You may have heard the general rule that oral contracts are binding, but there are exceptions. It can be tricky to know when an oral contract is sufficient and when a written contract is required. This article outlines the exceptions to the general rule that oral contracts are binding, and provides some food for thought on situations in which oral contracts are binding. A caveat, however, is that each court makes case-by-case decisions, and the rules for oral contracts may not always play out exactly as planned. It is ALWAYS best to get a written agreement if possible. Often, however, this question arises after a dispute concerning an oral contract.
The central legal concept when discussing the validity of oral contracts is the "Statute of Frauds". This is an old legal term that basically dictates what types of contracts must be in writing in order to be valid. The rule is intended to avoid situations where fraud could easily result if oral contracts were allowed. Contracts that are unenforceable unless in writing, and are said to "fall within the Statute of Frauds", can be divided into the five categories below. Be aware that each category has much more specific rules and state case law and this list is intended only as a general outline.
Uniform Commercial Code (UCC) contracts- A contract for the sale of goods for a price of $500 or more.A contract that could not possibly be completed in less than one year.A contract for the sale of an interest in land.A contract to pay the debt or answer for the duty of another (Suretyship/ Executor).A contract made upon consideration of marriage.
These categories point out that the situations in which a written contract is required can come up quite often in a wide variety of business transactions. The first three categories alone cover a large number of common transactions. Any time there is a sale of goods over $500 that falls within the UCC, any contract that could not be performed in less than one year, and any contract for the sale of land must be in writing in order to be binding. The other two also come up, but not as often.
The Real World of Oral Contracts
Some people make a major error when thinking about whether or not to rely on an oral contract. What does "enforceable" actually mean in a real-life situation? Even oral contracts that are legally enforceable are difficult to enforce if a dispute ever arises. Perhaps a hypothetical situation will illustrate the point. If Albert agrees to paint Bella's house for $1,000, fails to do so, and admits in open court that the contract was agreed upon just as Bella says, then Bella would win the lawsuit because the oral contract is enforceable. In reality, this situation rarely plays out. Oral agreements are inherently vague. People often assume that the other party knows what they want or expect. When a dispute arises, people often remember and repeat the oral conversation differently in which the terms were discussed. Sometimes this is because they simply forget, and sometimes they lie to save their skin. The ultimate dispute is reduced to nothing more than a he-said, she-said swearing match. The point is this: whether or not a situation could be covered by an oral agreement, it does not mean that it should be. Contracts should be in writing in order to ensure that both parties know they have the same understanding and expectations, and to make any possible dispute resolvable in a much faster and simpler fashion. In fact, having the agreement in writing can often avoid the need for costly litigation and encourage parties to find common ground. At the beginning of a business agreement, almost everyone thinks that it will go smoothly and no dispute will occur, and they are usually right. But out of those countless blissful business beginnings, disputes do happen. If you have failed to get the agreement in writing simply because an oral contract is "enforceable", you are much less likely to win the dispute.
Some might argue, "I will lose business if I seem like I am trying to push someone into signing a contract." The truth is that the vast majority of legitimate businesses will sign an agreement, especially if they understand that its purpose is to clarify the roles of each party and to protect both parties. Generally, a party who refuses to sign any type of written agreement in a transaction is a walking red flag and is probably not worth the risk. Losing that kind of business can save yours.
When considering a business transaction or agreement, it is essential to use experienced and knowledgeable attorneys to draft these documents so that the agreements will hold up in court if challenged. Further, if a dispute arises concerning an oral or a written contract, you will need attorneys that are very familiar with commercial and civil litigation. The attorneys at Gunderson, Denton & Peterson can provide the solid legal advice and services that will allow you to sleep well knowing you are protected and well-represented.
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