Written vs. Oral Contracts In Business Law

Many Oral Contracts May Be Binding, But Take Precautions

There are certain contracts that must be in writing to be enforceable: a contract concerning an interest in real property; an agreement to stand good for the debt or obligation of another person; and an agreement to perform any act or service which cannot be performed within one year or less. Otherwise, oral contracts are usually enforceable. But, oral contracts can present enforcement problems, as illustrated by these true stories.

The Compaq Controversy

A few years ago I was asked to assist in developing a contract to be used in doing business with Compaq Computer Corporation (this was before Compaq was bought by HP). My client had left his salaried position, gone into business for himself, and was anxious to get this project from Compaq. After preparing a simple contract for him I did not hear back for several months. Then, one day he calls and tells me how the written contract was submitted but Compaq never signed it. He had been so interested in adding a feather to his cap he proceeded doing business with Compaq on a verbal basis. The project had a tight deadline and he put a blood and guts effort into the project and incured substantial payables getting it finished. After he successfully completed the project, Compaq refused to pay his final invoice.

This put him in a very bad situation. He owed close to $70,000.00 to subcontractors who had worked on credit based upon their trust and belief in him. Furthermore, there was nothing to compensate himself for all of the many weeks that he spent working on the project. Can you say STRESS?!

Upon review, we discerned that Compaq’s key personnel had been guilty of misrepresentation and fraud in dealing with my client. The agreement was not one that the statute of fraud required to be in writing to be enforceable. When Compaq responded to my demand letter by offering a small fraction of the amount due, we filed a lawsuit. That lawsuit was a full blown “fight to the death” kind of controversy with Compaq, which of course, was represented by a large defense firm here in Houston. After working on the case for 18 months, attorney’s fees had reached about $90,000.00. And even though Compaq’s attorneys had declared they would never agree pay more than $75,000.00 to settle the case, they realized we were serious about trying the case and finally settled just prior to trial.

Although my client made an informed decision to settle instead of trying the case, after paying litigation expenses, attorney’s fees and the subcontractors he owed, there was little left for him, personally. Even though he won, he lost!

An Expensive Mistake

A second story which illustrates the difficulties and expenses which can arise out of not using a written agreement is a case which was recently completed.

Although my client had a preprinted proposal which a prospective customer may sign and convert the proposal into a written contract, he did not use it this time. The homeowner made a down payment and my client installed a nice fence on the homeowner’s property. But, when he went to collect the balance of money due for labor and materials, the homeowner claimed that my client was mistaken about the terms and provisions of their verbal agreement. The homeowner argued that he only owed a small part of the balance due, and then refused to pay even that.

My client came to me and we sent a demand letter, which was ignored. A lawsuit was filed to collect about $2,000.00 and you would think it involved a federal question. The parties have engaged in discovery and my attorney’s fees have far exceeded the original $2,000.00.

Although he prevailed, in the final analysis my client was not a “winner.” Look at the stress and lost production he suffered because he failed to put a simple agreement in writing.

Of course, the moral in both of these stories is to get the agreement in writing. Difficulties definitely arise as a practical matter with oral contracts because controversy frequently develops over the terms of the parties’ agreement. Although litigation still happens when written contracts are used, the controversy usually evolves around disputed facts or the meaning of particular words.