Oral contracts are just as valid and enforceable as written agreements, provided they meet the basic elements of a valid contract, the High court has ruled.
In a ruling arising from a dispute between two Indian businessmen, Mohanpal Singh Bharj and Hitesh Mahendra Mehta, over a loan of Shs 270 million, justice Patience Rubagumya affirmed that the absence of a written agreement does not invalidate a contract if all essential elements are present.
“For a contract to be valid and legally enforceable, there must be capacity to contract, intention to contract, consensus ad idem (a meeting of the minds), valuable consideration, legality of purpose, and sufficient certainty of terms,” Rubagumya stated.
The case stemmed from a lawsuit filed by Mohanpal, who claimed that he had advanced Shs 270 million to Hitesh as a friendly loan, which the latter had refused to repay. The transaction, he said, was not documented in writing but was made in good faith.
In his defence, Hitesh argued that the money in question was not a loan but part of his professional payment as Mohanpal’s tax agent. He claimed that Mohanpal had agreed to pay him Shs 550 million in total, of which Shs 270 million had been paid.
He further contended that the law prohibits enforcement of oral loan agreements exceeding 25 currency points (Shs 500,000), insisting instead that Mohanpal owed him Shs 280 million in unpaid professional fees.
However, Mohanpal maintained that he had already paid $9,440 as tax agency fees and that the Shs 270 million was indeed a loan. In her judgment, Rubagumya held that where all the ingredients of a valid contract are established and the agreement has been partially performed, even an oral contract exceeding 25 currency points can be deemed valid, binding, and enforceable.
“It is undisputed that the plaintiff transferred the sum of Shs 270 million to the defendant. Whatever agreement the parties entered into cannot be invalidated merely because it was not reduced into writing,” the judge ruled.
She noted that Hitesh himself admitted during cross-examination that the money had been deposited into his personal account, unlike his professional fees, which were typically paid to the account.
He also told the court that the money was paid to his personal account to avoid taxation, an assertion the judge found inconsistent with his claim that the amount was professional fees. Rubagumya concluded that, on the balance of probabilities, the Shs 270 million had indeed been advanced as a loan, and therefore ordered Hitesh to repay the amount with 10 per cent annual interest until full payment.
The court further awarded Shs 20 million in general damages, with interest at 6 per cent per annum, and granted costs of the suit to Mohanpal.
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