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Can An Oral Contract Override A Written Agreement?

Sometime around the beginning of 2008 Ahmad Hassan agreed to purchase Sam Altoum's dry-cleaning business for $360,000. Unfortunately, Mr Hassan fell ill and Sam Altoum agreed to let Mr Hassan out of the deal.

About a year later the parties again agreed to enter into the deal and Sam Altoum's lawyer drafted up the agreement for the same purchase price of $360,000. What in fact got signed by both parties was a written agreement of purchase and sale providing for a sale price of $300,000. According to the agreement, Mr Hassan was to pay $280,000 on closing and a further $20,000 three months after closing for a total purchase price of $300,000.

The agreement had one other rather interesting clause in it which stated very clearly that the writing in the agreement was the whole agreement. That's pretty clear don't you think? If there was something not in writing...something outside of the agreement...it wouldn't be binding on either party!

Read on!

Apparently, Mr Hassan's bank had told him when he applied for the loan that the bank would lend him $280,000 but only if the maximum he still owed the vendor was $20,000. That is why the purchase price on the agreement of purchase and sale was shown as $300,000 payable, $280,000 on closing and that last $20,000 three months after closing.

Here is where it gets interesting.

Both parties agreed that contrary to the clause in the purchase agreement, there was at least one unwritten term which they purposely left out to mislead Mr Hassan's bank so he could get the $280,000 cash. The one term left out of the written agreement but agreed to orally, had to do with the purchase price. Both agreed, in fact, that the real purchase price was more than $300,000.

Mr Altoum claimed that the real purchase price both had agreed to orally was $360,000.

Mr Hassan agreed the real purchase price was not the $300,000 shown in the agreement, but he argued the oral agreement set the purchase price at $330,000. Purchasing a dry cleaning business for an extra $30,000 was one thing to Mr. Hassan, but paying an additional $60,000...well, that was being 'taken to the cleaners'.

During the trial the judge heard evidence from an employee who had overheard Altoum and Hassan discussing a purchase price of $360,000. After hearing evidence from Altoum and Hassan themselves, the judge said:

"I do not find Mr Hassan's story so plausible. I reject it."

So, let's review what we know:

•  The parties entered into a written agreement which was meant to mislead a bank.

•  The agreement specifically stated that the written agreement was the whole agreement.

•  The judge found that he believed the evidence of Mr Altoum and that the real purchase price agreed to orally was $360,000.

Based on those facts, what would you do?  Would you:

a)  Find that Mr Altoum was out of luck because he had entered into a misleading agreement that was meant to be the whole agreement?

Or,

b)  Would you simply ignore those points and find in favour of Mr Altoum and order Mr Hassan to pay the full purchase price of $360,000?

If you said that b) was the correct answer you might consider a career in law. The judge who heard the case simply ignored the problems with the agreement and ordered Mr Hassan to pay the full $360,000 price to purchase the dry-cleaning business.

Lessons to be learned:

1) Notwithstanding the decision in this case, honesty is still the best policy.

2) Good lawyers, through creativity, can negotiate mutually acceptable solutions to problems.

3) Getting it done right in the first place can avoid the time, trauma, and expense of a trial.

At The Ross Firm, we have lawyers whose practice focus is Torts, Property, written Agreements, and other Contractual matters.

Give us a call.

Talk to us.

We can help.

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