Are Verbal Contracts Legal?

Are Verbal Contracts Legal?

Business people often make handshake agreements. But are these agreements really legal? They may be legal, depending on the circumstances, but they may not be helpful if the agreement must be taken to court. Here's a story to illustrate:

A Business Barter Story 

Jim and Carter agree on a barter arrangement. Jim will maintain the landscaping around Carter's dental office and Carter will do Jim's dental work. They agree to an amount of work that each will do, roughly equal amounts on both sides. Jim makes an appointment with Carter and has his dental work done. He shows up one day to work on the landscaping, goes home after an hour, and never shows up again. Later Carter hears that Jim has declared bankruptcy. Can Carter sue Jim? Sure. But the bigger question is whether he can win a lawsuit against Jim.

Carter may be able to recover his money from Jim, but maybe not, especially if there is a bankruptcy in process.

The Difference Between "Legal" and "Enforceable"

The simple answer to the question, "Are verbal contracts legal?" is: "Yes, in many cases. But..." Most types of contracts don't have to be in writing, and it is not illegal to enter into a verbal business contract unless the nature of the contract itself is illegal (as in a contract for illegal drugs). But that's not the problem. 

Sure, it's legal, but is it enforceable? That is, can the verbal contract be upheld in a court of law? A verbal contract is difficult for a court to uphold because it turns into "he said/she said." There is no way for either side to prove their version of the contract. A written contract, on the other hand, can stand by itself. While there may be issues of ambiguity and incompleteness  in a written contract, it's much easier for a court to deal with a document that says:

If either party defaults on the contract terms, that is, fails to live up to his part of the contract, the court can give the judgment to the other party.

Some Contracts Must be in Writing

Each state has a Statute of Frauds that describes the types of contracts that must be in writing in order for them to be enforceable. The most common list of contracts that must be in writing includes:

• Contracts to answer to a creditor for the debt of another (as an executor for a will, for example)
• Contracts relating to marriage (prenuptial agreements, for example)
• Contracts for the sale of real estate or relating to an interest in real property
• Contracts not to be performed within one year.

Each state has different requirements for contracts and agreements that must be in writing. Florida law, for example, says that "contracts related to the sale of real estate or contracts that cannot be performed within one year must be in writing."  The California Statue of Frauds has a longer list of contracts that are invalid if not in writing. 

Using Free Contract Forms

If you have a quick and easy agreement you want to make with another business or individual, just to keep it legal you may decide to use one of those free contract forms that are floating around the internet. I asked several attorneys about using these forms. Yes, they are attorneys, but they give some powerful reasons not to use free contract forms. 

In years past, it was common to have business agreements which were sealed with just a handshake. For better or worse, those times are past. It is best in every case to write up some kind of simple contract, even when you think "Well, this is silly." As I always say,"If it isn't in writing, it doesn't exist."  Or, as Sam Goldwyn said, " A verbal contract isn't worth the paper it's printed on."

Types Of Arbitration

Types Of Arbitration

Arbitration is distinct from litigation primarily because the parties to the dispute have the right to choose the arbitrator depending on the type of arbitration they opt eg: ad hoc or institutional.

India is a signatory to the New York convention, which facilitates the enforcement of international arbitral awards.

There are different categories of arbitrations namely:

Domestic Arbitration

The term “Domestic Arbitration” denotes arbitration which takes place in India, when the subject matter of the contract, the merits of the dispute and the procedure for arbitration are all governed by Indian law or when the cause of action for the dispute has arisen wholly in India or where the parties are otherwise subject to Indian jurisdiction.

International Arbitration

International Arbitration” has a foreign ingredient. Arbitration becomes “International” when at least one of the parties involved is resident or domiciled, outside India or the subject matter of the dispute is abroad. The law applicable to an arbitration proceedings may be the Indian law or a foreign law, depending on the terms of the contract in this regard and the rules of conflict of laws.

Foreign Arbitration

“Foreign arbitration” is an arbitration conducted in a place outside India, where the resulting award is sought to be enforced as a "foreign award".

Ad hoc Arbitration

Ad hoc arbitration” is arbitration agreed to and arranged by the parties themselves without recourse to an Institution. The proceedings are conducted by the arbitrator(s) as per the agreement between the 'parties' or with concurrence of the parties. It can be domestic, international or foreign arbitration.

Institutional Arbitration

Institutional arbitration” is arbitration conducted under the Rules laid down by an established arbitral organization. Such Rules are meant to supplement provisions of the Arbitration and Conciliation Act in matters of procedure and other matters the Act permits. The rules may provide for domestic arbitration or for international arbitration or for both and the disputes dealt with may be either general in character or specific.

Specialized Arbitration

"Specialized arbitration" is arbitration conducted under the auspices of arbitral institutions which might have framed special rules to meet the specific requirements for the conduct of arbitration in respect of disputes of particular types, such as, disputes as to commodities, construction or specific areas of technology. Some trade associations concerned with specific commodities or Chambers of Commerce also specify that arbitration under their rules will be conducted only between members of that organisation.

Statutory Arbitration

“Statutory Arbitrations” are arbitrations conducted in accordance with the provisions of certain special Acts which provide for arbitration in respect of disputes arising on matters covered by those Acts. There are about 24 such Central Acts. Among them are the Cantonments Act, 1924, the Indian Electricity Act, 1910, the Land Acquisition Act, 1894, the Railways Act, 1890 and the Forward Contracts Regulation Act, 1956. Many State Acts also provide for arbitration in respect of disputes covered by those Acts, including Acts relating to co-operative societies. The provisions of the Arbitration Act, 1940 generally apply to those arbitrations unless they are inconsistent with the particular provisions of those Acts, in which case the provisions of those Acts will apply (Sections 46 and 47, Arbitration Act, 1940).

THE LAW GOVERNING THE ARBITRATION PROCEEDINGS

THE LAW GOVERNING THE ARBITRATION PROCEEDINGS

The issue of choosing the law governing the arbitration proceedings depends on the fact whether the arbitration agreement refers a matter to the permanent arbitration institution or to the ad hoc arbitration.

Basically, if the matter is referred to permanent arbitral institution, proceedings are held in accordance with the rules of said institution. For example, if the dispute is referred to ICC International Court of Arbitration, the proceeding is governed by their rules.

In ad hoc tribunals, the law governing the arbitration proceedings is determined from the seat of arbitration, meaning that the governing law in this case is the law of the seat of arbitration. If the parties have not designated the seat of arbitration, the proceedings are governed by the express choice of law of the merits of the dispute.

THE LAW GOVERNING THE MERITS OF THE DISPUTE

Arbitration tribunals are required to apply the choice of law rules of the seat of arbitration. Many countries have foreign arbitration laws that include a statutory provision setting out special choice of law principles to be applied by arbitration tribunals. This provision was introduced, for example, into English law by the Arbitration Act 1996. Previous to this English arbitrators were bound to apply the choice of law rules which were binding on the English courts only.

The choice of law rules of the Arbitration Act 1996 deal with three types of situations: situations in which the parties make a choice of law, situations in which the parties choose ´other considerations` instead of making a traditional choice of law and situations in which the parties fail to make a choice of law.

Choice of law

This principal means that the arbitration tribunal will decide the dispute submitted to it according to the law which the parties have chosen as applicable governing the dispute. In other words, if the parties choose a specific law to govern their contract, the arbitration tribunal is obligated to comply with the decision (express choice of law clause).

Choice of other considerations

Instead of making an express choice of law the parties may agree that the contract is governed by principles common to the laws of both parties, or they also may agree when making a choice of law clause that the contract is governed by principles common to the laws of some other country as well as public international law. The Arbitration Act also allows the parties to make a choice of law clause stipulating that the contract will be governed by internationally accepted principles of law governing contractual relations (also referred to as lex mercatoria), an non-national corpus of rules, such as the UNIDROIT Principles of International Commercial Contracts, and finally, it is also permitted to choose a religious law to govern the contract, such as Jewish law or Sharia law. Under the Arbitration Act it is also possible, if the parties so wish, for the arbitration tribunal to apply to the dispute the principle of equity or fairness instead of strict rules of law.

Absence of choice

If the parties have not made a choice of law, it is up to the arbitration tribunal to decide the proper choice of law applicable to the particular dispute, and this law is determined on the basis of the conflict of rules the tribunal considers applicable. In these situations it is possible, for example, to apply the choice of law rules contained in the Rome Convention on the Law Applicable to Contractual Obligations.

In other words, where the parties have not made a choice of law, the arbitration tribunal will decide what the applicable law is. There is, however, a traditional choice of law methodology to be followed despite the considerable freedom the arbitration tribunals can exercise in choosing the applicable law. According to the traditional choice of law methodology the arbitration tribunal must first decide what choice of law rules are applicable, and then apply those rules to identify the law of a country as the applicable law. The European Convention on International Commercial Arbitration (entered into force in 1964) provides also that where the arbitrators choose the applicable law they shall take into account of the terms of the contract and trade usages while doing so (Article VII – Applicable Law).

The arbitration process

The arbitration process

Although every arbitration is different, there are general steps and procedures that are followed:

1. Starting the arbitration

Any party to an agreement can start an arbitration (usually called the claimant). The claimant will typically send a notice of arbitration (sometimes called a Notice to Request to Arbitrate, or Arbitration Application) to the other party involved in the dispute. Where and how notice is to be given is often covered under the notice terms of the agreement that is being arbitrated.

This notice should contain information such as:

·         the name and address of both parties,

·         a description of the dispute, and

·         what result the person starting the arbitration hopes to obtain.

The person receiving the notice must respond within a certain time period, and must either confirm the accuracy of the information in the notice, or make corrections to it. If an arbitrator has already been agreed upon, the notice must also be sent to the arbitrator.

2. Choosing the arbitrator

An arbitrator must be chosen and agreed upon by all parties. Often, the process for selecting an arbitrator, and the number of arbitrators that will be required, is set out in the document under dispute. If there is no written agreement, the parties can agree on an arbitrator and decide if more than one arbitrator is necessary. If the parties cannot agree upon an arbitrator, the court may appoint one.

3. First meeting

Once an arbitrator is chosen, all parties and the arbitrator usually hold a first meeting. The parties may also retain legal counsel to attend at the arbitration and represent them. The initial meeting, sometimes called a pre-hearing examination, gives the participants a chance to discuss and clarify any outstanding issues regarding the arbitration process, such as:

·         identifying the issues in dispute,

·         determining what form the arbitration will take: that is, an oral hearing, or in writing,

·         the scheduling of all events, including the date and place of the arbitration hearing, and

·         identifying and listing witnesses and any experts that will be called to give evidence.

This meeting could be held in person, by telephone, or by videoconference.

4. Arbitration hearing

If it is determined that the arbitration will be in writing, the arbitrator will examine documents and render a decision. The arbitrator may ask for further documents or explanations with regard to the documents being examined.

Often, the parties will request an arbitration hearing. At the hearing, each party presents their case, evidence is given, and witnesses may be examined. Depending on the complexity of the case and the monetary value at stake, the parties may choose to hire lawyers to represent them at the arbitration.

5. Decision of arbitrator

Once the arbitration has taken place, the arbitrator or panel will make its decision, which is usually final and binding. The decision must be in writing and provided to all parties. The decision must include an explanation of why the decision was made. Among other things, the decision may involve:

·         ordering specific action to be taken, such as having one party make a payment to the other,

·         ordering an injunction against specific actions, such as refraining from selling a product,

·         monetary awards (which may include one party paying the other party’s costs of arbitration, plus interest).

Subject to applicable legislation and any arbitration agreement that may exist between the parties, the decision of an arbitrator may be appealed to a court of law.

6. Fees and costs of arbitration

There are costs to both parties in preparing and participating in an arbitration. The costs include such things as the arbitrator’s fees, the cost of expert witnesses, disbursements and so on. The costs can vary depending on several factors, such as:

·         whether there was an oral hearing requiring the attendance of the arbitrator and fees for the hearing facility, or if the arbitration required only written submissions,

·         if expert witnesses were called,

·         how long the arbitration lasted, and

·         if the arbitrator awarded costs of the arbitration to be paid by only one of the parties.

Generally, fees or a deposit must be paid when a copy of the notice of arbitration and response is sent to the arbitrator.

Is it important to note that there are time frames that exist for all steps in an arbitration, either as set in the Arbitration Act, or as agreed upon by the parties and the arbitrator.

Rights and duties of arbitrators

Rights and duties of arbitrators Article 11

(1) An arbitrator must accept his appointment in writing. Such acceptance may be made by signing the arbitration agreement.

(2) An arbitrator must conduct the arbitration with due expeditiousness and undertake measures on time in order to avoid any delay of the proceedings.

(3) Unless agreed otherwise, the parties may discharge by their consent an arbitrator that fails to perform his duties, or does not perform them in a timely manner.

(4) An arbitrator has the right to reimbursement of expenses and a fee for the work completed, unless he has waived these rights in writing. The parties shall be jointly and severally liable for the payment of such expenses and fees.

(5) If an arbitrator has determined the amount of his own expenses and fees, his decision does not bind the parties unless they accept it. If the parties do not accept this decision, the expenses and fees will be determined, upon request of an arbitrator or of a party, by the authority specified in Article 43, paragraph 3 of this Law. The decision made by such authority is a title for enforcement against the parties to the arbitral dispute.

 Challenge of arbitrators Article 12

(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose any circumstances likely to give rise to justifiable doubts as to his independence or impartiality. An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall without delay disclose any such circumstances to the parties unless they have been previously informed of them by him.

(2) An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or if the arbitrator does not possess qualifications agreed to by the parties or if he fails to fulfill his duties specified in Article 11, paragraph 2 of this Law. Law on Arbitration (Arbitration Act) 6

(3) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons that occurred after the appointment or reasons of which he becomes aware after the appointment has been made.

(4) The parties are free to agree on a procedure for challenging an arbitrator, subject to the provisions of paragraph 7 of this article.

(5) Failing such agreement, a party who intends to challenge an arbitrator shall, within fifteen days after becoming aware of the appointment of the arbitrator or after becoming aware of any circumstances referred to in paragraph 2 of this article, send a written statement of the reasons for the challenge to the arbitral tribunal.

(6) Unless the challenged arbitrator withdraws from his office or the other party agrees to the challenge, the arbitral court, including the arbitrator subject to the challenge, shall promptly decide on the challenge.

(7) If a challenge under the procedure specified in paragraphs 4 and 6 of this article is not successful, the challenging party may, within thirty days after having received notice of the decision rejecting the challenge, or if the arbitral tribunal does not decide on the challenge within thirty days after the challenge was made, in a further thirty days from the moment of the expiration of the first thirty days, request from the appointing authority specified in Article 43, paragraph 3 of this Law to decide on the challenge. While such a request is challenged arbitrator, may continue the arbitral proceedings and make an award.

Relevant Conventions and Documents

Relevant Conventions and Documents

One of the most relevant convention in the field of international commercial arbitration is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958). It requires courts of contracting states to give effect to private agreements to arbitrate and to recognize and enforce arbitration awards made in other contracting states and it applies to arbitrations which are not considered as domestic awards in the state where recognition and enforcement is sought.

On European point of view, the next relevant legal document is the European Convention on International Commercial Arbitration (1961), which applies to arbitration agreements concluded for settling disputes arising from international trade between physical or legal persons residing in different Contracting States.

The UNCITRAL Model Law on International Commercial Arbitration reflects the worldwide consensus on key aspects of arbitral process accepted by different states and it is designed to assist States in reforming and modernizing their laws on arbitral procedure.

The UNCITRAL Arbitration Rules provides a set of procedural rules upon which parties may agree for the conduct of arbitral proceedings arising out of their commercial relationship. These rules are widely used both in ad hoc arbitration and in permanent arbitration institutions.

In addition with these conventions and documents, arbitration process is regulated by other regional conventions, such as Inter-American Convention on International Commercial Arbitration, and Conventions covering certain subject matters, such as the EU Tax Arbitration Convention, as well as national arbitration laws.

Powers and duties of arbitrators

Powers and duties of arbitrators.

(1)  Arbitrators shall have the duty to conduct fair and impartial hearings, to take all necessary actions to avoid delay in the disposition of proceedings, to maintain order, and to meet the sixty day time frame required  for the rendering of a decision. They shall have all powers necessary to meet these ends including, but not limited to, the power:

(a) To consider any and all evidence offered by the parties which the arbitrator deems necessary to an understanding and determination of the dispute;

(b) To regulate the course of the hearings and the conduct of the parties, their representatives and witnesses;

(c) To schedule vehicle inspection by the technical experts, if deemed necessary, at such time and place as the arbitrator determines;

(d) To continue the arbitration hearing to a subsequent date if, at the initial hearing, the arbitrator determines that additional information is necessary in order to render a fair and accurate decision. Such continuance shall be held within ten calendar days of the initial hearing;

(e) To impose sanctions for failure of a party to comply with

(f) To calculate and order the joint liability for compliance obligations of motor home manufacturers, when applicable, as part of arbitration decisions when ordering repurchase or replacement of a new motor vehicle

.

(2) The board is responsible for the assignment of arbitrators to arbitration hearings. The selection and assignment of arbitrators is not subject to the approval of either party.

(3) Arbitrators must not have a personal interest in the outcome of any hearing, nor be acquainted with any of the participants except as such acquaintance may occur in the hearing process, nor hold any prejudice toward any party. Arbitrators shall not be directly involved in the manufacture, distribution, sale, or warranty service of any motor vehicle. Arbitrators shall maintain their impartiality throughout the course of the arbitration proceedings.

(a) An arbitrator shall sign a written oath prior to the commencement of each arbitration hearing to which he or she has been assigned, attesting to his or her impartiality in that case.

(b) There shall be no direct communication between the parties and the arbitrators other than at the arbitration hearing. Any other oral or written communications between the parties and the arbitrators shall be channeled through the board. Any prohibited contact shall be reported by the arbitrators to the board and noted in the case record.