Case law: Oral contracts

00:00 23 Aug
2006
By Geoff Brewer
The case: Brian Royle Maggs -v- Guy Marsh & Others, CA 7 July 2006.
The issue: Examining the rules for the interpretation of oral contracts.
The implication: Whereas subsequent conduct may not be taken into account in
interpreting the terms of a written contract, such evidence is perfectly admissible where
the contract is oral or partly oral.

Oral contracts
It is commonplace in the construction industry for substantial work to be undertaken on
the strength of an oral agreement. While the oral agreement may be binding between the
parties, the difficulty, of course, lies in determining the precise terms of that agreement in
the absence of clear written evidence.
It is for this reason that Parliament intended that the provisions of the Housing Grants,
Construction & Regeneration Act 1996 should apply only to written contracts. It was
recognised that disputes that concern the underlying terms of the contract raise difficult
questions of evidence and these are not readily susceptible to resolution by a summary
procedure such as adjudication.
These difficulties were highlighted by the Court of Appeal in the recent case of Brian Royle
Maggs -v- Guy Marsh. Marsh was a retired jeweller who set about the refurbishment of his
townhouse in Bath. He contacted Maggs, a general builder, and arranged to meet him on
site to discuss the work. Following that initial meeting, Maggs prepared a budget estimate
for the works in the sum of just over £44,000 plus VAT. The estimate did not particularise
the works to be covered. Further discussions ensued, a breakdown of the estimate was
given and, in due course, a revised estimate in the sum of £36,500 plus VAT was orally
accepted by Marsh. Work began in June 2003, but as might be expected, all was not plain
sailing.
Marsh gave instructions to Maggs’ workmen during the course of the works that additional
items of work were to be carried out. No estimates were provided for any of these
additional works, despite the fact that some were quite significant – for example two
bedrooms on the third floor were to have en-suite bathrooms added.

Final invoice
The works progressed and interim payment invoices were submitted. On completion in
early 2004, Maggs submitted his final invoice in the sum of approximately £70,000,
showing a balance due of some £26,000 plus VAT. This final invoice was accompanied with
a list of omissions and additions made up of round, lump-sum figures.
Unwisely, as events turned out, Marsh disputed that bill with the result that by April 2004
Maggs had commenced proceedings in the County Court. This led to expert quantity
surveyors being appointed by both parties and, as might be expected, the claim rising
from an initial £70,000 to a claimed total contract price of £126,000. No particulars of how
that sum was arrived at were provided to the court, but it was apparent that the
justification for the significant increase was the valuation carried out by Maggs’ quantity
surveyor after submission of Maggs’ final invoice several months earlier.
When these matters came to court, it became obvious that a difficulty would be
encountered in establishing what had been included in the original contract. It was agreed
between the parties that the contract was an oral contract.
Marsh’s lawyer argued that in determining which items of work fell within the original
agreement it was appropriate for the court to take into account all of the evidence,
including the evidence of what the parties said or did after the contract was formed.
Marsh wanted to make it clear that in determining what the original contract contained, it
was proper to look at the final invoice submitted by Maggs shortly after completion,
together with its list of additions and omissions, because that evidence would throw light
on what the parties then believed was the scope of the original contract.

Objective interpretation
It is a general and well-established rule of law that when parties have made a complete
record of their agreement in writing, those written words alone must be objectively
construed or interpreted. The question is what meaning the written document would
convey to a reasonable person having all the background knowledge that would be
available to the parties at the time that they made the contract. It is irrelevant to call
evidence of how one party behaved after the event. That would only shed light on what
that party subjectively thought he had agreed.

Case evidence
In the County Court, the judge accepted this rule and agreed with Maggs that evidence of
this type should not be taken into account and, preferring Maggs’ evidence generally, he
ordered that Marsh should pay the majority of the account now claimed by Maggs. In July
of this year that decision was taken to the Court of Appeal.
Marsh’s lawyers complained that in the context of an oral contract, it was wrong of the
County Court to have disregarded the evidence of the subsequent conduct of the parties.
Lady Justice Smith in the Court of Appeal agreed. The general rule that such evidence
should not be taken into account applied only to written contracts. The scope of an oral or
partly oral contract was always a question of fact. Establishing the facts will usually
depend upon the recollections of the parties and other witnesses and therefore it would be
highly relevant to hear evidence about what the parties had said and done about the
disputed matters in the meantime.
The consequence of this decision was that the appeal would be allowed, and if the parties
were unable to obtain a negotiated settlement, the whole affair would have to go back for
a rehearing before another judge in the County Court.
[Contract Journal, 23 August 2006, p 20]