An attorney friend of mine once told me the above and, in my 27 years as an attorney, it has proven to be true time and again. It is what I tell my clients before drafting an agreement to emphasize the point that business agreements and relationships are held together more by the character of the people involved than by a contract.
However, for the protection of everyone involved, it is always better to put an agreement in writing. Though people will usually enter into a business transaction with good intentions, misunderstandings sometimes occur over exactly what was promised, when the goods or services were to be delivered, the exact price involved, etc.
In California, oral contracts are just as legal and binding as written contracts. But it is MUCH more difficult to prove the existence of an oral contract—and its terms and conditions — in court, as memories fade with passing time. A written contract memorializes exactly what has been agreed to, and therefore helps preserve a business or social relationship from "loss of memory" and subsequent litigation.
Fostering a relationship with your business partner based upon honesty and integrity will usually result in a business transaction and an ongoing business relationship that is both pleasurable and profitable with little or no problems.
Unfortunately, "spills" do occur as business transactions and relationships shatter for a variety of reasons. If litigation becomes necessary, a written contract will go a long way to help "clean the mess" and ensure that the person or entity wronged in the broken transaction is fairly compensated.
It is worth keeping in mind that old but wise saying, "An ounce of prevention is worth a pound of cure."