Why You Should Always Write Out Your Contract No Matter What

There are a lot of adages in the world.  Some useful, many are nonsensical.  “What goes around, come around” is one that has been a particular thorn in my side, not because I keep getting screwed over from all the bad stuff I do, thank God, but because as the Occupy Wall Street protesters will tell you, bad guys (especially the white-collar ones) seem to get away with everything.  But of all the sayings in the world, the most useful one is “You have nothing until you get it in writing.”

Why is that such an important saying?  Because, as anyone who is in business or has otherwise dealt with life will tell you, people have a funny way of not doing what they promised to do.  Yeah, I know, you might be saying that the people you work with are honest people and that you’ve known them for years and that they would never cheat you just to gain a temporary monetary gain.

Well, you may be right about the first two, but not the last.  Now I’m not trying to be an untrusting cynic or anything; rather I’m just saying that one should be cautious.  Because even the most honest people, when pushed to a point where it’s a matter of survival, can do some pretty unpredictable things.  I say this because recently a situation just like this one occurred to a close friend of mine.

Let’s call him Bob.  Bob is a dealer in wholesale goods.  He buys and sells various knick-knacks and other things like comic books, and he’s pretty successful at it.  My friend Bob has been doing this for at least 10 years.  He knows his trade well and certainly is no stranger to the importance of proper contract drafting.  He stresses the essential nature of contracts in business to all his friends, including me.  Like he says, “It’s the only thing that will keep you away from court.”

Anyway, a couple of weeks ago, Bob’s friend, let’s call him Mike, was in a bit of a pickle.  Mike bit off a little more than he could chew in terms of debt.  You see, Mike bought a house and secured a pretty hefty loan to pay for it.  Everyone has probably heard the rest of his story before: a couple of years ago Mike lost his job and hasn’t been able to find another one.  He’s been living off his savings ever since and has been using it to continue to pay off his mortgage.  Recently though, Mike was getting really far behind on his payments and was facing foreclosure.  That was when he went to Bob.  Mike had a really big and valuable comic book collection worth well over $20,000.  But he needed the money and agreed to sell it to Bob for only $10,000.  Bob, knowing his friend was in need, agreed to do the deal for $15,000.  Bob knew he’d probably only break even on the deal, but he wanted to help Mike out.

Since Bob knew Mike for many years, he decided to do the whole thing on a handshake.  There was no contract, no emails, and for that matter no paper trail whatsoever.  Mike asked for the money in cash first and told Bob he could come by in a couple of days with a truck to pick up the comics.  Bob agreed thinking nothing of it and gave Mike the money.  However, when Bob went by to pick up the comics, Mike reneged and refused to give the money back.  Now Bob is out $15,000.

Pretty bad situation, huh?  Certainly, the law of contracts tells us that a breach in contract would obviously mean that Bob deserves his comics or at the very least, his money back.  An oral contract is considered just as binding as one that is written.  And there is certainly an oral contract here since there was an offer, acceptance, and consideration.  Bob agreed to give $15,000 to Mike for his comic books, they both agreed on the terms, and Bob held up his end of the deal.  Though Mike can raise a defense called statute of frauds, which states that any sale of goods for a price of $500 or more must be put into writing, Bob can always fight this by showing that he performed by paying Mike in reliance upon Mike holding up his own end.  So it would still seem like Bob would win his case in court.  The problem is that Bob would actually have to sue Mike.

You see, in law school, they don’t really do a good job of showing you the expense of legal representation.  Though the law is obviously on Bob’s side, to win it would be a very long and costly process.  Mike is claiming he got the money from a reserve of cash savings he’s had since he was a kid, and the lack of any paper trail makes it very difficult to prove otherwise.  However, the worst of this is that Bob considered Mike to be a really good friend and doesn’t want to take him to court and make both of their debts worst than it already is.

So what’s the lesson here?  You have nothing until you get it in writing, even when it comes to dealing with friends or family.  I was sad to hear Bob’s story because it not only ended with him being out $15,000, but it may also lead to him being out of a friend.

Any of you have a nightmare contract story to tell?  As always, share your tale of woe in the comments section below.