Oral Contracts

February 1, 2020 12:27 am Published by

Do Oral Contracts Carry Any Weight

If you’ve watched TV judge shows like “Judge Judy” you know that if you ever loan someone money or make any sort of deal you should have a written contract. This seems to be common sense, yet many people still make oral agreements and then end up on these shows looking for damages to be awarded.
So, is it foolish to make an oral agreement? Can these “gentleman’s agreements” be binding?
Historically, oral contracts were the norm, not the exception. In ancient times, personal honor was highly prized. For a gentleman, his word was supposed to be his bond. This was part of the chivalric code and it was considered shameful for a noble person to violate a promise. Shakespeare refers to this in his plays and legal proceedings from courts such as the Old Bailey refer to this.
Since even those who were not formally “gentlemen” wanted to be considered honorable, this system of oral contracts was actually practiced by all ranks of society. It also made sense for the lower classes in other ways. Since they were often not literate, they could not draw up a contract. They were also often too poor to afford an attorney.
When European settlers came to America, they brought these traditions with them. On the frontier, it was often hard to find a lawyer to draw up a contract; therefore, the honor code would often suffice and oral agreements were common.
Generally, the final step to these verbal agreements was a handshake. It acted as the signature on a written contract, making the agreement binding. Because of this, these contracts would sometimes be referred to as handshake agreements.
The handshake, like the honor code, dates back to ancient times. At one point, men would clasp each other’s wrists to ensure that the other person wasn’t hiding a knife up their sleeve. Over time, this evolved into a modern handshake.
For generations this was the way business was commonly conducted in places from the wild frontier to urban landscapes and even European courts. While nowadays large corporations have teams of legal experts and contracts are carefully crafted to allow for every eventuality, oral agreements are still considered a valid form of contract and are legally binding as long as they can be proven.
Of course, this was always the case, even in ancient times. While an ideal man, according to the old honor codes, would keep his promise even without any witnesses, in reality, then as now, people can and did renege. Therefore, even then there were courts to enforce contracts.
Ultimately a contract can only be enforced if it can be proven in court. In court, the word of one person against another is not sufficient.

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Anyone who has watched courtroom dramas on TV or the various judge shows knows this. If two parties agree to something, even if the judge believes one party over the other, without any other evidence, no judgment will be awarded. Therefore, it is important when making an oral contract that the people involved take some precautions, such as getting witnesses or having corroborating paperwork. This is a drawback to an oral agreement that does not exist with a written contract.
Yet despite this, many oral agreements and “handshake deals” continue to be made even in modern times.
An example, there was the Gentleman’s Agreement between the United States and Japan in 1907. At the time, there was a great deal of anti-immigrant bias against people from Asia. Japan did not want to be targeted by something similar to the Chinese Exclusion Act. That legislation formally prevented the immigration of Chinese laborers to the United States. Additionally, however, it discriminated against the Chinese in many areas of life. Rather than asking Congress to pass formal legislation, President Theodore Roosevelt reached a gentleman’s agreement with the Japanese government.
Japan agreed not to issue passports for Japanese citizens who wished to work in the continental United States while the Americans agreed to accept those Japanese who were already residing in the United States and to allow them to bring over family members. Additionally, Japanese children would not face discrimination in California schools. This verbal contract worked because the Japanese government had a strong desire for their people to be treated as equals in America and President Roosevelt had a positive opinion of the Japanese and wanted an alternative to more punitive legislation against them.
Even today, rich and powerful people such as Bill Clinton, Bill Gates, Steve Jobs, and Newt Gingrich have all made deals that started off as oral contracts. However, they later turned those gentleman’s agreements into written contracts and filed the proper legal paperwork.
There are several reasons for this. Writing down the terms of a contract not only makes it easier to enforce but also clarifies the terms of the deal. It makes it easier to keep track of details and prevents misunderstandings. By writing down the terms, it’s easier to make sure that all parties are agreed upon their responsibilities. It also ensures that everyone knows what they are entailed to receive from the other parties.
For this reason, while you still often have, for example, two friends tinkering over a new invention in a garage or a few people who form a band manages their business without any formal agreement, once they start to make money, they will want to draft a contract. This isn’t just to split the profits fairly but also because, as time goes on, the complexity of their jobs may increase. To prevent conflict, it’s important to know who is responsible for what.
This is why everyone advises you to put it in writing even if it’s just a simple deal between friends. It’s not due to a lack of trust, but to increase clarity.

Should You Start with an Oral Contract?

There is nothing wrong with simply having an oral contract to start with when you make an agreement with a friend, and then draft a written contract when the time is right. And there are cases where the court system has awarded judgments based on oral contracts.
For example, in the 1990s, when actress Kim Basinger reneged on her agreement to star in the Jennifer Lynch movie “Boxing Helena”, the producers took the actress to court. The jury in that situation decided they deserved $8 million in compensation. While the actress later appealed this decision, she was still forced to settle.
One important aspect of this case was that the producers could prove that Ms. Basinger had caused them to suffer financial loss when she backed out of her agreement. This is something to be aware of not simply with oral contracts but with any such agreement – even if one party violates the terms, if there have been no provable negative consequences based on this action, then there will be no compensation awarded.
Therefore, if you decide to create an oral agreement with someone, be aware that if they renege and you sue them, you will not just have to prove the existence of such a contract but also that you suffered a loss in order to be awarded a settlement.
If you decide this is the way you want to go, we would advise you to make sure you have a few witnesses. What you don’t want to happen – going to court with only your word against someone else’s. You don’t want he says/she says situation. As long as you have at least a handful of people who are willing to swear under oath that you took part in the agreement, you are covered.
What if you’ve made an oral agreement and you didn’t have any witnesses? Well, one way to give it teeth is to immediately put your words into action. If, according to the deal, you were supposed to provide something of value, then put in the work necessary to make your half of the bargain a reality. Make sure that your partner is doing the same, as this will add legitimacy to the deal and will provide evidence that it occurred.
The problem is, of course, if you start to make your side of the bargain happen but the other party does not.
What do you do if you had a verbal contract without any witnesses and where the other party is not providing evidence through their actions that a deal was made?
You do have the option, in this case, of trying to find supporting materials that will back up your claim. For example, did the other party send you a text message that seems to support your claim? Any and all written correspondence between you and the other party is legally admissible in court. If it’s sent via certified mail, that is even better. But letters, emails, texts, faxes, and receipts can all be used to help back up your claims that there was, indeed, an agreement made.
Of course, none of this is necessary if you make an agreement and both you and the other entity are happy with the outcome. If both parties do what they said they would, then there is no reason they’d end up in court. But if your partner reneges, you may have to take them to court, and for this reason, it’s a good idea to try to have a backup from the beginning.
To prevent an unhappy situation, it’s best to have a written contract. However, if there is a reason you can’t draw up such a document, at least try to have witnesses to a verbal agreement. If that is not possible, then having other types of verification is a good idea. For example, if you are making an agreement with a friend you could ask them to write a “thank you” letter acknowledging the terms and have them email this letter to you. An email will provide a timestamp that can be used to verify the date of the agreement if that is necessary. While the person sending you the “thank you” letter can think of it simply as a polite gesture, it is also a piece of evidence that can be used if necessary.
Because of how difficult it can be to enforce the terms of an oral contract unless there are witnesses or several pieces of corroborating evidence, it is usually best to only use such a verbal agreement for a simple transaction, or for a deal where the cost is very low if the other party reneges. For example, if you loan a friend $20 and they fail to pay you back, it’s not that big a deal. Or if you offer to trade someone your frequent flyer miles in exchange for them paying for the rental car when you go on vacation.
For more complex deals or for agreements involving more money, it’s better to use a written agreement. This is not due to a lack of trust so much as clarity. When things become complex, it’s good to have all the terms clearly defined and agreed upon. As anyone who has played the telephone game knows, words can sometimes be confusing.
You might say something to a friend and they might hear something slightly different. This might not cause a problem when it comes to a small transaction or a simple one, but for larger, more complex deals – even a small misunderstanding can grow into something that can lead to hard feelings.
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