Are Oral Agreements Legal?
Business people commonly make deals based on a handshake. After all, who needs more than “my word is my bond” to trust that the other guy intends to honor his promise? Handshake deals are even more common between good friends or relatives. Sometimes, maybe even the majority of times, these informal arrangements work out just fine and everyone makes millions. But, sometimes they don’t. Then what?
First of all, you should know that oral agreements are almost always legal and enforceable. California law requires certain types of agreements to be in the form of a written agreement, like the sale of real estate. But, generally, oral agreements of all kinds are legal.
Side Effects & Symptoms of Oral Contracts
Nonetheless, oral agreements present many difficulties. The most obvious of which is ambiguity regarding to what you actually agreed. In other words, the process of writing out an agreement – especially with the help of an attorney – causes the parties to think about various issues that might arise and then address them. For instance, good friends often form partnerships like a yogurt shop or software firm, and the only things they discuss are what each of them will contribute (e.g., “I’ll put up $20,000 and you do the inventing”) and how they’ll share profits (e.g., 50:50). Dozens of other likely or even unlikely issues are never discussed and, of course, never the subject of agreement.
So, what if the company suffers a loss and the company doesn’t have enough money to pay creditors – who pays? What if one partner wants to sell out to a stranger – does the remaining partner have to accept a stranger as his new partner? What if the worker bee partner gets a divorce and has to devote more time to his kids and less to his work – how does that affect the agreement and what will they do to get the work done?
Another big problem with oral agreements is that usually people don’t communicate very well. Partner A hears or believes they agreed to X but Partner B believes they agreed to Y. This misunderstanding comes out six months or 2 years later when the company is very profitable or losing money. Because of the misunderstanding, the partners become angry with and distrustful of each other. So, chances of a peaceful resolution go out the door.
Agreements without Written Contract
These are only a few examples of the problems with an oral contract. Though these contracts are fully enforceable, no one can predict what a court will determine to be the actual agreement, and the road to a conclusion is likely to be difficult, expensive and full of anxiety.
Are you convinced that it’s much better to spend a little money and take the time to formalize all of your agreements? If you’re not, ask a friend who’s been through litigation over an oral agreement how she liked the process. I’m sure you’ll see the light then.