"Oral Contracts Are Not Worth the Paper They're Written On"
(Old Legal Saying)

Most people will acknowledge, on a philosophical level, that a person's word is their bond. Traditional business people often speak of the days when business was conducted "with a handshake," and reminisce about kinder, gentler times, when it was possible to rely on a verbal representation. The same people, when asked about a business transaction gone south, will say, however, "It wasn't in writing... I didn't have a contract or anything like that."

In fact, the old days weren't any better (Upton Sinclair didn't write The Jungle because things were grand). The law on verbal contracts has remained essentially unchanged (with certain exceptions) for almost a hundred years. Oral contracts exist, and they are absolutely enforceable.

What has changed is the rate at which people, and in particular people in the construction industry, communicate and do business. Today, the pace of the construction industry requires design professionals to verbally agree to modifications in the scope of a project, or the nature and extent of the job they initially agreed to. This verbal agreement is enforceable. The owner and/or contractor can sue to enforce the agreement. By verbally agreeing to a modification, the design professional expands liability and has little or no extrinsic evidence of the exact nature of the agreement. Although the agreement may have been made in the field or on the phone, the design professional and the owner may have different understandings of what was agreed to. The verbal contract is like superglue — it bonds instantly and without the opportunity for correction. When it comes time to enforce the agreement, the only evidence of a contract is the recollection of the parties, and whatever notes may have been generated as part of the process.

When verbal contracts are not allowed

Legally, the Statute of Frauds, which has been around since the days of powdered wigs and putting people in stocks, requires certain types of contracts be in writing. If you have one of these agreements and it is not in writing, the other party can declare it void. You might think you have a valid, enforceable verbal contract, but if it doesn't meet the Statute of Frauds, it isn't "worth the paper it is written on."

Contracts which must be in writing are:

1. Contracts for goods (i.e., materials) with a value over $500;
2. Contracts for services which cannot be performed within one year; and
3. Land Contracts.

Subsequent modification to contracts, i.e, change orders and supplemental contracts, should be in writing. Avoid incorporating other documents "by reference." If you are in doubt, consult an attorney.

Frequently, the scope of a job will change. Although there is discussion about the possible effects on costs, many construction professionals decide to move forward on a "time and materials" basis. Proceeding in this manner is problematic for two reasons. First, "time and materials" are non-self-defining terms. Parties may have substantially different perceptions of what is needed to complete the job. Second, if you haven't defined payment, attempts to hold a party to the original payment terms will be challenged, because the additional scope isn't supported by additional consideration. In short, one party can't make another party do more on their contract, without expanding their own obligations under the contract. Coming back at the end of the job and holding the other party to the original contract payment terms won't work.

How to avoid problems associated with verbal contracts

1. Require all contracts be in writing;
2. Use form contracts (AIA and AGC both have standard form of contracts);
3. Tailor your contract to the job;
4. Require changes or modifications be in writing;
5. If you are unsure of a contract term, consult an attorney — Never guess about a contract term.

The next time you are involved in negotiating a contract on a project, consider that your word is your bond and, even though it isn't in writing, you will have to live with it.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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