I Thought We Had a Deal
We all heard this before: “In the good old days, we just shook hands and we had a deal.” Today, many people do not believe that a handshake is enough to enter into a contract. In the eyes of the law, however, for most contracts, a handshake or words or conduct indicating that a contract has been made can still be enough. However, there are many good reasons why a contract should always be put in writing.
A contract is a legally enforceable agreement between two or more persons involving mutual promises to do or not to do something. Generally, an oral agreement, so long as it contains the essentials of an enforceable contract, is just as enforceable as a contract etched in stone. The exceptions are those contracts that are subject to the so-called statute of frauds, discussed below, which must be in writing.
The essentials of an enforceable contract are the following:
- The parties must agree what the contract is about (mutual assent);
- The parties to the contract must give up something in order to induce the other party to enter into the contract (give consideration);
- The parties must be legally competent to contract (generally, over 18 years old and not mentally incompetent at the time of the execution of the contract);
- The object to be achieved by the contract must be lawful and not against public policy;
- The contract must require performance within an agreed period of time; and
- The contract must be in the form required by law.
A tremendous amount of business is conducted by means of oral contracts. For instance, if you call a plumber to fix the drainage in your bathtub, you are obligated to pay the plumber for the services he or she performed. This is so, even if you have not signed a written contract that states that you are obligated to pay.
If an oral contract is just as enforceable as a written contract, then why put things in writing? The reason is the difficulty of establishing the existence and the terms of an oral contract and the problem of persuading a court that your version of the facts is the right one. Memories fade, witnesses move away or die, and, unfortunately, some people lie. An oral contract causes no problem as long as all parties are happy with its terms and perform them. But once a dispute arises, the existence and the terms of an oral contract are frequently hard to prove.
On the other hand, most of the time, a writing doesn’t lie. Sure, even a writing can be ambiguous. Sometimes, it can omit certain provisions that the parties wanted to include or misstate a term that the parties agreed upon. But at least it is concrete evidence that the parties intended to form a contract.
In some types of contracts, a writing is an absolute “must.” Without the written agreement, the contract is invalid and will not be enforced by any court. This is so because of the so-called statute of frauds. A more accurate title would have been the “statute to prevent frauds.” The courts thought that certain agreements are so prone to fraud, that a writing was required in order to enforce them. Some examples of such agreements are: (a) an agreement for the sale of land or any interest in land; (b) an agreement that by its terms cannot be performed within one year from the date of the making; (c) a contract that promises something upon someone’s marriage; (d) an agreement by an executor or administrator of an estate to pay the debts of the deceased out of the estate of the executor or administrator; (e) a contract to pay someone else’s debt.
Whether the contract you are about to enter into is or is not covered by the statute of frauds, you should, as a matter of course, put it in writing. You should do so, even if you and the other contracting party are friends and you feel that a handshake is all that is needed. That way, everything that is important to each of you is laid out in the open and everyone knows what the other side expects. Also, third parties will be able to see what the contract is about and will not have to rely on your or the other party’s memory. It will also make it easier if a party other than the original contracting parties wants to enforce the contract. That is the case, for instance, when the contract is assigned to someone else. Lastly, unfortunately, sometimes even the best friends can have a falling out. When that occurs, a written contract will be helpful in resolving any disputes that may arise out of the contract.
We often advise our clients about what provisions they should include in their contracts. Most people, when they negotiate a contract, do not think of provisions that designate the courts in which litigation should be brought or that allow for an award of attorneys fees to the prevailing party in case a lawsuit is brought. However, in hindsight, many people wish they had thought about these provisions.