Debunking Myths About Oral Contracts

Most people who go into business with a partner do so with someone they know. It’s a daunting prospect to launch a new enterprise, logistically and financially, so it’s natural to team up with people you have some reason to trust, such as family members, friends, or members of your community. Unfortunately, when people go into business relying on their personal ties, they sometimes overlook the kind of legal safeguards they might use to protect themselves under different circumstances.


The most common pitfall is relying on verbal agreements instead of recording the terms of a business arrangement in writing. Written contracts clarify the terms of the deal and commit all parties to honoring the agreement in ways that can protect you, your assets, your hard work, and the personal relationships that led you to work together in the first place. No matter how much you think you know someone, there is always room for disagreement and misunderstanding if you don’t formalize your arrangements in writing, and trying to prove your side of a dispute without written documentation can be difficult if not impossible.


Is An Oral Contract Legally Binding?

The short answer is yes. The more accurate answer, however, is: yes, but only if you can prove that it happened. Most oral contracts take place very informally. For low-stakes arrangements like loaning a friend a small amount of money, a “handshake agreement” might be enough to seal the deal, but in the context of running a business, relying on someone’s word can quickly spiral into real trouble.


The worst calls we get are from people we can’t help because they have no documentation to support their claims. Some sold their business assets to a friend or fronted money for a purchase, which was never repaid. Some were promised future ownership in exchange for their labor or management rights in exchange for an investment, which never happened. Most often, the wronged party is someone who has discovered that their trusted partner made serious mistakes or even engaged in financial misconduct for which they now have to answer because they have nothing in writing to protect their interests. Having everything in writing means not having to prove that the agreement existed and what the terms of the agreement were should you ever find yourself in a dispute.


What Agreements Must Always Be In Writing?

Because verbal contracts are so difficult to prove, California law actually requires most contracts to be in writing. This includes but is not limited to:


  • The sale of real estate
  • The sale of goods over a certain amount (usually $500 or more)
  • Agreements that cannot be performed within one year of the agreement date
  • Transfer of ownership for patents and copyrights
  • Sale of stocks, bonds, or debt
  • Marriage and divorce agreements


What Should I Do If I Have Already Entered An Oral Contract?

It’s a good idea to document the terms of the agreement as best you can, e.g. by email or letter, but the best thing to do is consult with legal counsel. By their nature, verbal contracts are usually vague in ways that can easily hurt you, and do-it-yourself written agreements sometimes aren’t much better. A good attorney can help you assess your situation and take effective steps to protect yourself.


At Integrated General Counsel, P.C., our team is experienced in all aspects of contract law. If you have any concerns about the agreements underlying your business operations, contact our office online or call (925) 399-1529 (1LAW) for a free consultation.

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