Saturday, 22 March 2008

WRONG: A verbal contract isn't worth the paper it's written on

Verbal contracts probably aren’t what you think they are – the term actually covers any agreement made in words, spoken or written. (You can have non-verbal contracts. For example, a visit to the dentist involves an implied – but unspoken and unwritten – contract to pay him or her for the agony provided.) What people usually mean by the phrase is oral contracts, which can be worth a great deal of paper, as Texaco discovered to their cost in 1985.

The oil giant had its eye on Getty Oil, the company that made legendary billionaire J Paul Getty famous. J Paul’s son Gordon had made an oral deal to sell the business to Pennzoil, but reneged when Texaco offered a better price. The courts agreed with Pennzoil that Texaco had interfered unfairly, and awarded the Pennsylvania company $11.1 billion, the biggest-ever settlement at the time. Texaco began bankruptcy proceedings and were only rescued when Pennzoil agreed to settle for $3 billion. (Getty, meanwhile, suffered not at all for being a cheeky swine.)

Oral contracts are just as binding as written ones, but harder to enforce if one party is willing to perjure themselves to deny the agreement took place. If both sides acknowledge the substance of the conversation, however, then by law they are obliged to honour it (unless they settle, of course – ie they both agree to drop it, usually as a result of money changing hands).

Defining the substance of an oral contract is problematic too, however – the creator of social networking website Facebook was sued by his college roommates, who claimed he reneged on a deal to work with them on their similar site. The judge said “dormroom chit-chat does not make a contract." (Under UK law, the “chit-chat” would have had to qualify as an “intention to create legal relations”.) The reason people generally prefer written contracts – and the reason written contracts have such tortured language – is so that both sides can, in theory, be under no illusions about what they are agreeing to. Though anyone who’s waded through the small print of any financial product would have cause to disagree.

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