“But, we had a deal!” Not a phrase that generally leads to anything but wasted time and energy. Do you know what really leads to an enforceable contract, and what’s relegated to unenforceable business contemplation?
Some agreements must be in writing in order to be enforceable because of what’s referred to as the “Statute of Frauds.” However, except for the special circumstances handled by this rule, agreements do not need to be written down (much less signed) to be enforced. Oral contracts are just as ‘real’ as written ones.
A contract is formed when there is an offer, an acceptance and a meeting of the minds between the parties. The offer must be definite enough to “invite” acceptance, and consideration (goods, money, effort, etc) must be exchanged by both parties. Of course, this is VERY broad, and there are untold nuances and exceptions under the law. However, the bottom line is your business practices could be creating enforceable oral contracts you do not intend.
So, what should you do?
- Put agreements in writing;
- In your negotiations, make it clear that there is no agreement until it is signed by both parties;
- Label all drafts “DRAFT” and add a footer that it is not binding until signed;
- Actively tell the other party that they should not rely on the possible agreement until it is signed (i.e. buy goods or equipment to fulfill the contract); and
- Rectify any misunderstandings quickly.
Failure to realize when you’ve made an oral contract can have significant consequences. A subsequent signed contract often cannot be used to add any terms. Your carefully crafted contract may be thrown out or just used to interpret the terms of the oral agreement. What’s worse, to prove the oral contract both sides will engage in a battle of witness statements and affidavits – a very messy situation indeed.