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The "legal nightmare" of oral agreements


Picture of a horse in a barn

In the horse world, we all know that a lot of business is done on a handshake. But what happens when a deal goes south and one side of the deal sues to enforce the deal? Can an oral agreement serve as a binding and enforceable contract? Technically, “yes.” But should you rely on oral statements to make a contract. NO!! Especially when a lot of money and high value horses are at stake.

 

A 2023 case out of Texas serves as a good reminder and caution of what can happen. As the court in that case said about the fallout of such oral agreements, they create a “legal nightmare.” The Texas court went on to say about the case: “If ever there was doubt as to the wisdom of putting contractual agreements in writing, this case should put such doubts to rest.” Galyean v. Guinn, Civil Action 4:21-CV-1287-BJ | Casetext Search + Citator. In this Texas case, a client and a cutting horse trainer had an unwritten arrangement to develop a strong brand of cutting horses and in turn develop a profitable breeding program. When the relationship fell apart and the client removed the horses, the trainer sued on the basis that they had an oral partnership. In the lawsuit, the client denied the existence of a partnership.

 

As this case shows, it is extremely difficult and costly to prove the terms of an oral agreement, particularly when neither side will agree what the facts were or what either side said. And, in some circumstances, as in this Texas case, the “statute of frauds” says that some types of contracts are legally unenforceable unless they are in a writing signed by the parties. For example, the law may bar enforcement of a contract that cannot, by its terms or by the nature of the required acts, be performed within one year from the date of the agreement.

 

As a side note, in business dealings, there also can be significant tax consequences that depend on how the legal relationship between parties is characterized because it can change tax obligations, as the court alludes to in this case.

 

At the end of the day, it is a far better practice for two parties to plan ahead and plan IN WRITING the anticipated business relationship BEFORE they begin the venture. In this Texas case, the two parties could have spend a few thousand dollars in attorney fees to draft up and craft a written agreement that sets out the relationship and future expectations. Instead they are almost certainly out many tens of thousands of dollars in attorney fees, and possibly even more, litigating over a relationship they never documented in writing.

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As always, please remember that these informational updates are not legal advice about your specific circumstances and are not a substitute for obtaining legal counsel on any questions you have about your specific circumstances. Let us know if you have any questions! 


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