March 21, 2007

What happens when two people shake hands after reaching an agreement and one party fails to perform? Legally, the answer is "that depends." But anyone who has seen the movie Jerry Maguire (1996) too many times to admit knows all too well that the likelihood of recovery founded upon an oral agreement is as speculative as the evidence supporting it—perhaps nonexistent.

In Jerry Maguire, Tom Cruise plays the title role, a sports agent who secures the representation (and importantly, entitlement to a commission) of a quarterback who is expected to enter the NFL as the number one draft pick. Maguire seals the deal with the quarterback's father and manager, who refuses to memorialize the agreement in writing. Instead, he says, shaking Maguire's hand, "What you do have is my whole word, and it's stronger than oak." On the night of the NFL draft, Maguire's handshake deal falls apart when the quarterback "signs" with a rival agent. Shamed and embarrassed, Maguire extricates himself from the situation without a fight, stating, "I'm still sort of moved by your 'My word is stronger than oak' thing."

Perhaps Hollywood exaggerates the shame and embarrassment that result from an oral agreement gone sour. After all, Cruise's character did not dare draw attention to his pitfalls by bringing a lawsuit. In the real world, however, a multi-million-dollar judgment could be quite comforting and, arguably, build character too.

When Is an Oral Agreement Sufficient?

Although nothing can replace an executed, well-written contract, an oral agreement sometimes warrants the business risk, especially if a significant deal would not move forward otherwise. In those instances, it is important to leave a paper trail and gather as much evidence as possible regarding the existence and terms of the verbal contract. E-mails, written notes, invoices, pictures and witnesses, for example, are all very helpful. But even more critical is knowing how your particular type of oral agreement stacks up against the applicable statute of frauds.

For example, the Illinois statute of frauds (740 ILCS 80/2) generally requires the following common types of contracts (among others) to be memorialized in writing in order to be enforceable: (1) any contract for the sale of lands; and (2) any contract for a longer term than one year. There are, of course, exceptions, including the judicially created exclusion for "contracts of uncertain duration." In an effort to significantly narrow the application of the statute, many courts have interpreted the timing requirement to mean "not capable of being performed" within one year. These cases hold that if performance is possible within one year according to the terms of the contract, then a written contract is not required. This applies even if performance is unlikely during that time frame.

What does this mean for your verbal contract? If the statute of frauds does not require it to be memorialized in writing, then the oral agreement is enforceable. And when the other party fails to perform, hope there is enough evidence for a judge to (1) find that the other party breached the oral agreement; and (2) show you the money.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.