Under California law, oral contracts are legal and binding. However, these kinds of contracts can place businesses at risk, as a recent California case demonstrated.

Although LeBeau Thelen, LLP, was not involved in this particular case, business owners need to understand the details of the case and the risk that oral contracts could pose.

A recent case shows the risk of oral contracts

Before the start of the 2017 farming season, the Sriracha hot-sauce maker Huy Fong Foods abruptly dissolved its relationship with the Kern and Ventura County jalapeño farmer, Underwood Ranches. When the Sriracha manufacturer did not place an anticipated order, the farmer suffered an 80% loss of business and worker lay-offs occurred.

Huy Fong claimed they dissolved the oral contract due to a previous lawsuit, where they claimed that the jalapeño farmer failed to return an overpayment of $1.4 million from the previous season. However, the jalapeño grower countersued, alleging breach of contract on the part of the hot-sauce manufacturer.

This complex case went to litigation and was only resolved in July of this year.

What did the jury decide?

Lawyers for the hot-sauce company argued that the two entities negotiated oral contracts on an annual basis for 28 years. However, the jury determined that the two partners operated on a mutual agreement and that a valid multi-year contract existed between them that needed to be fulfilled.

Therefore, the jury awarded Underwood Ranches $23.3 million in damages. The jury found:

  • Huy Fong Foods breached their long-standing partnership agreement. The jury awarded damages to make up for the jalapeño farmer’s loss of income; and
  • As reported by The Los Angeles Times, Huy Fong Foods committed fraud against the jalapeño farmer by misrepresentation and concealing information.

The primary issue? Oral v. written contracts

Without signed contracts specifying that a supplier will make a regular purchase, verbal agreements may be difficult to enforce. Keeping records of the amount of produce grown and goods shipped to a partner or customer may help in proving the amount of business previously supplied. To file legal action over a breach of an oral contract in California, the statute provides the right to do so within two years of the date of the alleged breach.