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Are Verbal Contracts Legal?

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  • Business people often make handshake agreements. But are these agreements really legal? They may be legal, depending on the circumstances, but they may not be helpful if the agreement must be taken to court. Here's a story to illustrate:

    A Business Story:

    Jim and Carter agree on a barter arrangement. Jim will maintain the landscaping around Carter's dental office and Carter will do Jim's dental work. They agree to an amount of work that each will do, roughly equal amounts on both sides. Jim makes an appointment with Carter and has his dental work done. He shows up one day to work on the landscaping, goes home after an hour, and never shows up again. Later Carter hears that Jim has declared bankruptcy. Can Carter sue Jim? Sure. But the bigger question is whether he can win a lawsuit against Jim. Carter may be able to recover his money from Jim, but maybe not, especially if there is a bankruptcy in process.

    Legal vs. Enforceable.

    The simple answer to the question, "Are verbal contracts legal?" is: "Yes, in many cases. But..." Most types of contracts don't have to be in writing, and it is not illegal to enter into a verbal business contract unless the nature of the contract itself is illegal (as in a contract for illegal drugs). But that's not the problem. 

    Sure, it's legal, but is it enforceable? That is, can the verbal contract be upheld in a court of law? A verbal contract is difficult for a court to uphold because it turns into "he said/she said." There is no way for either side to prove their version of the contract. A written contract, on the other hand, can stand by itself. While there may be issues of ambiguity and incompleteness  in a written contract, it's much easier for a court to deal with a document that says:

    "Jim promises to maintain the landscaping around Carter's dental office, including x, y, and z work for up to $x in value. Carter promises to do Jim's dental work for up to $y in value."

    If either party defaults on the contract terms, that is, fails to live up to his part of the contract, the court can give the judgment to the other party.

    Some contracts must be in writing.

    Each state has a Statute of Frauds that describes the types of contracts that must be in writing in order for them to be enforceable. The most common list of contracts that must be in writing includes:

    • Contracts to answer to a creditor for the debt of another (as an executor for a will, for example)
    • Contracts relating to marriage (prenuptial agreements, for example)
    • Contracts for the sale of real estate or relating to an interest in real property
    • Contracts not to be performed within one year.

    In years past, it was common to have business agreements which were sealed with just a handshake. For better or worse, those times are past. It is best in every case to write up some kind of simple contract, even when you think "Well, this is silly." As I always say, "If it isn't in writing, it doesn't exist." Or, as Sam Goldwyn said, "A verbal contract isn't worth the paper it's printed on."

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