Verbal contracts are open to dispute

While verbal contracts can be enforceable, there is always potential for a dispute to arise over what was agreed and what the terms of the agreement were.

A recent high profile decision in the NSW Court of Appeal has confirmed a trial judge’s decision that for oral agreements to be enforceable there must be an intention to create legal relations.

Verbal contracts are hard to enforce at the best of times. And in this case, concerning the estate of the late businessman Mr Richard Pratt and his alleged former escort and mistress, Ms Madison Ashton, the verbal agreement was found to lack contractual force because there was no intention to create legal relations.

Case study – Ashton v. Pratt [2015] NSWCA 12

In Ashton v Pratt [2015], the executor of the late Mr Pratt was sued by Ms Ashton over an alleged verbal contract. It was alleged Mr Pratt asked her to become his mistress, not to return to her work as an escort and in return he would pay her an allowance, give her a car and would establish a $2.5 million trust for each of her kids.

The first question was whether, on an objective assessment of the state of affairs between them, they had intended to create a legal relationship. The Court of Appeal attached significance to the language used by the parties and found that there was no intention to create legal relations. The Court added that even if there was such an intention, this agreement lacked certainty because it failed to set out essential terms such as her “obligations as mistress”, when the contract would start and end, and the terms upon which the trust for her children would be established. Additionally, the Court held there was no contract by “estoppel” since she did not suffer detriment by not returning to work as an escort since she received “substantial gifts”.

As part of the background to this case, it was held that Pratt’s mistress arrangement with Ms Ashton began in late 2003 and ended in about December 2004. It also held Mr Pratt stated Ashton would receive the use of a car, other allowances and would set up a trust for her children. In February 2005, Ms Ashton received an offer from Mr Pratt’s associate for the sum of $100,000 and the transfer of a car and later that day both ownership and money was transferred to her. Subsequently and in November 2005 she signed a document acknowledging receipt of $50,000 in full settlement of her claims against Mr Pratt, however, she later denied receipt of the money.

The Court at first instance found that there was no binding agreement between Ms Ashton and Mr Pratt and later the Court of Appeal affirmed that and dismissed the appeal and made orders for Ms Ashton to pay the costs of the Executor of Mr Pratt’s estate. (Mr Pratt died in April 2009.)

Comment by Streeterlaw

This case is not only a reminder to avoid making verbal contracts because of potential arguments about the nature of the terms but it also makes the case for setting the arrangements out properly in a document so there is certainty.

The Court of Appeal, for good reason, noted that no attempt was made to document the ‘transaction’, which Senior Counsel for Ms Ashton said was consistent with an “illicit transaction”. The Court of Appeal, by way of response, thought there would have been many lawyers not associated with the Pratt family who could have documented such a transaction.

For expert advice on your contractual issues, please contact Streeterlaw on 8197 0105 or email advice@streeterlaw.com.au

Written by Mark Streeter

The Director of Streeterlaw, Mark has been practicing Law since 1994. He has attained his Masters of Law in 1999 and in 2006 was awarded his Specialist Accreditation in Commercial Litigation. Mark is a member of ARITA, a graduate of the AICD and a member of AICM. A member of STEP, Mark enjoys working in the area of Wills and Estates. In 2020 Mark is the Chair of STEP NSW.

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