Why should you use a written contract?

March 29, 2018 - Posted by: admin - In category:

taxes - No Responses

Afterall, aren’t verbal agreements enforceable? 

The short answer to that second question is yes (sometimes).  Verbal agreements can be legally enforceable, but such enforcement is often quite difficult.  Therefore, even though you CAN enforce a verbal agreement, at least some of the time, I would suggest that in many business transactions, you do not want to rely on an oral agreement or a “handshake deal.”

We have all played the telephone game: you know, that game played at parties where people are gathered in a circle, one person whispers a message in the ear of the person next to them, that person repeats what he/she heard in the ear of the next person and so forth until the last person in the chain finally says something totally unrelated at the very end.  What makes that game so popular is the reality that very often, what one person says and what another hears are two very different things.  When it comes to verbal agreements, the same realities apply.  This can lead to passionate arguments made under oath in a courtroom, where one party to a verbal agreement claims the terms were A, B, and C, while the other party strongly asserts terms of X, Y, and Z.  Again, it is very often the case that what one person says and what another person hears and remembers are very different things.  Thankfully, written agreements were invented centuries ago and have been invaluable tools of business and commerce ever since.

In many respects, paper and coin currency is perhaps the oldest and most prevalent example of a “written” contract.  How so?  Well, if we could all be trusted to remember and honor verbal agreements, we could just “agree” that I have a certain amount of “credit” in my financial account and when I purchase something from you, I am transferring to you an agreed amount of my credit in exchange for goods received.  Since that idea of verbal currency/accounting must have proven to be totally unreliable long, long ago, our ancestors invented currency and accounting and bank ledgers (among other things).  Further, since a great many commercial arrangements call for more than just an immediate exchange of currency for goods or services, the written agreement also came into being.  The point is that at some level, namely, when it comes to our banking and spending, we all recognize the necessity of a “written” agreement.

Am I, therefore, suggesting that nobody can ever be trusted to honor their verbal agreement?  No, that would be very skeptical to suggest something like that.  However, I am proposing that each of us consider that much of the time, when someone gives us their verbal promise to do or not to do something, we should approach such situation with the mindset that if the promise-maker fails to perform, we will be left with the choice of simply walking away from that arrangement empty-handed OR seeking enforcement of a verbal agreement through messy, long and expensive litigation.  Since it will almost never make sense to choose the messy litigation option, we, therefore, should recognize that when we rely on verbal agreements, we are doing so at our own risk.  Many people are happy to accept such risk, and there is a plentitude of scenarios where this is prudent.  On the other hand, when it comes to business transactions among unrelated third parties, it will rarely be wise to take the “oh well, I can just walk away with nothing” approach.  Therefore, using a written contract is the best approach about 99% of the time when it comes to business matters.  While this may seem pretty straightforward (i.e., almost everyone reading this will nod their head and say “of course, that is obvious,” for various reasons), a shockingly high percentage of people and businesses elect to rely on verbal understandings even when it comes to matters involving lots of money.

Leave a Reply