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Is A Business Verbal Agreement Enforceable?

By Business Contracts, Business Lawyer

Is A Business Verbal Agreement EnforceableWhen you reach an agreement but don’t reduce it to writing, it’s commonly known as a “gentleman’s agreement.” This type of handshake deal occurs all of the time. But is a verbal agreement enforceable as if it were a written contract?

Like many areas of law, the answer is “it depends.” And often it’s a fact-specific inquiry.

Statute of Frauds

Certain types of contracts are required to be in writing by the statute of frauds and other law. For example, a real estate sales contract.

Related Resource: Free Business Contracts Management Spreadsheet

The writing requirement is designed to prevent fraud and reduce the likelihood that you’ll end up in court in an expensive protracted lawsuit based on fading memories of who agreed to what in an alleged verbal agreement.

Promissory Estoppel And Detrimental Reliance

There are ways to enforce a verbal contract if you can prove certain things. For example, under the concept of promissory estoppel, if you can show you relied to your detriment on the other party’s promise, you may be able to enforce an oral contract.

How does that work?

Let’s say you verbally agreed to buy a company car. Your business paid for the vehicle but the seller refuses to give you the car keys or transfer the title to your company. Detrimental reliance could be shown by evidence your business paid the seller.

Related Article: Is Your Business Using Legally Binding Contracts?

Or you accepted a verbal offer of employment from Apple, shut down your startup, sold your home, and moved across the country at your own expense to start the new job. However, upon arrival, the business that made you the oral employment offer changes its mind and you’re now unemployed. You can show detrimental reliance with evidence you shut down your business, relocated, etc. based on the promise of new employment.

Course Of Dealing Can Make A Verbal Agreement Enforceable

Repetitive behavior in business deals with the other party, known as “course of dealing,” can be used in some instances to make a verbal contract enforceable.

Let’s say you’ve been supplying the other party with 10,000 widgets per month based on a handshake deal you made two years ago. Agreed upon Net 30 payment terms have always been met. Yet the other party suddenly decides Net 180 are the new payment terms and will only buy 5,000 widgets per month at a price that wipes out your profit. Your course of dealing can be evidence used to enforce the gentleman’s agreement.

How To Prevent This Problem In The First Place

If you’re trying to make a verbal agreement enforceable, chances are you’re either heading to court or alternative dispute resolution (mediation, arbitration, etc.). That costs you a lot in time and money even if you have the evidence you need to prove your case.

The solution is to use professionally prepared written business contracts. As Dallas Business Lawyer Mike Young likes to point out, Benjamin Franklin was right when he said that an ounce of prevention is worth a pound of cure.

If you need a written business agreement, check out our firm’s Business Contracts Legal Protection Package.

Gentleman’s Agreement: How to Avoid Getting Screwed

By Business Lawyer

gentleman's agreementWhether by handshake or an email that says “It’s a deal,” business owners often get into legal trouble because of a gentleman’s agreement (a.k.a. gentlemen’s agreement).

What is a Gentleman’s Agreement?

A gentleman’s agreement is an agreement which is not an agreement, made between two people neither of whom are gentlemen, whereby each expects the other to be strictly bound without himself being bound at all.” – Sir Harry Vaisey

Despite Judge Vaisey’s cynical description of such an agreement, most informal deals are entered into in good faith between small business owners who want to get things done without the time and cost of retaining a qualified business lawyer to paper the deal as a legally binding contract.

Related Article: Can A Job Interview Form A Verbal Employment Agreement?

Donald Trump and the Art of the Handshake Deal

If you’ve read “The Art of the Deal” by Donald Trump or “Trump-Style Negotiation” by The Trump Organization’s senior legal counsel, George H. Ross, you’ll know that Trump will often shake hands on a verbal gentlemen’s agreement with another party.

However, Trump will then turn the deal over to Ross or another business lawyer to draft the contract that reflected the terms agreed to between the parties.

Words Have Different Meanings

So what’s wrong with just getting things done without a written contract in place?

Spoken words often have a different meaning to the listener than to the speaker. For example, if you’re buying a shipment of smart phones and tell the supplier that you need them a.s.a.p., you might mean delivery next week. However, the seller could interpret “as soon as possible” to be three months from now when he gets his next shipment from China.

Memories Fade

As pointed out by successful entrepreneur and author Harvey Mackay, “[p]ale ink is better than the most retentive memory.”

Unless the verbal agreement is performed within the space of a few hours, memories of what was agreed to will fade. That leads to misunderstandings and frequently lawsuits alleging breach of contract, bad faith, fraud, etc.

Honesty and the Verbal Agreement

Some contend that if both parties are honest, then there’s really no need for a written agreement because they’ll each endeavor to do what’s right.

Yet how can you tell? When it comes to deciding whether to enter into an oral B2B contract, there’s no acid test for honesty.

Better to get it in writing so there are remedies in place if the other party turns out to be a crook and a liar.

Preventing Misunderstanding of Your Gentlemen’s Agreement

Benjamin Franklin was right when he said that an ounce of prevention was worth a pound of cure. This is particularly true when preventing an expensive lawsuit or a bad business deal by taking a little time to get an oral gentleman’s agreement converted to a writing signed by the parties.

Related Article: How To Pick The Right Internet Lawyer For Your Business

According to Internet Lawyer Mike Young, you can protect yourself by having a qualified attorney prepare a written contract that accurately reflects the gentleman’s agreement both parties verbally agreed to with regard to price, quantity, time, location of performance, and dispute resolution.

Related Resource: Business Contract Legal Protection Package