When Oral Agreements Go Awry (or Who Needs a Written Agreement?)
Some time ago, our office conducted a survey that indicated that the majority of those surveyed believed that contracts and agreements were very different legal documents, with entirely different purposes, and that contracts were “more legal” than agreements. Actually, “Contracts” and “Agreements” are two names for more or less the same thing: an understanding between two (or more) people—whether oral or written—in which each party “promises” to do something with or for the other, or others. As long as the promises (and the surrounding circumstances) remain fairly simple, an oral (sometimes called "verbal") understanding may be a workable option. Unfortunately,however,, circumstances, nowadays are seldom simple.
The days of the “gentlemen’s agreement” appear to have all but vanished. Agreements that were once secured with a firm handshake and a square look in the eye may no longer be relied upon in today’s world. For several reasons, if an agreement is not committed to writing, it may very well turn out to be an “untrue” agreement. Every day and countrywide, enormous sums of money are spent on legal fees in an effort to have the courts resolve disputes that might never have arisen had the parties given serious thought to the need to put their agreements in writing. The recognition of this need, unfortunately, occurs too often after the fact. Rather than before. Despite strong evidence supporting the need for written agreements, many small businesses either do not currently enter into them as regularly as they should or do not take them seriously enough to obtain help from a professional in preparing them. For these shortsighted companies, the clock is ticking. Unfortunately, that clock is often connected to a time bomb.
One may one day suddenly find oneself blindsided by a broken oral agreement. If the dispute does not resolve through discussion, the parties may find themselves diverting money away from production and sales to fund a long and costly legal battle in which neither party is likely to emerge as a winner. This is not because oral agreements cannot be legally enforced. Generally, many of them can be. Rather, the cost and frustration are incurred, during litigation, in the course of each party’s attempt to establish the “truth.” Unfortunately, in the case of a disputed oral agreement, “facts” upon which a fair resolution might be reached may be, at best, scarce; and, at worst, impossible to establish.
Often, when faced with a verbal agreement that appears to have been dishonored, there is a consideration that the agreement was intentionally breached. This, however, is not necessarily the case.
Very often, when entering into any agreement, the parties may start with differing viewpoints about what is actually being agreed upon; viewpoints of which the other party may be unaware. When they start with a written agreement, these differences can be more easily brought to light and ironed out as each party reviews the draft and proposes revisions that may more accurately prompt a party’s better understanding of his or her particular desires and expectations. When the points of agreement are not written down, however, differences in perceptions and expectations are more likely to be discovered after the agreement is finalized, rather than before. In such a case, the frustration that each party will feel as he or she seeks to assert his or her interpretation of what the agreement (or important point, or points, of agreement) was will only grow as the parties argue the matter. Because there is no written language to refer to, no definitions to consult, frustration, more often than not turns to anger, and communication breaks down.
We have more than once been called upon to help secure the rights of a party who has fallen into an ugly disagreement with a business associate, someone with whom there had been, prior to the dispute, a warm and close relationship. Periodically, we find ourselves, during after-the-fact discussions about legal rudiments, having to apply the old “napkin lesson” to business people who have felt that they did not need a written agreement because they assumed they could trust themselves and the other party to work things out together as they proceeded toward the objective: We print on a napkin the word “ASSUME” and then fold it in such a way as to illustrate the principle that “assumptions make an ASS of ‘U’ and ME.”
And it is not necessarily because either party enters into such an agreement with the intention to go back on his or her word. Rather, the cost and frustration down the road are incurred in the course of each party’s optimism, of his or her failure to take a moment and consider questions such as: “despite our mutual trust and affinity, what might go wrong? Are there possible future changes in circumstances that might create tension between us and challenge our affinity? If so, what might they be, and how might we best handle these?
The problem seems to particularly arise in the case of two or more people who decide to join in some business venture as “partners,” whether the business entity used is a general partnership, a corporation or a limited liability company, and they never get around to establishing a partnership, shareholders or operating agreement that puts some commonly agreed- upon policy in place.
The issue in these cases is not one of unwarranted trust of another; rather it has to do with the inadvisability of placing one’s trust upon the shifting sands of words that cannot be nailed down for review, and points of consideration that, consequently, cannot be duplicated by the parties. The issue is the needless surrender of prediction. As elsewhere, prediction equals control in the business world, and control leads to success.
There is another important reason, in any venture, for insisting on putting a written agreement in place. That is that the process provides an opportunity to gain advice from someone familiar enough with such relationships to be aware of issues that may arise in the future and able to help plan for them. All too often, this process is set aside out of fear of confronting the cost that may be involved.
The choices are pay now, or pay much more later. What might have been a situation handled by a $1,500 -$2,500-or-less written agreement could turn out to be a $20,000 or more litigation matter. The choice, of course, is up to each of us (at least in this moment of time, while the clock is still only ticking).
Decide now. Make this article your wake up call, and begin the planning that can bring your business relationships more securely under your control today.
 It is easy to understand the confusion between the two terms. The word, “contract,” comes from the Latin word for “transaction,” while the word, “agreement,” is derived from a French phrase meaning “at pleasure.” A “contract” has traditionally meant that sort of agreement that is enforceable under the law, while an “agreement” ranges in meaning from mere mutual understanding to a binding obligation. However, these words are used interchangeably today by attorneys when negotiating a mutual understanding between their clients. Nevertheless, even though most written contracts are referred to within themselves as an “Agreement” (as in, for example, a “Settlement Agreement), the term “contract,” continues to carry with it the idea of something more formally prepared—in writing—while the term “agreement” continues to suggest something more informally arrived at.