Back in the good old days, it used to be said – for certain trustworthy individuals – that “their word was their bond.” Even today, people still use this phrase to describe someone’s credibility and respectful nature. But in our modern-day, more complex and litigious society, does a person’s word still count for anything today?
Rustin Smith, an attorney with the regional law firm of Stewart Melvin & Frost, is a Gainesville native who formerly worked with the local District Attorney’s office. Today, his area of specialized practice consists of both litigation and transactional matters, with a focus on real estate litigation, contract disputes, personal injury, and creditor claims. Rustin offers some insight on this question.
Question: Most people would assume that unless you have a signed contract, that a “deal is not a deal’ – particularly in today’s world. Is that true?
Rustin: Actually, that’s not the general rule of law. Believe it or not, even today, in many instances the old saying that “your word is your bond” still holds water under the law.
There have even been a few highly publicized court cases involving “oral contracts.” Back in 1993, you may recall that actress Kim Basinger was sued by a movie production company after she backed out of a verbal agreement to star in the film, “Boxing Helena.” A jury eventually sided with the movie producers and awarded them $8 million in damages. The actress eventually had to file bankruptcy.
In another example of a high-stakes “gentlemen’s agreement” at the corporate level, representatives of Getty Oil made a handshake deal to sell their company to Pennzoil back in 1984. Shortly afterward, Texaco came in with a higher offer, and Getty Oil changed its mind, reneging on their deal with Pennzoil. This led to a lawsuit filed by Pennzoil alleging “tortious interference with an oral contract.” The court agreed and awarded Pennzoil more than $11 billion in damages.
Question: So, what does the law say about so-called “oral contracts”? Is any handshake deal valid under the law?
Rustin: In general, the answer is yes. The courts do recognize that oral contracts are just as valid as written and signed contracts. But there are a few catches.
First, the laws regarding oral contracts, known as “Statute of Frauds,” vary from state to state, and they do exclude certain types of agreements. For example, one type of agreement that requires a signed contract is the purchase of land. If you make a handshake deal to buy someone’s land, and then the owner turns around and sells the land to someone else, you won’t be able to enforce your handshake deal in court. That’s because a lawsuit based on an oral agreement in a land purchase is barred by the Statute of Frauds.
Another example is the sale of goods which is covered by the Uniform Commercial Code. A spoken agreement to buy something for $500 or more is not enforceable in court unless you have something written down and it also must be signed
For example, let’s say you place an oral order over the phone for radios in the amount of $1,000 and the seller fails to deliver the radios. You cannot sue the seller because the contract was not in writing and was not signed. Of course, there are some exceptions such as if you pay for the goods in advance. Or if both parties qualify as “merchants”, meaning they have particular knowledge about the type of goods sold, the rules are more relaxed and one party can just confirm the order by sending the other party a written confirmation.
Question: If you do have an oral contract or handshake deal with someone, wouldn’t it be difficult to prove?
Rustin: Yes, and that is why it is better if you have something in writing if at all possible. Otherwise, you can spend a lot of money in court trying to make a case that can be proven only with testimony, which will be contradicted by the other side. And you will have the burden of proof.
At the same time, people should still be aware of the enforceability of oral contracts, which obviously have gone the other way involving millions of dollars of damages in cases like I cited earlier.
And in my own practice, for example, I have seen verbal contract disputes in the construction industry between contractors and subcontractors. In some cases, these agreements can be enforced because they involve services, not goods.
So, the bottom line is you need to either be careful what you say or commit to in a business agreement, or make sure you have the agreement in writing especially if it involves a lot of money.
One other interesting note: Technology has played a big role in recent years in the enforceability of verbal agreements. If you can provide e-mails or phone-text messages, for instance, that demonstrate an agreement between two parties, those digital communications can be used in court to uphold your verbal agreement even without a formal contract.