A sales rep from Littleton, Colorado called me recently to help him collect an override bonus he was entitled to for training a new colleague. The expected bonus was sizeable, but unpaid, and he wanted to sue. His problem was that the bonus arrangement was an oral agreement that had never been reduced to writing and signed. Realizing that he had no other way of proving a right to a bonus, the sales rep planned to take the stand to tell his story and testify to the terms of his arrangement.
Sometimes, though, you can't be your own witness.
A 35-year-old Colorado court decision illustrates one such situation. In the case of May Bell Gaddis, Executrix of the Estate of William H. Gaddis, versus Ralph L. McDonald, an employee sued to collect an oral royalty payment but could not testify on his own behalf at trial. Ralph McDonald, a geologist, went to work for Gaddis Mining Company, an oil and gas company. McDonald and Gaddis shook hands on a deal in which McDonald would get a monthly salary to develop oil and gas leases and also get a 1% overriding royalty interest in leases he acquired for the company. Mr. Woodley, the land manager for the company, had a similar arrangement. This is a common incentive arrangement in the oil and gas industry.
The company paid McDonald and Woodley their monthly salaries, but never paid any royalties. Gaddis, the owner, died 18 months after McDonald started work. Mrs. Gaddis, his widow, refused to pay royalties to either McDonald or Woodley because there was no written agreement for either in the company's files, and she had never heard of the agreements.
There was a lot of money at stake, so both men sued Gaddis' estate for the royalty payments. Woodley's trial came first. He expected to testify about his handshake agreement with Gaddis. But the judge refused to let him testify, ruling that his testimony was prohibited under Colorado's Dead Man's Statute. This law protects heirs from people who would take the stand and testify that the deceased person had promised them something or owed them money. The Dead Man's Statute prohibits a person with a direct interest in the outcome of a case (like Woodley) from testifying on their own behalf against the interests of the dead man's estate.
Since Woodley had no documents and no witnesses who could explain the terms of his royalty agreement, he couldn't prove his case, and lost. The appeals court agreed that the trial judge was right to prohibit Woodley's testimony at trial.
When McDonald's case came to trial, he, too, could not testify because of the Dead Man's Statute. However, he was able to call Woodley to testify about the terms of McDonald's royalty agreement. Woodley testified about a meeting he had with Gaddis (the deceased business owner), McDonald, and another employee in which Gaddis told him about McDonald's royalty agreement. This testimony was not prohibited by the Dead Man's Statute because the person testifying (Woodley) wasn't the person suing, so he didn't have a financial interest in the result of the case. The estate did not have a witness who disagreed with Woodley's testimony. His testimony provided the details necessary to prove the terms of McDonald's handshake agreement, and McDonald won his case.
The decision in Gaddis v. McDonald stands as a powerful warning to those who do business on a handshake: If you are not going to write down and sign your agreements, at least make sure you have a neutral (impartial) witness who will listen carefully. Equally important, your witness needs to be someone who will be willing and able to go to court to testify for you in case you end up having to file a lawsuit to enforce the agreement later on. And these days it certainly wouldn't hurt to follow up with an email stating the terms of your agreement and requesting confirmation.