It is surprising how frequently a client will ask if an oral contract is binding.

The answer is “yes”.  You already do it all the time.  And oral contracts are just as binding as written contracts, in the eyes of the law (more on that below).

It is important to understand the advantages and disadvantages of oral vs. written contracts.  But first, it is important to understand the exceptions to the validity of oral contracts.

The principal exception is this: certain types of contracts must be in writing, or they are completely invalid.

This exception to the general rule is a descendant of the English Common Law, and is hundreds of years old.  It is generally referred to as the Statute of Frauds, and you get only one guess as to why it carries that title.

The Statute of Frauds has now been made an integral part of the law in every US state and territory, although the terms may vary slightly from state to state.

In California, the law is contained in Civil Code §1624.  The types of contracts specified in that section, which must not only be in writing but must be signed by the parties (to be valid) are:

• An agreement which is not to be performed within a year.
• Guaranteeing someone else’s debt (e.g., a personal guarantee that a corporate loan will be repaid)
• Real estate sale, or lease for longer than one year
• Listing agreement with a real estate broker
• An agreement that is not intended to be performed during the lifetime of the promisor (that would be called a “will”, with its own formalities)

We’ve omitted other types of contacts from this list, which are encountered with extremely low frequency.  And there are many other types of contracts which must also be in writing, but the requirement is set forth only in the section of the law dealing with that particular type of contract.

For instance, as we’ve noted above, wills must be in writing.  But you won’t find that in the Civil Code!

So, under what circumstances should you take the time and incur the cost to insist on a written contract, even when it is not required by the law?  Here are some major factors to consider.

• When the subject of the contract is very complex and you could be exposed to considerable financial exposure if there’s any misunderstanding or dispute.  While an oral contract is equally binding, “proving its terms” can be a big stumbling block to enforcement if there is a breach.
• When the contract is going to be around for a long time.  If a dispute regarding an oral contract arises a year or two after the contract was entered into, and you and the other party disagree about the terms of the oral contract, we’ve got a problem, Houston!  It’s going to be your word against that of the other party.  Lawyers’ fees and costs are going to skyrocket!
• When the costs are anticipated to be quite considerable.  For instance, when you place a phone order for some new Labor Law posters to be delivered within a week, do you really want to waste time in arranging for a written contract?  On the other hand, if you’re buying a $100,000 machine tool, it doesn’t sound like such a good idea to have the transaction undocumented, without a purchase contract?

At the firms we’ve owned or managed, we generally put the following criteria in place.  Written agreements are required when:

• Specified by the Statute of Frauds or any other statute;
• Not going to be completed within 3-4 months (a “tighter standard” than the Statute of Frauds would require); or
• Involves a company commitment or obligation that is going to cost $X,000 or more.  What’s “X”?  Whatever is appropriate for your particular company, depending on how much risk you are willing to take.  Sometimes this is translated into requiring the boss’s signature on such contracts.

If your company is still very small, you may be doing much of the purchasing yourself, and don’t need formal procedures.  But as soon as you get large enough to have someone else involved in making binding commitments on behalf of your company, it is important to publish a written policy and procedure to guide your staff and help protect the company’s assets from improper demands.

 

Spring is coming, what better time than to make sure that your business complies with corporate formalities. Don’t let a creditor pierce the corporate veil. Contact ISLLP to put together your 2012 annual board and shareholder minutes.

Neither snow nor rain nor heat nor gloom of night stays these legislators from the swift completion of their appointed lawmaking tasks.

Whoops! That’s too much like the US Postal Service’s slogan as inscribed on a New York Post Office. But perhaps there is something to it: both organizations seem to spend a lot of our money with the primary purpose of retaining their jobs, rather than improving the service level provided to ordinary citizens and the small businesses they own and manage.

Last time we recall checking, the number of new laws adopted by the California Legislature each year generally approaches and sometimes exceeds 1,000. So let’s take a look at just those related to Labor Law.

Here’s the list of areas in which there are significant new laws effective in 2013.

• Religion and Reasonable Accommodation
• Sex Discrimination and Breastfeeding
• Social Media and Personal Passwords
• Inspection of Personnel Records
• Itemized Wage Statements for Temporary Service Employers
• Penalties for Wage Statement Violations
• Commission Agreements
• Fixed Salaries and Overtime
• Wage Garnishment
• Human Trafficking Posting
• Workers’ Compensation Reform
• Accessibility Reform
• FEHC Eliminated, Duties Transferred to the DFEH
• Intellectual Disabilities
• Unemployment Insurance: Overpayment and Penalties
• Prevailing Wage
• Farm Labor Contractors
• Warehouse Workers

Many of them will have no significant effect on your business. But it’s an educated guess to say that every business with more than 4-5 employees is likely to be affected by at least some of these laws.

What continually amazes me is how legislators expect and effectively burden the average small business owner to learn all this “new stuff” each year, to avoid exposing himself to the peril of suffering penalties which can be rather draconian, even for small errors.

We have available a 3-page memo published by the California Chamber of Commerce that provides a sentence or two of description about the above topics. Copies available on request … let us know if you’d like a copy emailed to you. Please use the Contact Us inquiry form on this web site to submit your request. Those descriptions may help you learn if you need to do more digging to see which laws might affect you.

This section of our web site, which is changed every month or two to provide new information, provides advisory information for owners, managers and professional staff of small to medium size businesses. Legal News & Tips deals with real-world issues and problems you’re likely to encounter, including issues related to general business transactions, employment law, financial and accounting matters, business practices, distribution and marketing.

Legal News & Tips focuses primarily on the California business environment, and laws affecting the operation of California businesses. The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.