement to refer to
  • different interpretations: parties have no fixed interpretation on their terms that written contracts have
  • lack of evidence: a party claiming for a breach of contract may have difficulty in proving this because of the lack of documentary support

Addressing the issues and risks of verbal agreements

Lawyers provided insights on how to address the risks of oral or verbal agreements’ legal binding effect. While these are discussed in the context of labour and employment issues, these insights are also helpful for those who are regularly engaged in entering or executing contracts.

Know that verbal agreements are binding

The Divisional Court’s decision in the Bombardier case doesn’t reflect a change in law, but it is important in that it’s “a great reminder,” says Stuart Rudner. He is the Managing Partner of Rudner Law, an employment and labour firm in Toronto.

“Just because something’s not signed and in writing, it’s still a binding agreement,” he adds.

Watch this video from Rudner Law that discusses the Bombardier case and settling severance claims:

For expert advice on verbal agreements, contact an employment lawyer in your area.

Confirming what is orally agreed

Even casual responses from an employee should be confirmed, says Rudner. From the employer side, “Say, ‘if we accept this, can we have a final agreement?’ and make that very clear.”

Rudner suggests this so that it will be almost impossible for the [employee] to turn around later and say, “‘Well, we were just discussing certain items, but I didn't think this was a complete agreement.’”

Even in an informal exchange, it’s important to clarify what the terms of the agreement will be, and then counsel should send over detailed documents containing all the terms, Rudner says.

Employees should also be asked to sign full and final releases for a severance package or similar agreement. “That would also preclude them from filing a claim later on,” he adds.

Sherrard says the Bombardier case represents “a caution to all of us to be very careful in our approach in settlement discussions and also in discussions with clients.”

“You may have a negotiation orally, but you always want to bring it back down to writing,” adding that it is often in the parties’ interests to attempt to negotiate or find a compromise.

Employees must also beware

Rudner says it’s not unusual for dismissed employees to informally write to an HR department to ask for a more attractive severance package. If the company agrees to this, “their understanding is that they have a deal,” he says.

The employer can then be upset when it gets a demand letter from an employee’s lawyer “when they thought that everything had been settled.” In such a situation, says Rudner, at the very least, the company is unhappy, and there is potential for the employee’s reputation to be damaged. “And in a worst-case scenario [for an employee], like in Bombardier, the person might well be held to the bargain they accepted.”

Evidence in court litigation

The use of modern technology – email, text messaging and voicemail – may also facilitate the collection of evidence should the dispute on an oral agreement go to court. “Now, it's typically either by email or by text, which means there's a very clear record of this discussion,” says Rudner.

In the past, where more agreements may have been settled orally.

Principle in Bombardier may apply to other legal practice areas

The Bombardier decision could also extend to other areas of employment law, Sherrard says. For example, an oral offer of employment might likewise be considered binding.

Sherrard provides some developing best practices that parties in an oral agreement may want to consider.

The first is to meet with the client, ideally face to face, to discuss their situation and agree on a course of action.

Second, says Sherrard, “We always want to ‘paper’ the instructions we’ve been provided with, [and] make sure everyone understands the nature of the offer.”

So, after instructions are received, counsel should write to the client to confirm those instructions.

“We always want to have a written communication with our clients that actually set out our instructions,” Sherrard says.

Getting a lawyer early on

Dismissed employees should “get a lawyer!” Rudner says, highlighting the importance of legal counsel in employment disputes.

Although someone who has just lost a job may not want to incur legal costs, “they might leave a whole lot of money on the table,” he says.

Additionally, the employer may even agree to pay legal costs that employees may incur, such as in the Bombardier case.

Verbal agreements as contracts

Whether a quick “yes” or a detailed conversation, verbal agreements can be legally binding, reminding us to think before we speak. A verbal agreement isn’t just a casual exchange; it can be as binding as any written contract. Whether you're negotiating terms or finalizing a deal, what you say could very well hold up in court, making each verbal agreement legally binding.

How do you ensure that your verbal agreements are clear, fair, and enforceable? Share your tips and experiences with us.

 

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