I'm Confused About Oral Contracts. Are They Binding?

Oral contracts can be as binding as written contracts. But without a written record, it can difficult to prove what you have agreed to. If your deal goes south, you may be endlessly chasing the truth. Make it easy on yourself and write up an agreement.

Often parties enter into agreements

that are partially oral and partially written, based on a handshake and a few letters or memos that may indicate some of the aspects of the agreement without actually being contracts themselves. In this case, the "agreement" is contained partly in the oral agreement and partly in the letters and memos. Put all the information relating to your agreement in one place -- a single, clear and complete written contract.

Some oral contracts are legally unenforceable. These four types of contracts, which involve a high risk of fraud, typically must be in writing by law. They are:

Contracts for the sale or purchase of land

Contracts for the sale or purchase of goods priced at $500 or more (with a few significant exceptions)

Marital settlement or prenuptial contracts

Contracts that cannot be performed within one year of the time the contract is made

I've found that most of the time clients don't have a good reason for not putting together a written contract. If you choose to use an oral contract based on one of the following rationalizations, perhaps you should reconsider your decision:

I'm too busy to write it down. A legal battle over your oral contract will take much more time than putting together a written contract.

The other party won't agree to put it in writing. Reconsider your relationship. The world is full of honest people, and none of them mind putting what they promise in writing.

I trust the other party. Don't base any business decision solely on trust.

The deal is too complicated to write down. Odds are that it is not too complicated; you just don't understand it. Take the time to write out the deal and hash out any unclear points with the other party as you go along. If you don't understand the deal, how will a judge or jury understand it when you try to enforce it?

It's a great deal for me -- I don't want the other party to think it through too much. Chances are that the other guy is thinking the same thing about you. If the deal is such a great deal, make sure that it's enforceable.

For more information, check out the Contracts Center at AllBusiness.com. Copyright by Richard D. Harroch. All Rights Reserved.