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ORAL OR VERBAL
CONTRACT: WORTH THE PAPER IT IS WRITTEN ON?
Introduction:
To the surprise of
many of the citizens of California, oral or verbal contracts can be
fully enforceable in this State in many circumstances. The California
Civil Code specifically prohibits certain contracts from being oral-they
must be in writing. But, with those exceptions noted below, a verbal
contract can be enforced in this State.
Before proceeding
further with this Article, the reader should review our article on
Contracts
on this Web Site to get the basic law for what constitutes the
requirements for a contract and should also review our article on
Fraud.
The problem with any
oral contract is that the terms must be proven by oral testimony rather
than with a clear written document and people often have different
recollections about what was agreed-or lie. It is axiomatic that it
takes twice as long and costs three times as much to prove the terms of
an oral contract rather than a written contract. A written contract is
ALWAYS preferable to an oral one.
But that does not
mean that oral contracts are not enforceable in many cases-merely harder
to prove.
In certain instances
oral contracts are explicitly prohibited and without a writing the
courts will not enforce them. Those are discussed below.
The issue of an oral
contract’s enforceability should not be confused with the PAROL EVIDENCE
RULE which is a rule of evidence indicating when oral testimony can be
used to prove or disprove a writing.
Another difference
to keep in mind is “express contracts” which are verbally agreed upon
contracts, and “implied contracts” which are those inferred by the
conduct of the parties. Civil Code Section 1619 states,
1619. A contract is
either express or implied.
1620. An express contract
is one, the terms of which are stated in words.
1621. An implied contract
is one, the existence and terms of which are manifested by conduct.
What is “conduct?” It can be any action
or inaction which proves to a judge or jury that an understanding had
been reached. An example would be if I paint your house after you have
provided to me the paint, tools and access and told your wife that you
were intending to pay me the going rate. (An oral contract would be you
told me you were going to pay me the going rate and I verbally agreed.)
Basic Law of Oral
Contracts
California law normally allows oral
contracts. At Civil Code Section 1622 (hereafter “CC”) we read:
1622. All contracts
may be oral, except such as are specially required by statute to be in
writing.
Further, if a party tricks another into
not having a written contract, a verbal contract may be enforced even
when normally required to be in writing.
1623. Where a contract,
which is required by law to be in writing, is prevented from being put
into writing by the fraud of a party thereto, any other party who is by
such fraud led to believe that it is in writing, and acts upon such
belief to his prejudice, may enforce it against the fraudulent party.
And those contracts that must be in
writing are specifically listed at CC 1624:
1624. (a) The following
contracts are invalid, unless they, or some note or memorandum thereof,
are in writing and subscribed by the party to be charged or by the
party's agent:
(1) An agreement that
by its terms is not to be performed within a year from the making
thereof.
(2) A special promise
to answer for the debt, default, or miscarriage of another, except in
the cases provided for in Section 2794.
(3) An agreement for
the leasing for a longer period than one year, or for the sale of real
property, or of an interest therein; such an agreement, if made by an
agent of the party sought to be charged, is invalid, unless the
authority of the agent is in writing, subscribed by the party sought to
be charged.
(4) An agreement
authorizing or employing an agent, broker, or any other person to
purchase or sell real estate, or to lease real estate for a longer
period than one year, or to procure, introduce, or find a purchaser or
seller of real estate or a lessee or lessor of real estate where the
lease is for a longer period than one year, for compensation or a
commission.
(5) An agreement that
by its terms is not to be performed during the lifetime of the promisor.
(6) An agreement by a
purchaser of real property to pay an indebtedness secured by a mortgage
or deed of trust upon the property purchased, unless assumption of the
indebtedness by the purchaser is specifically provided for in the
conveyance of the property.
(7) A contract,
promise, undertaking, or commitment to loan money or to grant or extend
credit, in an amount greater than one hundred thousand dollars
($100,000), not primarily for personal, family, or household purposes,
made by a person engaged in the business of lending or arranging for the
lending of money or extending credit.
For purposes of this
section, a contract, promise, undertaking or commitment to loan money
secured solely by residential property consisting of one to four
dwelling units shall be deemed to be for personal, family, or household
purposes.
The above basic law has many exceptions
often obtained by special interests or by unique requirements of the
markets. For instance, various oral contracts are allowed for sale of
commodities and precious metals orally, currency options, etc. See
subsection b of the above Section which provides,
b) Notwithstanding
paragraph (1) of subdivision (a):
(1) An agreement or
contract that is valid in other respects and is otherwise enforceable is
not invalid for lack of a note, memorandum, or other writing and is
enforceable by way of action or defense, provided that the agreement or
contract is a qualified financial contract as defined in paragraph (2)
and (A) there is, as provided in paragraph (3), sufficient evidence to
indicate that a contract has been made or (B) the parties thereto by
means of a prior or subsequent written contract, have agreed to be bound
by the terms of the qualified financial contract from the time they
reached agreement (by telephone, by exchange of electronic messages, or
otherwise) on those terms.
(2) For purposes of
this subdivision, a "qualified financial contract" means an agreement as
to which each party thereto is other than a natural person and that is
any of the following:
(A) For the purchase
and sale of foreign exchange, foreign currency, bullion, coin or
precious metals on a forward, spot, next-day value or other basis.
(B) A contract (other
than a contract for the purchase of a commodity for future delivery on,
or subject to the rules of, a contract market or board of trade) for the
purchase, sale, or transfer of any commodity or any similar good,
article, service, right, or interest that is presently or in the future
becomes the subject of a dealing in the forward contract trade, or any
product or byproduct thereof, with a maturity date more than two days
after the date the contract is entered into.
(C) For the purchase
and sale of currency, or interbank deposits denominated in United States
dollars.
(D) For a currency
option, currency swap, or cross-currency rate swap.
(E) For a commodity
swap or a commodity option (other than an option contract traded on, or
subject to the rules of a contract market or board of trade).
(F) For a rate swap,
basis swap, forward rate transaction, or an interest rate option.
(G) For a
security-index swap or option, or a security or securities price swap or
option.
(H) An agreement that
involves any other similar transaction relating to a price or index
(including, without limitation, any transaction or agreement involving
any combination of the foregoing, any cap, floor, collar, or similar
transaction with respect to a rate, commodity price, commodity index,
security or securities price, security index, other price index, or loan
price).
(I) An option with
respect to any of the foregoing.
Experienced legal advice would be
required to determine if the exception above would apply to the various
types of transactions described. Note that the above subsection would
not apply to the average consumer.
Also note that the law is in flux as to
the enforceability of the types of contracts created by electronic
means. Given the power of the internet and the amount of agreements
made in this form of communication, and the fact that the centuries old
definition of a “writing” has not taken into account electronic
commitments, the following law has been passed to attempt to address the
issues:
CC 1624
(3) There is sufficient
evidence that a contract has been made in any of the following
circumstances:
(A) There is evidence
of an electronic communication (including, without limitation, the
recording of a telephone call or the tangible written text produced by
computer retrieval), admissible in evidence under the laws of this
state, sufficient to indicate that in the communication a contract was
made between the parties.
And note that actions of the Parties
subsequent to the oral contract can enforce a contract often required to
be in writing. At CC 1624 (B) we read that such a contract is
enforceable if
… A confirmation in
writing sufficient to indicate that a contract has been made between the
parties and sufficient against the sender is received by the party
against whom enforcement is sought no later than the fifth business day
after the contract is made (or any other period of time that the parties
may agree in writing) and the sender does not receive, on or before the
third business day after receipt (or the other period of time that the
parties may agree in writing), written objection to a material term of
the confirmation. For purposes of this subparagraph, a confirmation or
an objection thereto is received at the time there has been an actual
receipt by an individual responsible for the transaction or, if earlier,
at the time there has been constructive receipt, which is the time
actual receipt by that individual would have occurred if the receiving
party, as an organization, had exercised reasonable diligence. For the
purposes of this subparagraph, a "business day" is a day on which both
parties are open and transacting business of the kind involved in that
qualified financial contract that is the subject of confirmation.
And if a Party admits that a contract
was made, the requirement of writing can be eliminated. At CC 1624 is
found:
(C) The party against
whom enforcement is sought admits in its pleading, testimony, or
otherwise in court that a contract was made.
And, last, a writing that is not the
contract, but is signed by the party denying it which admits that a
contract has been made, may create a binding contract even if the
underlying contract was verbal:
CC 1624 (D) There is a
note, memorandum, or other writing sufficient to indicate that a
contract has been made, signed by the party against whom enforcement is
sought or by its authorized agent or broker.
The law has have also relaxed the
amount of information required for electronic communications to
constitute a written contract. At CC 1624 the statute provided
For purposes of this
paragraph, evidence of an electronic communication indicating the making
in that communication of a contract, or a confirmation, admission, note,
memorandum, or writing is not insufficient because it omits or
incorrectly states one or more material terms agreed upon, as long as
the evidence provides a reasonable basis for concluding that a contract
was made.
Going further, the law now allows for
electronic signatures on documents creating a written binding contract,
similar to the Federal Law on the same topic and allows computer
information to be formed into a written contract:
CC 1624 (4) For purposes
of this subdivision, the tangible written text produced by telex,
telefacsimile, computer retrieval, or other process by which electronic
signals are transmitted by telephone or otherwise shall constitute a
writing, and any symbol executed or adopted by a party with the present
intention to authenticate a writing shall constitute a signing.
Conclusion:
The above citations are only a small
segment of the copious law and statutes, relating to the enforceability
of verbal contracts in California. Suffice to state that anyone feeling
that a binding verbal agreement may exist should seek competent legal
counsel to determine if that is the case and not assume that only a
writing can bind the parties even in those areas normally required to be
in writing.
Courts dislike fraud and are inclined
to enforce contracts if they feel that one of the parties somehow
“fooled” the other side into relying on a promise. As seen in our
article on
Contracts, such concepts as waiver and promissory
estoppel can be invoked to create a binding agreement even if the
formalities are not adhered to.
Which is not to say that one should opt
for oral contracts. A writing is always better and the cost and turmoil
of attempting to enforce a verbal agreement are quickly evident. Such
useful clauses as providing for
arbitration and mediation
or attorneys fees to the prevailing party can be inserted in a written
contract and cannot be enforced in an oral contract.
And certain types of contracts
involving real estate or guaranties are extremely difficult if not
impossible to enforce absent a writing, even with all the exceptions
noted above.
Get it in writing if you can. If you no
longer can, do not give up until you have consulted with experienced
counsel.
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