What Exactly Is a Verbal Settlement Agreement?
The legal definition of a verbal settlement agreement is one party making an offer to settle a matter to the other, and then the second party accepting the terms of the offer. This is similar to the definition of a written settlement agreement.
In both cases, the parties do not have to actually sign the documents; verbal agreements are enforceable even if they are not put in writing.
Once the court enters an order that is based on a verbal settlement agreement, it can be almost impossible to back out of the agreement. These verbal agreements are absolutely enforceable unless there is fraud, undue influence, or some other exceptional circumstance surrounding the signing of the verbal settlement agreement that permits backing out of the agreement .
Verbal settlement agreements are very common in divorce cases. When adults have a verbal agreement, they put the matters in their case in order that is otherwise acceptable to them. They agree to all the topics, but do not usually put the verbal agreement on paper. Once the verbal agreement is made, they will draft an order, and have it signed by the judge.
Verbal settlement agreements are also common for informal probate matters where there is a very straightforward, non-contested informal probate matter. In these situations, it is simpler to draft the document after the verbal agreement than having one party go off to draft a written settlement agreement. But once the court enters an order, neither party can back out of the verbal agreement.
Are Verbal Agreements Legal and Enforceable?
While most people are under an impression that anything agreed to by two or more people in a verbal discussion is done and cannot be undone, in the realm of settlement agreements, that is not necessarily true. The legal essence of a verbal contract is that the parties must have had the legal intent to make themselves legally bound to something. This requirement means that the verbal agreement must be supported by the various necessary elements of a valid contract, such as things of value being exchanged, a meeting of the minds, and a lawful purpose in which to enter into the contract.
In simple terms, unless it meets the criteria of all essential terms of the agreement being in place, a verbal agreement may not be enforceable in a court of law. The essential elements of a general contract are the following:
- a valid offer by one party;
- a valid acceptance of that offer by the other party;
- sufficient and clear terms of the offer;
- an intention of the parties to bind themselves legally;
- a lawful purpose for making the agreement;
- and a capacity of the parties to enter into the agreement.
In the world of verbal settlement agreements, the United States generally requires that any negotiated settlement be in writing before a Court has the capacity to enforce the terms of the settlement. While generally not a problem and few lawyers would not hereby put their client’s signature to settlement on a piece of paper, a Court specifically quoted in Roxbury Town Center, Inc., et al., vs. Roy Sixs, Inc. et al., 2008 Tenn.App. LEXIS 268 (Tenn. Ct. App 2008) held that if a trial court has any discretion in setting aside a verbal settlement agreement, the trial court may withdraw its acceptance of the settlement agreement based on the important factors of public policy and judicial efficiency. Based on the fact that written contracts are more enforceable than verbal agreements, this ruling makes logical sense and puts restraint on a party wanting to back out of a verbal settlement agreement made with the intent to be bound. It also places some restriction on a Court to issue judgment based on a verbal settlement agreement and to allow a withdrawal if it interferes with the public and judicial interest.
Verbal settlement agreements can be legally binding so long as they have the essential elements to be upheld in a court of law. In such a case, you have no other choice but to honor the verbal agreement. However, as in the case of Roxbury Town Center, Inc. v. Roy Sixs, Inc. et al., reaching a verbal settlement agreement does not always conclude the matter. Even though the verbal agreement meets all the elements of a general contract, if the Court has discretion to impose the "important factors of public policy and judicial efficiency", the verbal settlement agreement may be declared null-and-void.
Can You Pull Out?
Mutual consent can also invalidate an agreement. This occurs when both parties to a settlement reach a new agreement to either undo or alter the existing verbal settlement arrangement. For example, if you and the other party agreed that a verbal settlement arrangement is no longer in your best interests and you both mutually agree to either modify the existing arrangement or to make a new arrangement, this can be a legitimate basis for nullifying the verbal settlement.
It is also worth noting that sometimes, the law will have a built-in "cooling-off" period after a verbal settlement arrangement is made. After the expiration of that period, either party can try to back out of the verbal settlement arrangement if they have changed their mind. For example, the California rules governing verbal settlements arising from court-mandated mediation will afford an opportunity to renegotiate or reverse the verbal settlement agreement after the certified finalization of the mediation statement, which serves the same function as a "cooling-off" period.
Factors Impacting Enforceability
Whether or not a verbal settlement agreement is enforceable involves a multi-factor balancing test that takes into account the specific facts and circumstances of each case. If the parties have agreed to the settlement terms and have taken some step toward performance, it is often held that they must comply with the agreement notwithstanding its verbal nature. Fordyce v. City of New York 37 N.Y.2d 209 (1975). On the other hand, an oral agreement may be found unenforceable where one person was acting under a mistaken impression harmonizing with the representations of another in such misleading manner as to materially to increase a possible benefit to the representor. See, e.g., Sigismondi v. Murphy, 161 A.D. 166 (1st Dept 1910). Verbal settlement agreements which have been found unenforceable include those where there is no unpaid consideration remaining due to the settlement agreement. Kreuting v. Stalzer, 83 A.D.3d 888 (2d Dept 2011); Goodman v. Matus, 234 A.D.2d 303 (1996). Where a party has recited the agreement in open court but refuses to perform the settlement, placing the actual execution of the agreement on trial, the record is often used by the trial court in determining the intent of the parties as to whether a binding agreement was actually reached. See, e.g., In Re: Flushings Inc. 2005 WL 1607361 (N.Y.Sup. Jan 07, 2005) (after an oral settlement was recited in court, the Court concluded "The fact that the plaintiff’s attorney later backtracked from this resettlement agreement does not erase the fact that an agreement had been reached. Moreover , the plaintiff’s conduct was the sole reason for the rescheduling of the trial date after the agreement had been entered into. In addition to the fact that the final trial date was adjourned at the plaintiff’s request, the case was also settled at the plaintiff’s request and the Court adjourned the case at the plaintiff’s attorney’s request.") Of course, state statutes of frauds also apply to bar the enforcement of certain verbal agreements. "A promise . . . which is not to be performed within one year from the making thereof" (General Obligations Law § 5-701 (a) (1) ) is barred by the statute of frauds and therefore unenforceable. Fordyce v. New York City Aboushaya, 290 AD2d 309 (1st Dept 2002). See, e.g., Rose v. Spa Realty Assoc, 70 NY2d 33 (1987); Yarde v. DeVito, 262 AD2d 621 (3d Dept 1999) where the Appellate Division held that there was no issue as to the existence of an oral contract regarding the sale of real property where there was no dispute that the oral agreement was governed by the statute of frauds as it could not be performed within one year since the transfer of title to the real property was involved and the deed had not been delivered before the death of the party who would have transferred the property. Decisional and statutory law also requires that certain contracts be written. A verbal contract, whether joint or several, for a business loan in excess of $50,000 that is not made in the ordinary course of business of any lender of such money is unenforceable. GOL §5-504(1). To sum up, while verbal settlement agreements can often be upheld and enforced, particular facts and circumstance are important and consulting an attorney and documenting a settlement is usually the best choice.
Legally Withdrawing from an Agreement
The risk of backing out of a verbal settlement agreement can lead to some unwelcoming consequences. In the best case scenario, such as when the parties are amicable, the other party may just express their frustration and simply wish that you had followed through on your word. Worst case scenario is that the other party may sue you for not going through with the verbal settlement agreement.
The most common charge a person can be sued with for backing out of a verbal settlement agreement is a breach of contract. To be more specific, the plaintiff may sue for breach of contract for specific performance or consequential damages.
When you back out of an oral contract, the other party may also go so far as to accuse you of breaking an obligation to act in good faith. For example, suppose you and your neighbor came to an agreement that you would pay him $100 per month for a specific period for the duration of a construction project on your property. You decide to back out of this verbal settlement agreement because you have other financial obligations that you need to pay. The proper ruling would be to order specific performance because you have the means to keep your obligation.
You can also be accused of bad faith breach. If the contract states that if there is a default in the payment schedule, your neighbor has the right to suspend further work on the project until outstanding invoices are paid, but still continues to do the work, then you can argue that the contract was not performed as stated. In this case, you can still be sued for breach of contract for specific performance, but you may also be sued for consequential damages.
Protecting Yourself
To protect yourself when entering into a verbal agreement, it is vital to establish what the terms of the agreement are as clearly and concisely as possible. If there is any ambiguity as to what is agreed to, follow up with an email to the other party clearly restating the terms of your understanding. Having a written agreement can help if the other party then tries to deny any terms or points they formerly agreed to. Examples of points that should be agreed upon in writing include: the amount of money or other consideration changing hands, a description of the property involved (if any), what you are supposed to do in exchange for the agreed-upon money or consideration, what the other party is supposed to do in exchange for it, and the dates that the agreement becomes binding on both parties.
When entering into a verbal agreement , strongly consider consulting with an attorney. Legal representation can prove invaluable in negotiating the terms of your agreement and avoiding any problems down the road if the other party tries to deny the agreement exists.
If you do enter into a verbal agreement, make sure to communicate with the other party in a clear way that avoids giving the impression that you are not honoring your end of the bargain. You should let the other party know if you perceive that he is not living up to his end of the bargain and state specifically what you believe he is failing to do. This gives him the opportunity to correct his behavior and can ultimately make it difficult for him to later deny entering into the agreement when he has seen from you in writing what you believed he was supposed to do.