An Oral Contract is Generally Worth the Paper It’s Printed On

It’s one of those things that you’ve probably been told a million times since childhood – “Oral contracts are perfectly valid, and we have a deal.” While the first part of that sentence is generally true, it is not always so, and evidentiary issues make proving the facts behind the second part difficult. Starting with the general rule – If the agreement includes everything necessary for a contract to be formed (i.e., offer, acceptance, consideration, capacity, and legality), then it makes no difference legally whether that agreement was a gentleman’s oral agreement or a complex document prepared by skilled lawyers.

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Description automatically generated with low confidenceOf course, as is typical in the law, there are exceptions to that general rule. One of the most exceptions is Statute of Frauds.[1] The Statute of Frauds requires that certain contracts be in writing and signed by the parties in order to be legally binding. While there are a number of these types of contracts, the most common ones are contracts affecting interests in real estate, sales of goods, and family law (including trusts and wills). You cannot sell your raw land in Dallas based on an oral agreement, nor can you lease your residence in Houston for more than 1 year without a written agreement. You can, however, lease either for less than a year with an oral agreement. This Statute also applies to any sale of goods worth over $500, the sale of securities, any agreement that conveys commissions on the purchase or sale of oil or gas royalties must also be in writing, and many other transactions.[2]

Family law is found throughout the statute of frauds in Texas. All trusts and wills must be in writing in Texas. Imagine the divergent stories the beneficiaries would claim in a will dispute without a written will. Marriages must also be recorded in writing, even if it seems a bit strange to think about marriage as a contract.[3] Other aspects of the statute are more specific and less important. They may not deserve discussion here, but they may impact the whether your agreement is legally binding if you fail to consider these specific provisions of Texas law. If contracts governed by the statue of frauds aren’t in writing (and signed), courts will not consider them to be contracts, and you may lose critical rights simply by failing to put them in writing.

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The other major issue with oral contracts is evidence, or lack thereof. If there is no document that has been carefully crafted to fully and accurately reflect the parties’ intent, both sides will have major hurdles in establishing the actual terms of their agreement if a dispute arises. No matter how clear the facts may seem at onset, complex business transactions can lead to a ‘he said/she said’ situation, where a court essentially will make its best guess of key contract terms in an effort to discern what the parties’ meant at the time they signed the contract. No one wants to leave the fate of their agreement to the judgement of a person who knows only what is admitted into evidence court, which is often contradictory and lacks nuance and background, even in the hands of the best attorneys. Even more troubling is the possibility that evidentiary rules, like the four corners doctrine, the hearsay rule and the payrole evidence rule may bar significant background or supporting witnesses from testifying regarding existence and terms of the oral agreement.

If there is a written agreement between the parties, a court will only consider that written document in assessing the validity of the contract. In other words, no testimony will be allowed to either party testify that “What I really meant to say there was…”. In the case of an oral agreement, your testimony will be filled with your side of what was said and what was done, but so will the other party’s, and that can put you in a very precarious place. That’s why a lot of lawyers use this axiom – “An oral contract is worth the paper it’s printed on.”

Consider the case of Harun v. Rashid [4], where Rashid financed a restaurant with Harun operating it. No written partnership agreements existed. Once the restaurant became successful, Harun locked Rashid out and claimed that there was no partnership at all. The Houston Court of Appeals disagreed. Beyond the contract damages awarded to Rashid ($72,000), the Court awarded attorney fees of nearly $80,000! While Rashid ultimately got some or all of what he had agreed to, he got it only after a long trial and appeal process. If the agreement had been written, 1) the parties could have clearly understood the terms and avoided the dispute altogether, 2) a court could have more easily resolved the dispute if there was a disagreement about the written terms, and 3) the parties could have saved a lot of time, mental energy, and attorneys’ fees at the end by incurring much lesser fees at the front end of the deal. Obviously, both parties would have benefited from competent legal representation during the contracting phase.

Before you engage in a commercial or business transaction that matters to you, it’s best to have a lawyer work with you during the process of writing down your agreements and reviewing agreements presented to you.

[1] Tex. Bus. & Com. Code § 26.01

[2] Tex. Bus. & Comm Code §§ 2.201, 26.01(b)

[3] However, under certain circumstances, Texans may establish a marriage under the common law without a written document. Tex. Fam. Code § 2.401.

[4] No. 05-16-00584-CV, 2018 Tex. App. LEXIS 231

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