A Credibility Contest: Are Oral Agreements Enforceable?

In a recent BC Supreme Court case Chiu v. Lam, 2016 BCSC 299, Mr. Justice Verhoeven reviewed the law with respect to oral agreements. Before you lend someone money based solely on an oral agreement, you should consider whether you will be able to prove it.

Ms. Chiu argued that she had lent money to her cousin Ms. Lam $45,000 as follows: $30,000 in 2007 and another $15,000 in 2008. Ms. Chiu says that the loan agreement was oral and had no terms for repayment and no terms for interest.

Ms. Lam denies that there was an agreement to repay the funds. She says that if there was an agreement, the agreement was made with her husband Mr. Lam or his company, not with her. Mr. Lam died in April 2009 leaving no records relating to a loan. Ms. Lam started re-paying the loan at a rate of $100 per month beginning January 2010 until December 2015.

The only witnesses called to give evidence were the parties themselves. It was up to Ms. Chiu to prove on a balance of probabilities that there was an oral agreement for repayment. Each party gave substantially different evidence on material points. Justice Verhoeven founds that Ms. Chiu’s evidence was not credible and although he did not fully accept Ms. Lam’s versions of events, he found that Ms. Chiu had not met the burden of proving the oral agreement.

Importantly, Justice Verhoeven performs a review of the law with respect to proving an oral agreement. He cites Justice Cohen at paragraphs 39 and 40 of Clifford v. Flores, 2004 BCSC 358 as follows:

39 As can be seen from the summaries of the parties’ testimony and their respective positions on the evidence, Clifford, Flores and Cunha have given versions of the dealings between them on the key issues which are irreconcilable. Thus, the court must decide whose version of events is most reliable in order to decide the issues. The credibility of the witnesses must be tested against those facts that are not seriously in dispute, and with the preponderance of the evidence and the probabilities surrounding the events.

40 Although this task is primarily one of fact finding, some legal principles submitted by defence counsel are of assistance:

a) First, the Plaintiff carries both the legal and evidentiary burden of proving, on a balance of probabilities, that the alleged oral contract was made.

b) Second, the basic contractual principles of offer and acceptance, and certainty of terms are applicable. These principles are summarized in Fridman, The Law of Contract in Canada (4th ed.). at pp. 16-17, and 20, as follows:

Constantly reiterated in the judgments is the idea that the test of agreement for legal purposes is whether parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract. The law is concerned not with the party’s intentions but with their manifested intentions. It is not what an individual party believed or understood was the meaning of what the other parties said or did that is the criterion of agreement; it is whether a reasonable man in the situation of that party would have believed and understood that the other party was consenting to the identical terms.

Sometimes it is a simple matter to decide what the parties have manifested to each other, and consequently, whether they have agreed, and if so, upon what. This is especially true where a document containing their agreement has been prepared and signed by the parties. If the plain wording of the document reveals a clear and unambiguous intent, it is not necessary to go further.

It is different, however, where the language is not unambiguous but vague and uncertain. In the absence of the requisite certainty and clarity the courts will not declare that a contract exists.

c) Finally, the Court of Appeal has also provided some guidance in how courts ought to assess the evidence of witnesses when credibility is an issue. In Faryna v. Chorny (1951), 4 W.W.R. (N.S.) 171 (B.C.C.A.) the plaintiff brought an action for libel contained in a letter. The recipient of the letter gave evidence that he did not know the meaning of the defamatory word or the identity of the person referred to in the letter. The trial judge found the letter to be defamatory, but did not expressly state in his reasons that he disbelieved the evidence of the recipient. On appeal, the appellant argued that the evidence of the recipient was uncontradicted and the judge in the course of the trial had commented favourably on the demeanour of the witness. The witness’s evidence therefore ought to have been accepted by the trial judge. In dismissing the appeal, at pp. 174 to 175 O’Halloran J.A. commented on how credibility ought to be assessed:

If a trial judge’s finding of credibility is to depend solely on which person he thinks made the better appearance of sincerity in the witness box, we are left with a purely arbitrary finding and justice would then depend upon the best actors in the witness box. On reflection it becomes almost axiomatic that the appearance of telling the truth is but one of the elements that enter into the credibility of the evidence of a witness. Opportunities for knowledge, powers of observation, judgment and memory, ability to describe clearly what he has seen and heard, as well as other factors combine to produce what is called credibility… . A witness by his manner may create a very unfavourable impression of his truthfulness upon the trial judge and yet the surrounding circumstances in the case may point decisively to the conclusion that he is actually telling the truth. I am not referring to the comparatively infrequent cases in which a witness is caught in a clumsy lie.

The credibility of interested witnesses, particularly in cases of conflict of evidence, cannot be gauged solely by the test of whether the personal demeanour of the particular witness carried conviction of the truth. The test must reasonably subject his story to an examination of its consistency with the probabilities that surround the currently existing conditions. In short, the real test of the truth of a story of a witness in such a case must be its harmony with the preponderance of the probabilities which a practical and informed person would readily recognize as reasonable in that place and in those conditions. Only thus can a court satisfactorily appraise the testimony of a quick minded, experienced and confident witness, and of those shrewd persons adept in the half lie and of long and successful experience in combining skillful exaggeration with partial suppression of the truth. Again, a witness may testify what he sincerely believes to be true, but he may be quite honestly mistaken. For a trial judge to say I believe him because I judge him to be telling the truth, is to come to a conclusion on consideration of only half the problem. In truth it may easily be self-direction of a dangerous kind.

The trial judge ought to go further and say that evidence of the witness he believes is in accordance with the preponderance of probabilities in the case and, if his view is to demand confidence, also state his reasons for that conclusion. The law does not clothe the trial judge with a divine insight into the hearts and minds of the witnesses. And a court of appeal must be satisfied that the trial judge’s finding of credibility is based not on one element only to the exclusion of others, but is based on all the elements by which it can be tested in the particular case.

[My added emphasis]

In Clifford, Christopher Clifford claimed he had entered an oral agreement with Isidro Flores, Joaqim Cunha and Concord Concrete Pumps Inc. according to which

1. Clifford would arrange for $1,000,000 in financing for Concord in exchange for a 30% interest in the company; and
2. Flores and Mr. Cunha (who are husband and wife) would pay him $10,000 for each concrete pump sold by Concord if he gave up his 30% interest in the company. Ms. Flores and Mr. Cunha say that the agreement was that Mr. Clifford would be provided with $10,000 for the first three concrete pumps sold by Concord.

At paragraph 41, Justice Cohen finds that where the evidence about matters and events that go to the root of the issues is in conflict, he should prefer Mr. Flores’s evidence and decide the lawsuit in the defendant’s favour. He based this decision on the following reasons:

1. Clifford did not plead a consistent set of facts regarding the terms of the alleged oral contract, and did not explain away the inconsistencies;

2. Clifford was unable to consistently recall when the alleged oral contract was made, the basic terms or the amounts of the payments to him under the agreement;

3. Clifford’s version of the facts was not consistent with the known, uncontentious facts;

4. Objective evidence (a handwritten document and cheques showing payments made to Mr. Clifford) is supportive of Mr. Flore’s version of events and not easily reconciled with Mr. Clifford’s version; and

5. Third party witness evidence supports Mr. Flores’version of events.

It is clear that making a case that parties had entered into an oral agreement will be fact-based and difficult for a plaintiff to do where there is no circumstantial, objective evidence which supports the version of the facts that the plaintiff is asking the court to accept.