Business Law: A Simple Solution to Verbal Agreements

By Nina L. Kaufman, Esq

A simple solution? Who says there’s a problem with verbal agreements? As a lawyer who has had to litigate contract cases involving verbal agreements, I say, “I do.”

Do you remember playing the game “telephone” as a kid? Where you are supposed to repeat the exact phrase that the person on your left whispers into your ear to the person on your right? I have vivid memories of being at summer camp, sitting in a large circle with 27 other eight-year-olds . . . the counselor would kick off the round with “Farmer Jones has a donkey.” By the time it made its way around the circle, the phrase became, “My gym partner is a monkey.” And that was one of the more accurate results!

Why does that happen? Are eight-year-olds that incapable of repeating a simple phrase? No – it’s that other things intervene. We were sitting in a field where a tractor was grinding nearby. Maybe someone didn’t hear the phrase accurately. Or maybe one of the kids deliberately wanted to change the phrase. After all, “Farmer Jones is a monkey” is a lot funnier than “Farmer Jones has a donkey.” Or maybe there were distractions (we hear all about ADD nowadays, don’t we?) . . . so by the time one child had to repeat the phrase to the next one, she didn’t remember it correctly.

What does this tell us about verbal agreements in a business context?
1. They can involve misunderstandings
2. They are not easy to prove
3. Memories are fallible

As a result, any one of these areas can create a contentious "he said, she said" situation if your respective memories don't agree. And these are the "honest mistakes." While it’s nice to want to think that “your word is your bond,” not everyone operates that way. Verbal agreements give you little defense against . . .

Verbal agreements give you little defense against those who would actively seek to "burn" you, if that's the scheming way they choose to conduct their business. Also, when your clients are located across state lines (let alone across the street), business can become more complicated. Where will you resolve disputes? Whose law will apply? These are issues that can add significant cost to a lawsuit, and which a “handshake deal” will not address.

Verbal agreements can be especially dangerous where personal relationships are involved. If a friend loans you money for your business and you have different recollections about what needs to be repaid and by when, you’re potentially jeopardizing both the business relationship and the friendship. Similarly, you don’t want the discussion of “when will my deadbeat sister get around to repaying my money?” to become the focus of Thanksgiving dinner. Friends and family are not necessarily “on your wavelength” merely because of the closeness of the relationship. In fact, it’s a time to be extra vigilant, because there’s more at stake.

So what’s the solution to verbal agreements? Simple: put it in writing. A written agreement ensures that you and the other party are – literally! – on the same page. When you see it in black-and-white, you have the opportunity to say, “Hey! I didn’t agree to that!” well before you get too far into the business relationship. And better yet, when you spell out exactly what you intend to do, how you will be compensated, and what happens in the event of a dispute, you can avoid any complications from selective, fallible, or faulty memory.

© 2004-2009 The Legal Edge LLC. Nina L. Kaufman, Esq. is an award-winning business attorney, author, and speaker. Under her Ask The Business Lawyer umbrella, Nina offers easy-to-understand business law resources that protect small businesses and save them money. To learn more, and receive our FREE "LexAppeal" ezine, visit http://www.GreatBusinessLawTips.com  or contact Contact Us. This article is for your general information only. Be sure to consult with an attorney regarding your particular situation to make sure you get the specific advice you need.

Nina Kaufman, Esq. Award Winning Business Lawyer, Author & Speaker