When Conversation becomes a Contract: The Law of Oral Agreements in Dawgs Canada Distribution Ltd. v Smith, 2025 SKCA 81

In the world of business, not every conversation between parties ends up with pen to paper. But can a conversation really amount to a binding contract? The Court of Appeal for Saskatchewan in the case of Dawgs Canada Distribution Ltd. v Smith, 2025 SKCA 81 recently affirmed that, in certain situations, yes it can.

The Background: A Verbal Deal to Sell Shoes

In 2005, two friends, Lee Smith (“Mr. Smith”) and Steven Mann (“Mr. Mann”), discussed going into business together to import and sell shoes. Mr. Mann incorporated Double Diamond Distribution Ltd. (“Double Diamond”) to run the venture.

Mr. Smith claimed that the two had reached an oral agreement: he would invest $23,000 (the cost of approximately one third of the first shipment of shoes) and receive one-third of the company’s shares in return. Later, when new investors came on board, the parties agreed Mr. Smith’s share would be reduced to 15% and then to 8%. However, he was never issued any shares, and his money was recorded as a loan by Double Diamond.

Mr. Mann denied any binding agreement existed, claiming their discussions were preliminary and contingent on further steps that Mr. Smith never completed. Mr. Smith sued for breach of contract, among other related claims.

The Trial Decision: Oral Contracts Can Be Binding

At the trial level in Smith v Dawgs Canada Distribution Ltd., 2024 SKKB 33, the trial judge found there was a valid and enforceable oral agreement between Mr. Smith and Mr. Mann. They had reached a “consensus ad idem” or “meeting of the minds” on the main terms of the agreement. The judge found there was a clear communication that a reasonable person would consider to be offer and acceptance sufficient to form a binding contract.

The judge concluded Mr. Mann breached the contract by not causing Double Diamond to issue shares to Mr. Smith. Mr. Mann was found personally liable and Double Diamond was also found liable because Mr. Mann was acting as agent for Double Diamond during his communications with Mr. Smith.

The Appeal Decision: The Reasonable Person Test

On appeal, Mr. Mann argued the trial judge erred in finding that a binding contract existed by (i) misapplying the law of contract; (ii) finding that Mr. Smith’s evidence about the contract and its terms was credible; and (iii) determining that an agreement on the contract terms was established on the evidence. The Court of Appeal for Saskatchewan found no error on any of these points.

On the first point, the Court of Appeal confirmed at paragraph 24 of the decision that, “in the absence of a written agreement, a court must determine whether a reasonable person in the position of one party would consider that the other party’s conduct constituted an offer and whether a reasonable person in the position of the latter would consider the former’s conduct to have constituted an acceptance.” In this case, the evidence established clear communication regarding contract terms that a reasonable person would consider offer and acceptance. As such, the trial judge did not err in applying this test to the evidence.

On the second and third points, the Court of Appeal found no error in the trial judge’s determination that Mr. Smith’s evidence was credible and reliable, and that the parties clearly agreed on the consideration price and the amount of equity that Mr. Smith was to receive under the oral agreement.

Legal Takeaways on Oral Agreements

The decision admits of our takeaways: (i) there is no requirement a contract be in writing, (ii) the court assesses the existence of the contract based on a reasonable bystander test, (ii) the essential terms of the contract must be clear and other elements of formation must be proven, and (iv) oral contracts may be amended orally.

1. No Writing Required: Generally speaking, there is no requirement that a contract be in writing in order to be enforceable (except in specific situations like land transactions). Oral agreements can be binding, provided the essential elements are present.
2. Objective Standard Applies: Courts apply an objective “reasonable bystander” test; that is, would a reasonable person believe, based on the conduct and words of the parties, that a contract had been formed? It is not about what the parties subjectively believed, but how their actions would be reasonably interpreted by others.
3. Elements of a Contract Must be Proven: Oral agreements must cover the essential terms: parties, subject matter, offer, acceptance, consideration, and a meeting of the minds. The court found these were sufficiently clear in this case.
4. Modification Is Allowed: The original agreement for one-third ownership was later modified orally to 8% as the business evolved and took on new investors. The court accepted this as a valid variation, which confirms there may be variation to oral agreement terms.

Final Thoughts

Oral contracts can and do hold legal weight, but they are far more difficult to prove and enforce than written ones. For anything beyond minor day-to-day arrangements, a written contract is almost always the better choice. Contact our Business & Corporate Team for assistance in preparing written enforceable contracts. Our litigators have experience enforcing or resisting agreements, including oral agreements.