When 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.
