The Single Most Important Thing to Know about Verbal Agreements

How many times have we run afoul of film producer Samuel Goldwyn’s famous maxim: “A verbal contract isn’t worth the paper it’s written on”? (I’ve certainly done it). And yet, isn’t life nicer, simpler when you don’t have to worry about creating a paper trail? Why not just trust the people you’re doing business with? Isn’t my word my bond?

“Jared” had had the same attitude. Jared is an easy-going computer geek, more interested in creative problem-solving for his tech support clients than printing out every possible piece of paper to cross “t”s and dot “i”s. That said, Jared had a written lease for his office space, under which he was responsible for paying his share of real estate taxes. Last year, the taxes skyrocketed. So when he received the bill, he called the landlord (a college classmate) to work out a payment plan, instead of paying the taxes in a lump sum. Because they were friends, Jared didn’t confirm his agreement in writing, thinking the landlord agreed to the arrangement. Yet months later, the landlord imposed late fees for the delayed payments, and Jared faced fines totaling several thousand dollars. Ouch!

Agreements do not always have to be in writing to be binding and enforceable. But the most important thing to remember about verbal agreements is this:

For verbal agreements to work, they require the complete, accurate, and fair memory of both sides.

Which, in reality, rarely happens. Memories are selective. And fallible. And faulty. Have you ever had a client who ignored your advice, made a mistake, and then blamed you for not telling her about the potential pitfalls? Welcome to selective memory. A vendor who provided you with thirty (30) items instead of the thirty-eight (38) you needed? Hello, fallibility. People remember what they want to remember, which usually is not in your favor. Ever had trouble remembering the name of someone you met repeatedly at networking events? You can thank your faulty brain cells.

There are a number of significant deal points that Jared and his clients might recall differently, because of selective, fallible, or faulty memory, such as:

1. The number of hours of computer tech services that Jared would provide
2. How much time Jared would have to respond to a technology “emergency”
3. How much Jared would be paid and within what time frame
4. Whether an agreement would automatically renew unless cancelled within a particular time frame
5. Whether there would be penalties for non-payment
6. Whether, as with the landlord, they decided to make any changes to their previously agreed-upon relationship
7. If there were any special arrangements that were not standard in the industry, such as the whether and how much interest Jared wanted to charge on outstanding balances
8. How you would handle disputes, if any arose

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.” 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.

Finally, don’t ignore the costs to your personal relationships if you are doing business with family or friends, as Jared did. People tend to take for granted that their friends and relatives are “on their wavelength” when it comes to doing business. Especially with closer relationships, do not assume anything. Be extra careful to treat the deal like you were working with a stranger. What you risk is not only the deterioration of the business relationship, but the personal one as well. That’s a high price to pay, when it could have been solved easily and wisely by putting pen to paper.

© 2005 Wise Counsel Press LLC. Nina L. Kaufman, Esq., is a small business attorney and the founder of Wise Counsel Press LLC, which offers easy-to-understand legal strategies that protect small businesses and save them money… wisely. To learn more, and to sign up for their FREE how-to articles and FREE audio class, visit http://www.WiseCounselPress.com.

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