I am always fascinated when business owners tell me about commercial relationships that have lasted for decades without a written contract.
Some businesses place orders through a phone call. Others lend substantial sums of money based on trust. There are even high-value deals concluded with nothing more than a conversation and a handshake.
These arrangements can work perfectly well until the parties disagree about what was actually promised.
A written contract should not be viewed as a sign of distrust. Properly drafted, it protects the relationship by ensuring that everyone begins with the same understanding.
Are Verbal Agreements Legally Binding in Malaysia?
A verbal agreement can be legally binding under Malaysian law. The Contracts Act 1950 does not require every contract to be made in writing.
An oral agreement may therefore be enforceable if the usual requirements of a valid contract are present, including:
- a clear offer and acceptance;
- lawful consideration;
- an intention to create legal relations;
- certainty of terms;
- free consent; and
- parties who are legally competent to contract.
Certain transactions must nevertheless satisfy specific legal formalities. The requirements will depend on the nature of the transaction and the applicable legislation.
The practical problem with an oral agreement is usually not whether it can be valid. The real problem is proving its existence and precise terms.
The Problem With Handshake Deals
When a business relationship is going well, the parties rarely examine every detail of their arrangement.
One party may believe that payment is due within 30 days, while the other remembers agreeing to 60 days. One may understand that a payment is an investment, while the other considers it a loan. One may believe that profits will be shared equally, while the other believes that the arrangement is based on each party’s contribution.
These differences may remain hidden for years.
When the relationship eventually breaks down, the court may have to determine various terms by examining the facts and evidence.
Without written terms, the dispute often becomes one person’s recollection against another’s.
What Malaysian Cases Tell Us About Oral Agreements
An Oral Property Deal Denied by the Seller
In Achi a/p Suppiah v Devamurthy a/l Suppiah [2010] 8 MLJ 189, the parties allegedly entered into an oral agreement for the sale of a property for RM300,000 during a gathering of family and friends.
The purchaser claimed that the important terms had been agreed and subsequently paid RM30,000. The seller later denied that any binding agreement existed.
The High Court ultimately found that the oral agreement had been proven. However, establishing it required the court to examine the testimony of several witnesses, the payment made and the parties’ conduct.
The case shows that an oral agreement can be enforced. It also shows how a transaction that could have been recorded in a short written document instead became a full factual dispute requiring witnesses and court proceedings.
SMS Messages Helped Prove a Debt
In Yam Kong Seng & Anor v Yee Weng Kai [2014] 4 MLJ 478, the Federal Court considered SMS messages in a dispute involving an outstanding debt connected with the construction of a factory.
The electronic messages helped establish an acknowledgment of the debt. The Court also recognised that an SMS could satisfy an electronic-signature requirement where the sender was adequately identified.
The practical lesson is simple: documentation does not always have to begin with a lengthy formal contract. Emails, WhatsApp messages, quotations, invoices and written acknowledgments can all become important evidence of what the parties agreed.
However, scattered messages are still a poor substitute for one document clearly setting out the complete arrangement.
An Alleged Oral Partnership Contradicted a Written Agreement
In Hanzac Bintang Sdn Bhd & Anor v Ma Ping & Anor, the parties disputed the existence of an alleged oral partnership arrangement that contradicted their written joint venture agreement.
The High Court found that the alleged oral arrangement, if it existed, had been superseded by the written agreement. The parties had conducted their business for years according to that document, which also stated that amendments had to be mutually agreed in writing.
This illustrates another common problem: parties may sign a written contract but later discuss changes informally. When those conversations are not documented, they may disagree over whether the original contract was varied or whether the discussion was merely a proposal.
A Written Contract Creates a Common Reference Point
A good contract records the commercial understanding reached between the parties while that understanding is still fresh.
It should answer practical questions such as:
- Who are the parties?
- What must each party provide?
- How and when will payment be made?
- How are profits, expenses or responsibilities divided?
- How long will the arrangement continue?
- Can either party terminate it?
- What happens if payment is late?
- Who owns the work, customer information or intellectual property?
- How will disagreements be resolved?
If these questions cannot be answered clearly, the parties may not understand the deal in the same way.
The process of documenting an agreement can uncover those differences before money is spent, work begins or commitments are made.
Written Contracts Make Disputes Easier to Contain
Putting an agreement in writing does not guarantee that a dispute will never arise. Parties may still disagree about performance, interpretation or breach.
However, a written contract narrows the scope of the disagreement.
Instead of arguing over whether there was an agreement and what its terms were, the parties can focus on whether a particular written obligation was performed.
Sections 91 and 92 of the Evidence Act 1950 also generally give importance to the written document where contractual terms have been recorded in documentary form. Subject to recognised exceptions, oral evidence cannot ordinarily be used to contradict, vary, add to or subtract from those written terms.
This gives the parties a more reliable starting point if a dispute arises.
Document Changes as Well as the Original Agreement
Business owners should not stop documenting the relationship after the first contract is signed.
Commercial arrangements naturally change. The parties may agree to:
- extend a deadline;
- reduce or increase a price;
- change the scope of work;
- allow payment by instalments;
- introduce a new business partner;
- suspend an obligation; or
- renew the arrangement.
If the original contract is changed informally, the same evidential problems may return.
Any important variation should be recorded in writing and acknowledged by the relevant parties. Even a short supplementary agreement or clearly drafted email is better than relying entirely on memory.
Not Every Agreement Needs to Be Fifty Pages Long
Many SME owners avoid contracts because they associate them with long and complicated legal documents.
A contract should be proportionate to the transaction. A straightforward arrangement may only require a concise document covering the essential commercial terms. A complex joint venture, investment or long-term supply relationship will naturally require more detail.
The objective is not to add unnecessary legal language. It is to record the agreement clearly enough that both parties can understand their rights and responsibilities.
At the very least, business owners should document:
- the identity of the parties;
- the goods, services, funding or opportunity involved;
- the price and payment terms;
- each party’s responsibilities;
- the duration of the arrangement;
- the termination rights; and
- the consequences of non-performance.
Make Documentation Part of Your Business Routine
An agreement is easiest to document when the relationship is good.
Once a disagreement has arisen, every attempt to record the arrangement may be viewed with suspicion. Each party will naturally prefer the version that best protects their own position.
Business owners should therefore make documentation part of their normal operating process:
- issue written quotations and purchase orders;
- confirm important conversations by email or WhatsApp;
- record loans and capital contributions clearly;
- prepare written employment and service agreements;
- document changes to price, scope and deadlines;
- keep signed copies in an organised location; and
- ensure that the person signing has authority to bind the business.
The best time to clarify an agreement is before either party needs to enforce it.
A Contract Can Protect Trust
Many successful business relationships are built on trust. A written contract does not replace that trust.
Instead, it helps preserve it.
When expectations are recorded clearly, both parties know what they have agreed to do. Misunderstandings are less likely to grow into accusations of dishonesty or broken promises.
Trust may be the foundation of a good business relationship. A clear contract helps protect that foundation when circumstances, expectations or people change.
To understand when verbal agreements become legally binding and how Malaysian courts determine whether a contract exists, explore Contract Law in Malaysia: A Practical Guide to Contracts, Agreements and Legal Rights.
