Enforcing Verbal Contracts When You Are Self-Employed
When you're self-employed, when you are an entrepreneur or freelancer, you wear a lot of hats: you're the boss, the intern, the accountant, and the brand ambassador. The buck starts and stops with you. Every time you make a promise, quote a price, or sign a deal, you are putting your reputation on the line. And an issue that often comes up is – how do you deal with a verbal contracts and the conflicts that can arise from them?
In the age of instant feedback, a customer who feels betrayed can log on and let loose with blistering speed, blasting your freelance business on Yelp, Facebook, or Angie's List before you can even say, “misunderstanding.”
Legally, verbal contracts are just as valid as written ones. The problem is overcoming the burden of proof…
It's great to be the boss, but be forewarned: bosses take a lot of flack. You're closing deals over the phone, making promises in coffee shops and cars, signing with a handshake rather than a pen—in short, you're moving at the speed of business—but when a deal falls through, you are in the hot seat. And as a solopreneur, you'll have days when you feel like you've got a target on your back. That's why you need to understand your rights and responsibilities when it comes to verbal contracts.
If you have to break a promise, are you liable? If someone makes a verbal promise, is it enforceable? If you have been stiffed by a deceitful client, are you out of luck?
It all depends.
Legally, verbal contracts are normally just as valid as written ones. As with any contract, three things are required to create a contract, verbal or otherwise:
- An offer
- An acceptance of that offer
Consideration is a bargained-for exchange –“I'll do this if you pay me that.”
The real problem is overcoming the burden of proof: if you want to sue for breach of contract, then you'll need to prove that the contract existed in the first place, which can be difficult if the only record is a phone call. Did anybody overhear your agreement? Are there secondary documents to back up your claim? It's tough work to convince a judge with, “he said, she said” arguments, and that's why Samuel Goldwyn famously said, “A verbal contract isn't worth the paper it's written on.”
Did your client really promise ten grand? Of course! But just try and prove it…
Often the best way to prove that you had a verbal contract if in fact you have no physical proof, is in the actions of the parties.
Often the best way to prove that you had a verbal contract if in fact you have no physical proof, is in the actions of the parties. Why did you deliver 1,000 widgets without a written deal? Not to be a nice guy of course, and as such, the logical conclusion is that you must have had a contract to sell the other party 1,000 widgets.
Verbal contracts can be proven by actions, if not written words.
Exceptions, Provisos, and the Fine Print
Any verbal promise to perform a service that you agreed to is a valid contract. However, certain types of contracts must be in writing (called the “statute of frauds,”) and if the contract is not in writing it is not legally valid. For instance, agreements to sell property or real estate, IOUs, and any contract that can't be completed in less than one year all fall under this rule.
Additionally, every state has its own statute of frauds. If you plan on making verbal agreements in the future, it would behoove you to take a few hours to research your state's statutes, and check out some of the info our friends at LegalZoom offer. A penny's worth of research can save you thousands of dollars (two words you never ever want to hear – legal fees!) down the line.
With those provisos in place (get it in writing next time!) there are a few guidelines to follow when making a verbal agreement to ensure that it doesn't boil down to “your word against theirs.”
- Immediately archive and back up all secondary documents such as emails and text messages, quotes, faxes, written correspondence—everything. Even if you don't have the terms of the agreement in writing, these documents could help you overcome the burden of proof
- Make contemporaneous notes of the agreement and keep them
- Send a writing as soon as possible outlining the terms of the agreement as you see it
- Make sure any witnesses to the agreement make note of what was agreed to
It goes without saying: the best way to deal with a botched verbal contract is to avoid the whole mess in the first place. Get it in writing. People remember things differently. People don't remember. People lie. So ask your clients to sign some simple paperwork. This is business, after all, and anyone who balks at written contracts is likely to pull a disappearing act once the bill comes due.
Also, if the project has a fixed fee, insist that your clients pay a portion of the price up front. Again, this is a standard practice. If a client is reluctant to pay a deposit, then you might want to wish them well and send them on their way. The bottom line: try to avoid major disagreements and the desire to sue because in the world of small business, once a disagreement goes to court, both parties tend to lose, regardless of the outcome.