Verbal Agreements: Hidden Costs of Not Writing It Down
As a small business owner have you ever found yourself asking, do I need to commit my new business deal to writing? In most situations, the law does not require a signed agreement for a binding contract to exist. The general rule is that oral contracts are enforceable provided you can demonstrate that an agreement existed and that the agreement involved the exchange of things with value. Common exceptions to this general rule, followed by both Indiana and Michigan, include the requirement that transfers of real estate and agreements which cannot be completed within one year to be committed to writing.
So if your deal doesn’t fall within one of those exceptions, why bother investing time and energy into negotiating deal terms and writing them down? What function do those written agreements gathering dust in your file cabinet serve? Most times, parties to a deal get what they expected to get out of it. In those instances, it doesn’t much matter whether they spent the time to commit the deal to writing. It is when things don’t go as planned and one party doesn’t get what it wanted that the existence of a written agreement becomes important. In those situations, a well-written agreement covering key deal terms acts like an insurance policy.
A written contract should capture the key elements of your business deal. Acknowledging that we all sign boilerplate agreements daily without giving them much thought when we sign on the bottom line we are indicating that we agree to the terms as written or that we can live with the terms as written if we do not take the time to read through them. If a disagreement between the parties to a written agreement should arise at some point in the future, the language in the body of the contract will be strong evidence of what the parties’ agreement was. Absent unusual circumstances, courts tend to enforce contracts as written. By showing deference to the written contract, courts limit the array of issues parties argue about at litigation. This, in turn, helps streamline the resolution of commercial disputes.
With verbal agreements, the party seeking to enforce an agreement must first demonstrate that the elements for the formation a contract exist: a mutual understanding concerning all of the key aspects of the arrangement; and the arrangement involves an exchange between the parties of things with value (e.g., goods, services, cash). Without a written contract to rely on, the party seeking to enforce an oral agreement needs to find other evidence to show the court that the agreement was formed and what the key terms of the agreement were. Compiling this sort of evidence is time-consuming and susceptible to a rebuttal from a party seeking to avoid enforcement. Making and supporting arguments for the enforcement of verbal agreements are time-consuming (which translates to expensive) and the outcomes of those arguments are uncertain. With a written contract, the dispute is often confined to what the proper reading of certain key language might be.
Not every business deal needs to be committed to writing. But if an arrangement is important enough to your business that you would consider litigation if you didn’t get what you expected from it, then a written agreement serves an important function. The upfront costs (in time, aggravation and expense) are offset by the protection you will have purchased should a dispute arise in the future. Finally, if your business involves entering into similar arrangements with others, the time and money spent on one agreement will help to lower the costs of negotiating future deals.
Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.