Oral agreements' validity governed by contract law

The eve of trial. All parties work late into the night, feverishly trying to reach a dollar figure that will allow them to avoid the unknowns of trial. The coffee flows, the jackets come off, the eyes redden. Attorneys whisper and clients fret. Finally, just as all appears hopeless and trial appears inevitable, the fateful words are uttered: "I think we can agree to that."

Then the fax arrives. As the paper streams out of the fax machine, the attorney sees the dollar figure, but it has now become immersed in a sea of words. Clause after clause emerges from the fax machine. The attorney begins to wonder: "Just what did I agree to last night?"

That is, after all, a good question.

Settlement agreements are essentially contracts and are governed by the law of contracts. Therefore, contract law will be used to determine if an agreement was actually reached and the legal effect of the paper streaming from the fax machine.

Formation of the contract. As a form of contract, a settlement agreement must include the essential elements of a contract, including competent parties, a proper subject matter, legal consideration, mutual agreement and mutual obligation. It is relatively easy to meet the minimum requirements for a valid and enforceable contract. The difficulty begins when it is time to actually follow through on the terms of the contract.

The statute of frauds. Settlement agreements need not always be in writing to be effective. However, one of the most important issues in determining the validity of the settlement agreement is whether the agreement is covered by the statute of frauds and must be in writing.

Settlement agreements must be in writing when the end result of the compromise agreement must be in writing to be enforceable. Whether the underlying dispute needed to be in writing to be enforceable is irrelevant. All that matters is the effect of the settlement agreement itself. This distinction is sometimes difficult.

For example, assume Bob sues Sarah for fraud over a forged Mark McGwire baseball. To settle the claim, Sarah agrees to buy the ball back from Bob for $1,000. The effect of the settlement is to transfer ownership of the ball to Sarah for an amount in excess of $500. Because any sale of "goods" in excess of $500 falls under the Uniform Commercial Code statute of frauds, the agreement must be in writing to be effective. If, however, Sarah simply paid Bob $1,000 there would be no need for a written contract because the statute of frauds would not apply.

Determination of whether the statute of frauds applies can dramatically change the effect of the late-night agreement.

What are the terms? The next problem facing the attorney as the seemingly endless fax continues to stream forth from the fax machine is to ascertain what has been agreed to and what else binds the client. As the coffee takes hold, the attorney remembers a few minor issues that were not agreed to during the frenzy of last night, and begins to wonder how they will be decided.

If the oral agreement is enforceable, it does not matter what terms are included in the proposed written agreement. Any terms beyond the actual oral agreement will simply act as offers of additional terms and will need to be agreed upon by the parties.

Even if some of the terms are ambiguous, the agreement will not be destroyed. In the settlement context, Missouri courts have interpreted ambiguous terms by applying the meaning that would be common in the particular context. For example, in a case involving three doctors, the Missouri Court of Appeals held that the term "coverage" had a common usage in the medical profession.

Gap-fillers. As with any contract, the law will imply certain terms to fill in where the parties have not reached an agreement. This is done to assist in the performance of the settlement agreement. Therefore, if the attorney rejects the additional terms in the fax, the law will fill any holes that would impede the full performance of the terms on which the parties reached an agreement. For example, if no time for performance is specified, a reasonable time will be implied. The law will also imply a requirement of "good faith and fair dealing" in the contract.

What happens next? The attorney's head begins to throb as the realization sets in that the never-ending fax may represent the beginning of many more months of litigation. Knowing that the client never agreed to the sheer number of clauses contained in the streaming fax and paranoid that the fax represents the other side digging in their heels, the attorney begins to formulate a plan to bring last night's compromise to fruition.

Several options exist for enforcement of the oral settlement agreement. The attorney can return to the court that was to hear the original lawsuit and ask that court to enforce the agreement. Alternatively, the attorney could file a new lawsuit for a breach of the oral settlement contract.

Conclusion. Finally, the paper has stopped streaming forth, the beeps of the fax machine are silent and the coffee has staved off complete collapse. With the issues beginning to clarify, the attorney and client can now study the fax to understand the full effect of the late-night negotiations.

Next time, the attorney thinks, I will not let this happen. Next time, the attorney resolves, I will send the first fax.

(Daniel E. Blegen is an associate at Rouse Hendricks German May PC in Kansas City. He is a former law clerk for Judge Scott O. Wright of the United States District Court for the Western District of Missouri.)