What is a Verbal Settlement Agreement?
To understand the enforceability of a verbal settlement agreement, it is first necessary to identify precisely what such an agreement is and in what context it may be made. At its core, a verbal (or oral) settlement agreement is the resolution of a litigation matter reached by two or more parties through verbal discussion. The substance of a verbal settlement agreement may be achieved as a result of mediation, negotiation, or good faith discussion, so long as the parties to the litigation are operating with the intent that they have reached a resolution of all issues in the case. Notably, a verbal settlement agreement stands in contrast to a written settlement agreement, which requires some sort of signature, conventionally in a formalized document. Further , a verbal settlement agreement (which are also referred to as oral settlement agreements) typically envisions one party paying another the sum of money in exchange for some form of performance. The substance of the agreement may be structured in such a way as to require performance at a later date (i.e., a payment to be made after the verbal agreement is reached, or the completion of some task). Alternatively, the substance of the agreement may require immediate performance of some form of action (i.e., ownership of an asset to be transferred immediately or the payment of a cash statement). In any case, Chancery Courts are quite accommodating in ordering that all issues in a case are considered settled once a verbal settlement agreement is reached.
How Legitimate are Verbal Settlement Agreements?
While the negotiations and terms of a settlement agreement are best captured in writing, verbal settlement agreements can still be considered legally valid under certain circumstances. As with any contract, courts will assess whether the elements of mutual consent and consideration are present.
Mutual Consent
Mutual consent exists when both parties have agreed to the terms of the agreement. This may seem overly simplistic, but it is not always clear. Consent must be voluntary and informed. Thus, both parties must have adequate understanding of the subject matter and consequences of entering into the agreement. Consent is not voluntary when the agreement is obtained through duress or undue influence.
Consideration
Consideration is the benefit or value that each party exchanges as part of the agreement. Both parties must receive something of value. A verbal settlement agreement is no different from other contracts in that both offer the parties recourse if either party fails to perform or comply with the terms of their agreement.
Statute of Frauds
Contract formation also requires that the terms of the agreement meet the Statute of Frauds. Most commonly, the Statute of Frauds applies to contracts that involve the sale or transfer of land or real estate, and contracts where the performance cannot be completed within one year of the date of agreement. A few other contracts fall into a category governed by the Statute of Frauds, but they are the most common. If an agreement falls into one of these categories, it must be in writing to be enforceable.
The statute of frauds does not, however, mandate a written contract when the agreement is settled out of court. This is a common misconception. While the statute of frauds may prohibit enforcement of an oral contract in the event of a breach, the court will normally enforce an oral settlement agreement tipping the scale toward enforcement and giving an oral settlement agreement the benefit of the doubt. In Rogers v. Because of You, Inc., 53 Cal. App. 4th 988 (1997), the appellate court ruled that an oral agreement to settle a lawsuit satisfies the statute of frauds because it was made in the course of the judicial proceedings.
With the exception of antitrust and private attorney general cases, California law favors settlements. Courts will presume the validity of settlement agreements and they will "grant all reasonable presumptions to validate settlements reached during judicial proceedings." McMillan v. State of California Dept. of Public Health, 234 Cal.App.4th 1037 (2015) (citing as a broader policy consideration, California’s strong public policy in favor of settlement). While it is still important to document the terms of a settlement agreement, it remains clear that a verbal settlement agreement is valid and enforceable under the right conditions.
Enforcement Issues with Oral Settlement Agreements
One of the most significant challenges in enforcing verbal settlement agreements in employment disputes is the lack of compelling evidence. Without any hard evidence, such as contemporaneous email correspondence, a draft agreement, or witness testimony, it is difficult to establish that a verbal agreement was actually made. In fact, without corroborating evidence, most judges will give little credence to a verbal agreement. In Casey v. Sunshine, the California Court of Appeal explained that the absence of corroborating evidence makes it an open and closed case.
In addition to a lack of credible evidence, other reasons for falling short of establishing a verbal settlement agreement include disputes over what terms were actually agreed to. Such disputes typically arise from the consideration, or lack thereof. Eastwood v. Barrow relates the lack of consideration in the verbal agreement between the parties as follows:
On the other hand, the defendants explain this element [consideration] by saying that Eastwood’s concession in not seeking reinstatement after the terminations was sufficient consideration. The trial court noted that it was true that Eastwood did not seek reinstatement, but thereafter ruled ‘whether or not there was consideration for the contracts which the plaintiff alleges were entered into by the parties, I think there is at least evidence of some reassurances that were made on behalf of the defendants that the terminations of his employment would be negated, which was relied upon.’ The court’s finding was not specific as to who reassured whom, and whether these reassurances took the form of a promise by the defendants or a waiving of the plaintiff’s legal right to challenge the terminations.
The Court found that the trial court’s "ruling leaves us with no basis on which to determine whether the facts which have been found are legally sufficient to constitute a binding contract. If a party wishes to assert the absence of consideration, the absence must be stated as a specific ground." Consequently, the Court rejected the California trial court’s reasoning.
Even in cases where the lack of consideration argument by the employer has likely not been preserved, a lack of consideration argument between the employer and employee will ultimately rely on the credibility of the parties. As discussed in the previous section, unless the verbal agreement is reduced to writing or another party witnessed the oral agreement, it comes down to two conflicting accounts—one given by the more likely credible party. Being an employer or former employee is not alone determinative as the more likely credible party. Other factors, such as the age of the parties, their relative education, sophistication, and background, play a significant role.
Verbal settlement agreements, if being considered as enforceable, require being made immediately available to the court after payment has been made or immediately upon default of terms. Failure to do so puts employers at risk of violating California Business & Professions Code section 17200 and related statutes. And while it is never a good idea to try to reach a verbal settlement agreement, if that is the last resort, following such an important principle can make all the difference.
How to Prove a Verbal Settlement Agreement in Court
For litigants struggling with a verbal settlement agreement, the next step can often seem unclear. What should a litigant do if faced with the issue of enforcing a verbal settlement agreement? How does a litigant prove the existence of a verbal settlement agreement against the opposing party who refuses to consent to an order adopting the terms of the said agreement? This haphazard event often occurs in situations where the parties agree to the principle terms of an agreement but, due to a lack of time, nexus, or circumstances, fail to finalize the specific terms in writing before leaving for the day. Fortunately, and despite the absence of a final signed written agreement, there are several methods in which a litigant can prove a verbal settlement agreement. These methods include relying on witness testimony, recordings, and/or contemporaneous notes.
Witness Testimony
In many cases, disputes regarding the existence of a verbal settlement stems from different recollections of what was agreed upon between the parties. In such cases, the best evidence in support of the verbal agreement will often be through witness testimony. For instance, in the case of Atkinson v. Speaks ("Atkinson"), the Appellate Division affirmed the trial court’s decision in rejecting defendant’s argument that no enforceable settlement existed. In Atkinson, plaintiff agreed to dismiss a negligence action with prejudice against defendant, and in return, defendant was to execute and deliver to plaintiff all right, title, interest, income, and proceeds of any inheritance he may have had. Id. at 1074. The defendant then later denied reaching a settlement. Id. at 1077. In affirming the trial court’s decision, the Appellate Division noted that the trial court credited plaintiff’s testimony that impeached defendant’s denial that he had entered into a verbal settlement with plaintiff.
Recordings
A recording that features the verbal agreement of the parties agreeing to settle a case can often be sufficient to satisfy the Statute of Frauds. For instance, in the case of Snowdon v. Tyra ("Snowdon"), the Appellate Division held that recordings of conversations between parties discussing the details of their settlement were sufficient to constitute an enforceable settlement agreement. Snowdon v. Tyra, No. A-3196-11T1, No. A-3604-11T1. In Snowdon, the female plaintiff and male defendant engaged in a series of communications which included a conversation discussing their settlement agreement. Id. at 8. Plaintiff recorded the conversation in which the parties discussed the settlement terms of the divorce. The settlement terms discussed consisted of custody of their children, child support, spousal support, medical insurance premium payments, property disposition, and plaintiff’s waiver to equitable distribution. Id. at 6. Despite the terms brought forth by the parties, the defendant later denied the existence of a verbal agreement and instead claimed plaintiff fraudulently induced him to enter into the agreement. However, the Appellate Division distinguished defendant’s failure to demonstrate a cause of action for fraud intent on the basis that possession of his wife’s property may have been in his best interest for purposes of equitable distribution and spousal support. Id. at 18.
Contemporaneous Notes
Contrary to witness testimony, contemporaneous notes are often a bit more reliable than witness recollections several years after the fact. Accordingly, the Appellate Division has previously relied on contemporaneous notes in determining if a verbal agreement exists. In the case of Ziemba v. Dore, No. A-4327-07T2, 2009 WL 2252533 at 4 (N.J. Super. Ct. App. Div. July 29, 2009), the Appellate Division, in looking for "some form of proof" that the parties entered into a settlement agreement, noted that "contemporaneous notes taken by [plaintiff’s attorney] of the communications from the Dores, as well as notes maintained by [plaintiff], which were made shortly after the receipt of the settlement agreement, constitute evidence that the terms of the agreement were discussed and accepted by both parties." Id. (emphasis added). Conversely, the appellant in Ziemba presented no proof apart from his own testimony, which the court found to be less than credible. Id. at 6.
When are Verbal Agreements Unenforceable?
However, there are situations in which an oral settlement agreement may not be enforceable. So-called "statutes of frauds" invalidate certain types of agreements unless they are in writing. For example, under Texas law, a "Written instrument" is defined to include: "any writing on which there is an agreement, and to which the signature of a party is affixed, … which contract is not to be performed within the space of one year from the date of making the same, or to be performed in any place out of this state , or the consideration of which is not to be executed to any part thereof in this state." [Section 26.01, Title 2, Chapter 8, Subchapter B, Subchapter A, Annex Central Code Annotated].
Therefore, a verbal settlement agreement that results in a promise to convey real estate, such as an option or an earnest money contract (however defined), may be unenforceable unless it is in writing. But the statute of frauds applies only to contracts that are within the statute. Finally, the scope of any statute of frauds is jurisdictional. Check with experienced counsel for your state’s requirements for oral settlements.
Protect Yourself: Setting Up the Agreement
As an attorney, there are several best practices I follow when entering into verbal settlement agreements with opposing parties. First, I immediately document my conversations in the form of an email or letter confirming the agreement and expect an immediate response with any comments or disagreements to the opposing party. I do not wait for a week or two after an agreement has reached to send out the confirming documentation, as I want the terms fresh in my mind. Additionally, I do not want the other side to have the ability to deny the agreement simply because time has lapsed and the agreement was not documented by them as well.
Another best practice is to have a witness to the agreement. Either a fellow attorney or an assistant should be present at the time of the agreement and note the terms of the agreement.
Of course, the best way to ensure that there are no disputes between opposing parties as to the terms of the agreement, is to put the verbiage in writing and obtain both parties signatures.
Conclusion: Understanding Verbal Agreements
Our discussion began by establishing that the principal rule that settlement agreements must be in writing is well established in Canada. However, both in general contract law and within the specialized area of family law, there are narrow exceptions that allow parties to enforce a verbal settlement agreement.
We then addressed when a verbal agreement might be binding, focusing in particular on the important cases of G.W. v. H.B. and O’Rourke v. Lacey and their progeny.
From those decisions, it is clear that a smorgasbord approach to verbal agreements is fraught with uncertainty; families and practitioners alike have to spend time and money to litigate the very question of whether a verbal agreement is binding. Time and again , the courts continue to emphasize that a verbal agreement must rise to some heavy weight of certainty to be enforceable.
So what is the solution? There is no recipe to create an iron clad verbal settlement agreement. But certainly, if you are tasked with negotiating a verbal settlement, or are being confronted with one, you should obtain legal advice.
In general, if there are terms that are important to you and your future, it is best to reduce them to writing. And of the myriad of reasons why a written agreement is a smarter (and probably cheaper) idea, perhaps the most appealing is that you will not have to expend time, stress and over $30,000 in legal fees like Mariellen and James did to negotiate and fight the issue of whether their verbal agreement is binding and enforceable.