Under California law, oral contracts (verbal agreements) are generally valid and enforceable. However, due to the uncertainty inherent in oral agreements, in some circumstances, a written record of the contract is required to make it legally binding.
California has statutory provisions, codified in Cal. Civ. Code. section 1624 and commonly referred to as the Statute of Frauds, that enumerate specific situations under which an oral contract is unenforceable. The Statute of Frauds is designed to reduce the likelihood of fraudulent conduct by requiring a written record of the terms agreed-upon by the parties to a contract.
California’s Statute of Frauds.
Under California’s law, the following transactions are invalid unless supported by a written agreement:
- An agreement that by its terms cannot be performed within a year from its making.
- A promise to answer for the debt, default, or miscarriage of another person.
- A lease lasting longer than one year, or a contract for the sale of real property.
- An agreement authorizing an agent to purchase or sell real estate, or to lease real estate for a longer period than one year.
- An agreement that is not to be performed during the lifetime of the promisor (the person promising to undertake some action).An agreement by a purchaser of real property to pay an indebtedness secured by a mortgage.
- An agreement to loan money or extend credit in an amount greater than one hundred thousand dollars ($100,000) made by a person engaged in the business of lending money or extending credit.
- An agreement for the sale of goods in excess of $500.00 in value.
- An agreement for the sale of personal property in excess of $5000.00 in value.
Requirements of the Statute of Frauds.
In order to comply with the requirements of the Statute of Frauds, a written agreement must:
- Be in writing.
- Identify the subject matter of the contract.
- State the material terms of the agreement (contracts for the sale of goods must state the quantity and price of goods to be sold).
- Be signed by both parties (under the Uniform Commercial Code, contracts for the sale of goods need only be signed by the party against whom enforcement of the contract is being sought).
Statute of Frauds Exceptions.
In some circumstances, certain agreements that would otherwise be unenforceable under the statute of frauds, may be valid pursuant to one of the following exceptions:
- An oral contract for the manufacture of custom goods is enforceable. For example, Bill verbally agrees to pay Jim $1,000 to print 10,000 signs for Bill’s upcoming mayoral campaign that say “Vote Bill For Mayor.” Jim prints 5,000 signs and Bill attempts to cancel the order. This oral contract would be enforceable because it is clear by the nature of the parties’ conduct what the terms of the agreement were.
- A written confirmation of an agreement between two merchants will satisfy the Statute of Frauds requirements. An example of such a confirmation might be an invoice between two merchants memorializing the terms of an oral agreement.
- If the party against whom enforcement of an oral agreement is sought admits the existence of the agreement in court, the admission can be used to enforce the contract.
- If one party partially or fully performs his obligations to an oral agreement, he may be able to enforce the oral agreement to the extent he has satisfied his duties under the contract. For instance, when a purchaser of land has taken possession of the property after making payments and then made permanent improvements to the property, it is difficult to return the purchaser to his or her position prior to the date the contract was formed. In such cases, courts usually look to the degree of injury that would otherwise result if the contract were deemed unenforceable. If the purchaser reasonably relied on the agreement in changing his or her position, the court can order specific performance according to the terms of the contract.
- Similarly, the law recognizes a doctrine known as promissory estoppel that is designed to prevent unfairness from occurring in contractual relationships. Promissory estoppel requires that a clear offer to contract has been made, one party reasonably relied on the offer, and the relying party suffered a loss. For example, an employee who works for a well known company with good job security accepts a two-year employment contract with another company pursuant to an oral contract. By leaving his or her present employer, the employee loses valuable rights including job security, pensions and other benefits. Once the employee quits his or her old job for the new job, a court may apply the promissory estoppel doctrine to hold that the agreement is enforceable notwithstanding non-compliance with the Statute of Frauds.
If you have questions regarding the validity of an oral contract in California, consult a San Diego contract attorney for guidance.