A Verbal Contract is as Legally Binding as a Written One
A contract can be created based on an oral representations and the court will take into consideration the events and background leading to the formation of the contract. Further, the Court would look into the intention of the parties in deducing whether there was an intention to create legal relations.
Lim Nyuk Foh (LNF), the Plaintiff, purchased 20,917,485 shares of Sarawak Consolidated Industries Bhd (SCIM) based on oral representations made by the seller, Datuk Zainal Abidin (DZA), the Defendant. LNF had also relied upon a brief 1 page written Letter of Undertaking. Relying on the oral representations and the Letter of Undertaking, LNF bought the shares for a sum of RM29,715,984.00 in October 2014. The shares were bought by LNF at a premium, as it was meant to be a controlling stake in SCIM, a public listed company. The Letter of Undertaking stated that LNF could appoint three directors, inclusive of the Managing Director in SCIM. There were no other documents to evidence the contract/agreement between the parties apart from the 1 page Letter of Undertaking.
The promise that LNF could appoint the Managing Director and 2 other directors in SCIM (and effectively take control of the Board of Directors of SCIM) did not materialise, as the SCIM’s board of directors did not approve of it. LNF then complained to DZA of the fact that he could not take control of the board of SCIM and demanded a refund of monies paid for purchase of the shares by LNF to DZA.
LNF had several meetings with DZA after which the DZA made a verbal offer to buy back the shares and to compensate LNF for the costs and expenses incurred. However, DZA failed to fulfil his promise to buy back the SCIM shares.
LNF then took action against DZA for breach of the oral agreement to buy back the SCIM shares at the price that he had paid and to compensate him for all losses and damage suffered by him. DZA denied making any oral promise/s to buy back the SCIM shares. DZA said he that he had only informed LNF that he was only willing to consider to buy back the shares but had never made any promise/s to actually buy back the shares.
Contract Can Be Verbal
The question to be decided by the High Court was whether the Plaintiff, LNF, could prove his claims that there was in fact an oral agreement by the Defendant, DZA, to buy back the shares and compensate LNF for the losses and damage that he had suffered.
The High Court referred to Achi a/p Suppiah v Devamurthy a/l Suppiah  8 MLJ 189, which held that a contract can be based on an oral agreement. However, when the contract sought to be enforced is an oral contract and the Defendant denies the existence of the same, the Court would have to evaluate all the evidence to decide whether a contract was formed or not. It was very much a case of proving the existence of the contract.
Intention to Create Legal Relations
LNF adduced evidence in the form of exchanges of What’sApp messages which indicated that there were some discussions about DZA buying back the shares from LNF at the price that the SCIM shares were sold to himhe . However, the What’s App messaqes did not per se prove LNY’s claims of the exietence of the agreement by DZA to re-purchase the SCIM shares. The Court then relied on admissions and matters stated by DZA in his cross examination to connect the dots and hold that there was in fact a binding contract formed between LNY and DZA for DZA to re-purchase the SCIM shares sold by DZA to LNF at the price paid by LNF and compensate LNF for the losses and damage suffered by LNF.
The court relied on Cipta Cermat Sdn Bhd v Perbandaran Kemajuan Negeri Kedah  2 MLJ 746 to hold that it is permissible to take into consideration events and background facts leading to the formation of the contract. The court is not concerned with the subjective intention of the parties. It is the imputed intention that is relevant. Therefore, communications between parties for instance, can be taken into consideration objectively for the Court to deduce whether parties had intended to create a legal relation. See Teras Kimia Sdn Bhd v Kerajaan Malaysia  7 MLJ 584.
DZA had also admitted during intense cross examination by counsel for LNF that he promised to buy back the shares through other companies in which he was the controlling shareholder.
The court also referred to the demeanour of LNF and DZA during examination in chief and cross examination and preferred to believe LNF as a more truthful and trustworthy witness of the existence of the verbal promise.
On a balance of probabilities the court found that DZA had at the material time, agreed to buy back the shares from LNF and to compensate him for the losses that he had suffered.
Judgement was given in favour of LNF.
This case reiterates the legal principle that verbal promises can be binding. The Court would take the objective approach in deducing the intention of the parties to create legal relations by taking into account the circumstances surrounding the making of the contract, including the factual matrix that forms the background to the contract. Although the evidence proving the existence of an oral contract may be thin, the Court can and will take into account the demeanour of witnesses to arrive at the truth between the parties apart from contemporaneous evidence in the form text messages.
Alex De Silva, Bodipalar Ponnnudurai De Silva acted as lead counsel for LNF.