Avoid Traps from Contract Writing Requirements

Let’s now move on to our last element to determining whether there is a valid contract, and that is the very important question of whether the contract must be in writing. This sounds like a fairly simple question, but there are a lot of subtleties related to this question, and fundamentally, the question is must the agreement be in writing, and there are two basic situations. First of all, there is the situation where it is in writing. And second, there’s a situation where it is not in writing. And if it isn’t in writing, there are two sub-questions. Is a writing required? And then, there’s a practical approach I want to talk about to avoid legal complications.

So, let’s start with the top situation where you have an agreement that is written, and look at some of the complications that can arise. Here’s the deal. Let’s say that you live in Mumbai, India. And you have a job offer from a company in New York City. So you negotiate an employment contract with that company in New York City. And you discuss all the details in the contract. Let’s say you have quite a bit of furniture for example, and one of the questions is will the company pay for shipping your furniture from Mumbai to New York City? Which is going to be fairly expensive, let’s say $10,000.

And the company says to you, no problem we promise that we will pay to cover your shipping cost. So you negotiate the deal, you then put the deal in writing. However, you forget to include the promise to pay for your shipping costs, so you ship your furniture to New York. You move to New York. You start your work, your job and then you bring your bill for the shipping costs to the company, your bill for $10,000 and the company says to you, yes, we remember, we absolutely made that promise. However, things are a little tight here, right now and we’re not going to cover the shipping bill.

Now let’s assume that you eventually sued the company for the $10,000 shipping bill. The question is, is that an enforceable contract or not? Now remember, the company clearly made the promise.

And they’ll admit they made it if you sue them in court.

So the question is,

can you enforce the promise even though it was not in your written contract? Think about that for a second and then jot down either yes or no. Yes, you can enforce the promise and recover your $10,000, or no you can’t? The answer to that question depends on something called the parol evidence rule. And here’s a concise statement of the rule. The rule seeks to preserve the integrity of written agreements by precluding the introduction of evidence about contemporaneous or prior declarations to alter the meaning of written agreements. And what that means in plain English is that once you reduce your contract to writing, then the agreement is limited by the four corners of that writing.

Courts, in determining what your obligations are, and what the other side’s obligations are, are only going to look at the writing. They’re not going to try to unravel the negotiations. And what was agreed to or not agreed to during the weeks or months of the negotiations. They’re going to focus on that written agreement. Whatever you said prior to that written agreement. Whatever you said at the same time as that written agreement aren’t going to account, it’s just whatever is in the written agreement. Now when I was in law school I thought this was one of the most boring rules ever to study, as a matter of theory.

But when I look at negotiation practice, I think it is one of the most valuable rules, because if a court decided to look into what was said during a negotiation, that could be an endless process during every negotiation. You reach certain agreements along the way, then you throw them out, so it makes very good sense to limit the decision to what you put in writing. And so bottom line, in this case, because you entered into a final written agreement, you intended that to be your complete agreement, the court would not allow you to recover for the for the promise to pay for the delivery of your furniture.

Now, there is a difference, by the way in the legal rule in certain countries, especially in civil law countries where the parol evidence rule Is not applied or it is applied in a different way and I’m not going to get into the technicalities. But the reality is that in virtually every business contract, the pro evidence rule is included as a separate clause. And I think this makes great sense. Regardless of whether you’re in a civil law country or a common law country, put in this clause, because then it brings the deal to a final conclusion. It prevents the possibility of a court going back and trying to unravel weeks and months of negotiations. Here’s an example of this contract clause.

This is a little bit hard to read but we’ve got a contract between a guy named Mark Zuckerberg of Facebook. And, basically, this contract is an agreement to amend an earlier employment agreement and so, I didn’t include all the details of Mark’s contract with Facebook here, but it covers his compensation which is $500,000 a year, it covers his benefits, for example, the contract stated he gets 21 days of paid leave per year. This is a strange contract by the way. Does Mark really care? Mark, the founder of Facebook whether he’s paid $500,000 a year or not when he is worth over $25 billion as a result of his ownership of Facebook.

But anyway they felt it was necessary to form this contract, but then, so you go through all the details of the typical employment contract, but then you get down to the end, and it says that this letter of agreement supersedes and replaces any prior understanding what agreements whether written or applied between you, Mark Zuckerberg and the company regarding the matters described in this letter. So like most business contracts they have incorporated the parol eventual into the contact and this is something that is done whether you’re in a civil law country or a common law country. Now let’s go back to our hypothetical example of you moving to New York and let me ask you this additional question.

Let’s say that you’re negotiating with the company so you sign the contract, the company signs the contract. Deal done. But then, after signing the contract, you remember that you forgot to ask them about shipping the furniture. So, you send an email to the company and you say to them, look, I forgot to ask will you pay for shipment of my furniture, it’s going quite expensive. They send an email back saying sure, that’s our company policy. We will pay for shipment of the furniture. So, in this hypothetical, unlike the earlier one, rather than making the promise before or at the same time of the written contract, they made it after the contract was signed. Question, is their promise enforceable legally?

Think about that for a second. Write down yes or no.

And the answer is no. It’s not enforceable legally because even though it does not violate the pro-evidence rule, because this was a promise made after the writing rather than before. It does violate another legal principle that we just discussed called consideration. Here, the company has promised to give up something. They promised to pay you for the shipment of the furniture. You are not giving up anything. You’ve all ready committed to work for the company and you’re not giving up anything else. And so that type of promise would not be enforceable as a result of consideration.

So, that’s a look at situations where the agreement is in writing and I especially want to emphasize the importance of the parol evidence rule, and including a parol evidence rule clause in your contract. Now let’s look at the other situation where the agreement is not in writing. Then the question is, is a writing required? Is the agreement enforceable when it is oral? And the bottom line answer to that is yes. Oral agreements are enforceable, even when they are multi-million dollar agreements. However, each country has exceptions. Each country says, well, certain types of contracts are so important that they must be in writing. For example, real estate is a fairly scarce asset. It’s a very important asset.

And so virtually every country around the world says if you’re selling real estate, that agreement must be in writing to be enforceable. Now I’m not going to go into the gory details of all of these exceptions. The important thing is when you are negotiating in any particular country, it’s a question you want to be sure you are clear about at the outset. Is this the kind of contract that has to be in writing, and therefore I’m going to put it in writing. What I would suggest as a practical matter,

forget about the technicalities of the law and always put your agreements in writing. You should always do this number one because it simplifies your life. You don’t have to worry about technical legal details. But number two the human memory is very fallible and so to avoid memory problems, put the deal in writing. There’s an old Chinese proverb that I think captures it best. The palest ink is better than the best memory. No matter how good your memory is, it’s better to have your contract in writing even if the ink is very pale.

Because even though you are not trying to cheat the other side, even though the other side is not trying to cheat you, the way you remember the deal, might be quite different.

And keep in mind when you do put your agreement in writing, it does not have to be a 20 page agreement that says contract at the top. You can be trapped by a written contract that is written on a napkin in a restaurant the courts aren’t going to be too interested in what was used for the writing, as long it was in writing it would be enforceable. Here’s an example, an American case. We have two people, Mr Lucy and Mr Zehmer who are drinking at a restaurant. And after they’ve had a few drinks Lucy offers to buy Zehmer’s 472 acre farm for $50,000. Zehmer accepts the offer. So far we have an offer and acceptance, it’s oral, not enforceable.

Because as I mentioned, real estate contracts have to be in writing. But then Zehmer writes on a restaurant order form quote, we hereby agree to sell to WO Lucy, the Ferguson farm complete for $50,000, title satisfactory to buyer, end of quote. And then Zehmer and his wife signed the writing. And here’s what the writing looked like. So, later, Zehmer changed his mind and he refused to transfer the farm to Lucy. He claimed number one, he thought Lucy was kidding when he made the offer to buy the farm ad number two. And number two, He claimed he was drunk. He said he was, quote, as high as a Georgia pine, end of quote.

And that the negotiation was, quote, just a bunch of two doggoned drunks bluffing to see who could talk the biggest. Well, the court decided he wasn’t that drunk, he had capacity to make the contract, and that he had a valid contract, we had the writing, as proof and therefore, he had to transfer the farm to Lucy. There’s one last, very important piece about this writing issue. And that is that even when you put your contract in writing, and this is called the express contract. There are a number of contract terms that are implied by law. And so it’s very important that you have a basic understanding of what goes beyond what you’ve put into writing.

In other words, it’s important that you not only understand what you expressly agree to but what the law automatically includes in your contract.