Legal Memorandum: Effectiveness of an Oral Agreement

Issue: Under Alabama law, can the effectiveness of an oral agreement be postponed until a written document is executed?

Under Alabama law an oral agreement to execute a written contract is not valid if the oral agreement “postpones its effect until the writing is signed,” citing H.C. Schmieding Produce Co. v.Cagle, 529 So. 2d 243, 246-47 (Ala. 1988).

Contractual language that makes an obligation “subject to” execution of an agreement by no means signifies, as a matter of law, that the parties intended not to be bound until the ultimate agreement was executed, although see the Seventh Circuit case Empro Mfg. Co. v. Ball-Co Mfg., Inc., 870 F.2d 423, 425 (7th Cir. 1989), for the proposition that when parties make their agreement “subject to” a later definitive agreement they have manifested an intention not to be bound until the later agreement is executed.  However, more recent Seventh Circuit cases make clear that such a proposition is not the law in the Seventh Circuit or elsewhere.  In truth, “the word ‘subject’ does not have unvarying talismanic significance in contracts analysis.”  See Magallanes Inv., Inc. v. Circuit Sys., Inc., 994 F.2d 1214, 1218-19 (7th 1993).  In Magallanes, the court observed that far from having an “unvarying talismanic significance,” sometimes the “subject to” language merely means “nothing more than an inartful phrasing of the parties’ understanding that their agreement would be formalized by [attorneys]” and does not signify an intention to postpone binding effect.  Id. at 1219; see Lambert Corp. v. Evans, 575 F.2d 132, 135 (7th Cir. 1978) […]