Some of the worst business disputes I have had to work on ironically involved people who, until that dispute arose, were very close to each other. Those were either close relatives or best friends who did business with each other, such as engaging in a partnership or another form of business venture, who did not feel comfortable asking each other to sign any agreements, and who were proud to agree on everything orally, believing that they will be able to work out any disagreement about their business in the future. 

The above approach to business often backfires and hurts all parties as oral agreements inherently have serious flaws that are bound to give rise to conflicts, fights, disagreements and lawsuits that could have been avoided if a proper written contract was drafted. Most people who enter into an agreement do not plan to deceive, defraud or steal from each other. The most common reason for business disputes is the fact that people simply did not outline and did not agree or reached a mutual understanding on many of the key aspects of their deal. Even the most simple agreement for consulting services is not as simple as it might look at first. For instance, John hired his best friend Brad to perform software consulting services. They agree on the start date and on compensation orally and believe that there is no need to sign any written agreements. Brad quits his job for the better and a higher-paying consulting position. Subsequently, several unexpected events might take place - John might change his mind a few weeks later and decide to not use Brad's services any longer; or Brad's services might prove to be unsatisfactory, or both simply feel that although they get along very well in social situations, they are not working together very well at all.  In this situation, the parties are left without any agreement on how they should go about terminating their relationship. Investing a few hundred dollars in drafting a proper consulting services agreement would have been well worth the effort and the expense.

At a minimum, a consulting services contract would provide for termination terms, any applicable penalties that each party might bear, and basic dispute resolution terms, among other important terms that clarify any possible misunderstanding that may arise between the parties and eliminate many ambiguity that are typical in business agreements.

 
 

We encounter contracts literally every day and much more often that it would at first appear.  Some of the contracts we entered into are obvious such as our residential and commercial lease agreements, purchase receipts with a return policy, while other contracts less apparent, such as statements of terms and disclosures at the back of our bank and credit card statements, and the ever more common "click through" agreements we have to digitally sign when we use various online services.   

What is "contract?"

The term "contract" might sound "self explanatory" and not requiring any special definition. However, it is important to understand the difference between a regular agreement and an actual contract. By definition, a contract is an agreement enforceable in law. That is, if the contract is breached, certain remedies will be available to the aggrieved party that can be recovered through administrative, judicial or alternative resolution system. To illustrate the difference, imagine the following situation: you agree with your friend that you will meet tomorrow at 8 pm near this movie theatre and you will be watching a movie together. Comes 8 pm tomorrow, and your friend doesn't show up. Do you have any rights against your friend? Can you seriously consider suing him? Obviously not. That agreement is not enforceable in law, and no judge will consider this to be a breach of contract that entitles you to recovery. To be a valid contract, it has to create a relationship between parties that is recognized by law and therefore can be enforced.

The second fundamental feature of a valid contract is that it has to contain mutuality of obligations. In other words, both/all parties to a contract must "bargain" for a deal and must give something up that they are entitled to in order to receive the benefit of that bargain. For instance, if a father promises his son that he will buy him a car for his birthday, this promise doesn't form a contract, because while the father "bargained" with his son by imposing upon himself an obligation to buy a car, his son didn't bargain for that offer and didn't agree to provide any benefit to his father in return for the promised car. 

If the son promised to pay his father a certain amount of money of that car, it would clearly create an obligation in the sun to pay and the contract would be formed. But what if the father told his son: "I will buy you a car by the end of the year if you promise not to smoke until then." - at first this doesn't seem to be different from the previous example. However, it is. In this example the obligation is mutual and therefore a contract is formed. Although quitting to smoke might not sound like a significant obligation (certainly not like paying the vehicle's price), it is a valid obligation because the son is about to give up something to what he is legally entitled and is free to do - smoking. 

Are oral contracts valid? 

Generally, it's always a good idea to memorialize the terms of any agreement in writing. This helps avoiding confusion, misunderstanding, lack of clarity in terms and also allows people not to rely on their memory for remembering what they agreed on. 

However, an oral agreement can be a perfectly valid and fully enforceable contract. This is usually the case when the conduct of the parties suggests that they must have had an agreement about their relationship. For instance, if a workers gets hired by his employer without signing any written employment contract or a similar document, a contractual employee-employer relationship is still created. The parties might later disagree about the terms of employment, compensation, etc., but if the employee presents evidence of performing work for the employer, lack of written contract will not relieve the employer from his obligation to pay his employee wages and fulfill other duties of a reasonable employer. 

Certain contracts must be in writing under the "statute of frauds:" the most common are: a transaction for sale of goods totalling over $500, a contract that will necessarily take a year or longer to perform (such as lease agreement for a year or longer), marriage, divorce, land transactions, and a promise to pay for debts of another (surety/loan guarantee). 

Another significant defense available in the absence of actual contract is "promissory estoppel." Under this theory, a party who reasonably relies on the promise of the other party and substantially changes his position to its detriment in reliance to that promise, will be entitled to be compensated for damages sustained if the promise is not upheld by the second party.  For instance, if an East Coast company hires an employee who currently lives on the West coast, and who, in a reasonable reliance to be employed for a certain period of time, quits his job, sells his house, leaves everything behind and moves across the country, he will be entitled to a certain compensation if his prospective East Coast employer changes his mind and doesn't hire him. At a minimum, the worker will have to be compensated for moving and losing wages that he would have reasonably been earning at his prior work place that he quit hoping to get this new job.