How Can I Get Out Of My Oral Agreement?

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It’s not true that oral contracts aren’t worth the paper they’re printed on. In fact, for all but some small classes of agreements, oral ones are no different than ones printed on the finest of rag papers. Certainly, they are more difficult to prove their very existence, let alone their detailed provisions. That’s a good reason they should be memorialized in a written version. We’ve written, “memorialized” because, in many cases that’s the real function the writing performs. The parties will have already agreed to the terms of their intended transaction. At that stage, they have a contract – a binding agreement. Writing it down doesn’t make it any more “official,” just a lot easier to follow and a lot easier to explain the “deal” to others, attorneys included.

So as not to mislead some readers, we aren’t dismissing the “Statute of Frauds,” something most (perhaps all) states adopted based on a 1677 English law with the self-explanatory name: “An Act for the Prevention of Frauds and Perjuries.” While various states have different lists of what kind of agreements need to be in writing lest one party or the other be able to disavow their agreement just because it was oral (and for no other disabling reason), traditionally most agreements involving conveyances of real property fall or fell (depending on where the property is located) under these statutes.

We have written “fall or fell” as explained by the following example. From its beginning in New Jersey until its Statute of Frauds was amended in 1995, an agreement for the sale and purchase of real property had to be in writing. If it wasn’t, either party could raise a successful defense that there was no writing. That usually ended the dispute.

In New Jersey, effective at the beginning of 1996, an oral agreement to lease or sell property became enforceable if its existence can be proven by clear and convincing evidence. The required level of proof is measurably more difficult than the one applied to almost all civil disputes, the “preponderance” of evidence standard. To satisfy the “preponderance” standard, one only needs to convince a court that its allegation is more likely than the opposing offer of evidence – think “more than 50%.” The clear and convincing standard doesn’t come with a specific “percentage,” but think 75% to 80%.

Once the existence of an oral agreement has been proven, then the actual terms of the oral agreement need only be proven by the simple preponderance of evidence standard.

Not all states have gone that far, but if the experience in New Jersey bears any weight (over the past 20 plus years), perhaps they ought to. Some readers may already know that the “nickname” for the Statute of Frauds is the “Statute to Commit Fraud” because it is often used by a party to get out of an oral agreement it clearly made just because a better deal came along later.

Now, readers who might have thought today’s blog posting was going to be about the enforceability of oral contracts have just not been reading Ruminations long enough. Readers who have suffered through even a handful of our 358 prior postings know that Ruminating sometimes means rambling. We deny it, but understand why some would think we have a genetic disposition toward rambling.

Today, we really write about another way that some agreements, many of them oral agreements, get ignored or dismissed by courts even though there is no question that those agreements would otherwise be fully enforceable.

Some written agreements, perhaps many, will have what is called an integration clause or a merger clause. Commonly, but not entirely correctly, people think such a provision means that the contract is the complete and final agreement between the parties and that any and all prior or contemporaneous agreements (oral or written) are to be ignored. In other words, if the parties intended to include the terms of any prior or contemporaneous agreements in their deal, they are declaring by use of an integration or merger clause that they have already included those provisions in the one, integrated, agreement.

There is no “fixed” or “required” language for an integration provision. Here is a common formulation:

This Agreement contains the entire agreement of the parties with respect to the subject matter of the Agreement. The Agreement supersedes any prior agreements, understandings, or negotiations, whether written or oral.

Seems pretty simple and clear, doesn’t it? There is, however, an overriding principle when it comes to interpreting the terms of an agreement: “What was the intent of the parties?” For that reason, there are basically two levels of integration provisions. We’ll illustrate using California law, but the principles will resonate in other United States jurisdictions as well.

California codifies nearly everything. After all it wouldn’t be called a “civil code state” if it didn’t. Many states just follow the same law as found in California, but do so as part of their court-generated body of law, their “common law.” [We’re talking about the “parol evidence rule.” “Parol” doesn’t mean “oral.” Basically it means evidence, written, oral or otherwise outside of the actual agreement being disputed in court.] Here how California’s codified parol evidence law works. This is the text of the first four subparts of Section 1856 of its Code of Civil Procedure:

(a) Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to the terms included therein may not be contradicted by evidence of a prior agreement or of a contemporaneous oral agreement.

(b) The terms set forth in a writing described in subdivision (a) may be explained or supplemented by evidence of consistent additional terms unless the writing is intended also as a complete and exclusive statement of the terms of the agreement.

(c) The terms set forth in a writing described in subdivision (a) may be explained or supplemented by course of dealing or usage of trade or by course of performance.

(d) The court shall determine whether the writing is intended by the parties as a final expression of their agreement with respect to the terms included therein and whether the writing is intended also as a complete and exclusive statement of the terms of the agreement.

Reading (a) and (b) together leads California courts to interpret this Code section as one that:

[C]reates two levels of contract integration or finality: (1) the parties intended the writing to be the final expression of their agreement; and (2) the parties intended the writing to be the complete and exclusive statement of the terms of their agreement. “Thus, a prior or contemporaneous collateral oral agreement relating to the same subject matter may sometimes be admitted in evidence. However, this is true only where it is consistent with the terms of the integration.”

If a writing falls within level 1 (the writing is a final expression) then a prior or contemporaneous oral agreement is admissible if it does not contradict the writing, and evidence of consistent additional terms may be used to explain or supplement the writing.

If a writing falls within level 2 (complete and exclusive statement) then evidence of consistent additional terms may not be used to explain or supplement the writing.

[To see the December 22, 2017 court decision from where the preceding text was “lifted,” click: HERE.]

How does this work in practice? The court decision we’ve noted above tells us a little story. It isn’t about real property, but the analysis would be the same.

The owner of a set of three related businesses reached an understanding, but not an agreement, to sell those businesses for “all cash.” There was to be no enforceable agreement (i.e., contract) until all of its terms were written down and the agreement was fully executed. Before that happened, the buyer’s lender insisted that the seller, who was to stay on for three years in a managerial position, retain a “stake” in the success of the business. So, the buyer’s offer was revised to be mostly cash, but also a small amount of preferred stock. The buyer wasn’t overly thrilled but agreed provided that the stock could be cashed out at the end of the three years. The parties agreed to such a structure, but the attorneys pointed out that the existence of a written agreement requiring conversion to cash at the demand of the seller would make the value of the preferred stock immediately taxable even though the money wouldn’t be available for three years.

To solve this “problem,” an oral agreement was reached. It provided that, at the end of the three years, the buyer or a principal of the buyer would buy back the shares. No one ever denied that existence or terms of this oral agreement. Thus, there was no question about the existence or even the terms of that oral agreement. But, when the business went “bad” before the end of the three years, the buyer’s principal (apparently the one who might have available funds at the time) refused to redeem the stock for the agreed-upon amount (or any amount at all) and argued that the integration clause in the sales agreement as his defense. If the integration clause really meant that all contemporaneous agreements such as the oral agreement were superseded by the written agreement then, despite the actual existence of the oral agreement, it couldn’t be enforced, having been merged into the sales agreement (my its omission). Gone, gone, gone.

[We’re simplifying because there were three agreements involved, two governed by Delaware law and one by California law. The dispute was heard in California. The California court ruled that the outcomes under the laws of the two states would be the same.]

So, here are more snippets of law (from the same case):

The crucial issue in determining whether there has been an integration is whether the parties intended their writing to serve as the exclusive embodiment of their agreement.

Under California law, the presence of an integration clause in the contract is not conclusive but is a factor which “may help resolve” that issue.

In considering whether a writing is integrated, the court must consider the writing itself, including whether the written agreement appears to be complete on its face; whether the agreement contains an integration clause; whether the alleged parol understanding on the subject matter at issue might naturally be made as a separate agreement; and the circumstances at the time of the writing.

On the issue of contract integration, “the court must consider not only whether the written instrument contains an integration clause, but also examine the collateral agreement itself to determine whether it was intended to be a part of the bargain. …” However, in determining the issue of integration, the collateral agreement will be examined only insofar as it does not directly contradict an express term of the written agreement; “it cannot reasonably be presumed that the parties intended to integrate two directly contradictory terms in the same agreement.”

In the case of prior or contemporaneous representations, the collateral agreement must be one which might naturally be made as a separate contract, i.e., if in fact agreed upon need not certainly have appeared in writing.

Whether a contract is integrated is a question of law when the evidence of integration is not in dispute.

If the issue of integration requires a resolution of a conflict in the evidence or of credibility, then the trial court’s determination is reviewed under the substantial evidence standard.

We’re not going to burden readers with a drawn-out explanation of what most readers already suspect the court decided – that the oral stock (re-)purchase agreement was not integrated into the purchase and sales agreement, that the parties, regardless of the presence of an integration clause, intended that the oral agreement survive. The basis was that it didn’t conflict or amend the sales agreement. It was a valid stand-alone agreement. Though it did relate to the sale of the businesses, its existence didn’t change the deal. So, in “legal” terms, what could have been interpreted as the “FULL expression” of their agreement, was found to be only a “PARTIAL expression” of that agreement.

So, again, as Ruminations has done in the past, we explode the notion that one can interpret the words of an agreement, such as: “This Agreement supersedes any prior agreements, understandings, or negotiations, whether written or oral,” and think the outcome is obvious and only a dictionary is needed to apply those words. That’s just plain not how it works. Basically, intent overrides a blind reading of the words in an agreement. All of contract interpretation rides on the intent of the parties. The words in an agreement are a good indication of such, but context is always needed because agreements are written by imperfect mortals and can’t possible, in print alone, express the totality of what the parties intended to happen.

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