What Kinds of Business Contracts Must Be in Writing?
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.
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.
Since I'm not an attorney, I didn't give him legal advice, but I can say that without a contract it's going to take a lot more time ... and money ... for Joe to attempt to prove he wasn't responsible for collecting the sales tax.
Taking a Contract to Court
The main reason a contract must be in writing is that the terms of the contract might have to be taken to court. With an unwritten contract, all the court can do is listen to the testimony of the parties about what happened and what they remember that they agreed to. It becomes a "he said/she said" situation.
On the other hand, if the terms of a contract are in writing, the court interprets the validity of the contract then looks at the written terms. A document that the court can deal with and review is much easier in a legal case.
Hanna Hasi-Kelchner at AllBusiness says that contracts must be in writing to make them "stick." This is a great metaphor; if a contract "sticks" it means it can stand up in court In the case above, the contract might not "stick" because the parties can't prove what was agreed to.
Why Business Agreements 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
To prevent fraud in contracts, here are some specific types of contracts that must be in writing, according to the statute of frauds.
The Statute of Frauds refers to statutory provisions (laws) that require certain kinds of contracts to be set out in writing in order for them to be enforceable. The original statute of frauds was developed in England in the 17th century, declaring that certain contracts would not be legally enforceable if they were not committed to writing and signed by the parties involved. The purpose of the statute, as the name implies, is to limit cases of fraud in unwritten contracts.
Types of Contracts That Must Be in Writing
The statute varies by state, so check your state's laws. These types of contracts usually include:
· Contracts for the sale or transfer of an interest in land
· A contract that cannot be performed within one year of the making (in other words, a long-term contract like a mortgage)
· 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, and
· A contract made in consideration of marriage a prenuptial agreement, for example)
As you can see, most types of business contracts fit into these categories. So most contracts need to be in writing.
Making a Contract with a Minor - Written or Not
Even if you make a contract and put it in writing, it may still not hold up in court. For example, a written contract with a minor (someone under legal age, depending on the state) is still not a valid contract, because the minor can decide not to honor the terms of the contract and there's nothing you can do about it.
In other words, you can't rely on a verbal contract. A verbal contract may be legal (an implied contract, for example), but it certainly isn't smart. As I always say, "GET IT IN WRITING. If it isn't in writing, it doesn't exist."