Hollywood Producer Sam Goldwyn is famous for saying, "Verbal contracts aren't worth the paper they are printed on." This dictum about contracts being in writing is true. While a contract doesn't always need to be in writing, some contracts do. A verbal contract may be legal (an implied contract, for example), but it certainly isn't smart.
A case in point: An independent contractor (Joe Martin) made a verbal agreement with a company executive (Xyz Company) to package and ship their products. The company would send the bills and collect the money. The verbal agreement between Joe and the Xyz Company executive included the understanding that Joe would not be responsible for collecting sales tax on the products sold. Joe shipped the products and Xyz company collected the money, but they didn't collect the sales tax. Then they claimed that Joe owed over $25,000 in sales taxes they said he was supposed to collect. The executive had left the company, so there was no one to confirm the understanding.
Without a written contract, Joe has no way to verify the understanding.
Why Business Contracts Must Be in Writing
1. People forget.
2. People disappear.
3. People lie.
4. People misunderstand.
And some contracts must be in writing by law (state laws).
Written Contracts and the Statute of Frauds
Each U.S. state has laws to prevent fraud in contracts, by setting specific types of contracts that must be in writing. These laws are called a Statute of Frauds, and they require certain kinds of contracts to be set out in writing and signed by the parties to the contract.
Types of Contracts That Must Be in Writing
The types of contracts that fall under the statute of frauds requirements vary by state. The most common types of contracts that must be in writing are:
- Contracts for the sale or transfer of an interest in land, and
- A contract that cannot be performed within one year of the making (in other words, a long-term contract like a mortgage).
Other types of contracts that must be in writing in some states are:
- A contract for the sale of goods valued at $500 or more
- A contract of an executor or administrator to answer for a decedent's debt
- A contract to guarantee the debt or duty of another (as a co-signer, for example), and
- A contract made in consideration of marriage – a prenuptial (before marriage) agreement, for example.
As you can see, most types of business contracts fit into these categories. So most contracts need to be in writing.
You can find Statutes of Frauds provisions in the Uniform Commercial Code (UCC) for each state. The state UCC laws regulate sales of personal property and other business transactions, like borrowing money, leasing equipment, signing contracts, and selling goods.
What Does "In Writing" Mean?
In order to satisfy the statute of frauds, the written document must contain all of these elements:
- Identity of the parties to the agreement
- Identification of the subject matter (what's being bought and sold, for example)
- Terms and conditions of the agreement
- identification of the consideration (what's being given in exchange for the subject, like money), and
- the signature of the party being sued.
The signature must be from the person being sued, not the person bringing the suit. The signature confirms that the person understood the terms of the transaction.
Common examples of acceptable documents would be an invoice, bill of sale, or a check.
Exceptions to the Statute of Frauds
Some exceptions to requiring that contracts be in writing are:
Partial performance. If a buyer has accepted part of the property and paid for it, and if the parties can't be returned to their pre-contract positions, a court may order specific performance - to perform as promised.
Promissory estoppel. In contract law, a party may recover on the basis of a promise if the party's reliance on that promise was reasonable and caused a problem. It's used in cases when there isn't an explicit (written) assumption that is enforceable.
Disclaimer: Statute of Frauds laws are complicated. If you have a question about a contract, check with an attorney about the law in your state.
"GET IT IN WRITING. If it isn't in writing, it doesn't exist."