Oral contract

An oral contract is a contract, the terms of which have been agreed by spoken communication. This is in contrast to a written contract, where the contract is a written document. There may be written, or other physical evidence, of an oral contract – for example where the parties write down what they have agreed – but the contract itself is not a written one.

In general, oral contracts are just as valid as written ones, but some jurisdictions either require a contract to be in writing in certain circumstances (for example where real property is being conveyed), or that a contract be evidenced in writing (although the contract itself may be oral). An example of the latter is the requirement that a contract of guarantee be evidenced in writing, which is found in the Statute of Frauds.

Similarly, the limitation period prescribed for an action may be shorter for an oral contract than it is for a written one.

The term verbal contract is sometimes used as a synonym for oral contract. However, since the term verbal could also mean just using words in addition to using spoken words, the term oral contract should be preferred when maximum clarity is desired. [1]

Texaco vs. Pennzoil case

Samuel Goldwyn said, "An oral contract is as good as the paper it's written on,"[2] but this is often not the case. The vast majority of transactions among individuals and between people and merchant companies are, in fact, the execution of oral contracts.

Oral contracts, when made correctly before witnesses, can be enforced. For example, in 1984, after Getty Oil was sold to Pennzoil in a handshake deal, which is legally binding under New York law, Texaco made a higher offer, and the company was sold to Texaco. (Even though the case was tried in Texas, New York law applied.) Pennzoil filed a lawsuit alleging tortious interference with the oral contract, which the court upheld and awarded $11.1 billion in damages, later reduced to $9.1 billion (but increased again by interest and penalties).[3]

See also

• Parol evidence rule
• Statute of frauds

References

1. Contract Law - An Introduction, Expert Law
2. Thorpe, C. P.; Thorpe, Chris P.; Bailey, John C. L. (1999). Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements & Promises. Kogan Page Publishers. p. 72. ISBN 978-0749428426. Retrieved 2013-11-04.
3. pennzoil V Texaco