What are the consequences of informal contracts?

Posted by David J. SteeleMar 07, 20170 Comments

Employers, landlords and construction company owners across western Montana rely on contracts to define professional relationships. However, some people get a little bit lax with regard to creating, reviewing or renewing these contracts when they feel like they have a history with the other party or when it seems like an informal agreement will suffice.

Sadly, the consequences of this relaxed attitude toward contractual agreements can prove to be serious if one party does not comply with the agreement. Should this happen, you might find that whatever contract you thought you had is actually not enforceable. In other words, it's as if the contract doesn't even exist.

Below are some common reasons why an informal contract might be invalid or unenforceable.

  1. It is not in writing. Some verbal agreements are binding, but certain contracts are required to be in writing in order to be valid. A list of these contracts can be found in this FindLaw article.
  2. One party was coerced into signing or was not fit to agree to anything. A contract can be voided if there is evidence that one party was forced, tricked or misled into signing, or if that party was impaired or otherwise unfit to sign a legal document.
  3. There are no witnesses to the signing, or the contract is not notarized. While this is not required of every contract, having a witness or notary present prevents situations where one party claims he or she was not the one who signed a contract.
  4. The agreement is secured only by good faith. This is often referred to as a “handshake agreement,” which is an informal and often non-binding agreement. As much as you may believe that the other party will follow through with his or her end of the agreement, unless these agreements are binding, there will generally be no legal repercussions for backing out of a handshake agreement.

These are all mistakes that could be quite costly for employers, property owners, supplies and any other parties who believe they are protected by informal contracts. Fortunately, with the help of an attorney, they are also mistakes that you can avoid.