What is a Verbal Contract?
Often confused with handshake deals struck between friends, verbal agreements are precisely what they sound like: legally binding contracts made without any written documentation. Just because you may have a verbal agreement in place, doesn’t mean the law won’t uphold it, however. In fact, verbal contracts are entirely enforceable, so long as they are made with a clear intent to be legally binding with specific terms agreed upon between two or more parties. But how does one identify a verbal contract? Generally speaking, they are made when parties sit down and discuss specific terms, or they can be implied from conduct. For instance, consider the case where a business owner allows you to rent office space for a reduced price . You and she might not have physically sat down and signed a lease but the owner has essentially created a verbal contract with you by taking your money and not asking for an agreement to be in writing.
So what situations are verbal contracts used in? It depends on the type of person or entity entering into a contract. A verbal agreement is often used as an alternative to a written contract when: Since written contracts have become the norm in the business world, many people assume that verbal contracts aren’t enforceable. It’s possible that, in certain cases, a written contract may be the better option for protection. It’s understandable that most people would feel more comfortable making a contract with loose terms more specific with a written contract. However, be assured that verbal contracts do have binding legal power.
Legality of Oral Agreements
For a verbal agreement to be legally binding, it must satisfy the following conditions:
Consideration – A verbal agreement must have something of value for both parties.
Intention – Both parties must intend for the verbal agreement to be legally binding, although exceptions are made for certain types of agreements (see below).
Legality – The agreement must not be illegal; thus, for example, someone cannot enter into a verbal agreement to carry out an illegal act.
Capacity – Legal capacity relates to a person’s ability to enter into a binding agreement and to be held responsible for it. Children lack capacity to contract.
Agreement – There must be agreement on all essential elements of the contract. (See the section on essential elements of a contract) If there is no agreement on essential elements, a verbal agreement can usually be upheld as a mere invitation to treat; a position that might disappoint the party that was relying on the verbal agreement.
Exceptions or limitations:
Employment Contracts – Even though it is usually possible to have a legally binding employment contract without it being in writing, there may still be a requirement for the contract to be in writing when it is for a particular type of employee, for example, employees who come under the working time regulations, where a written statement is required; or employees who work in the transport industry, who are required to have a written record of their agreed hours of work (JSA Act 1995).
Hiring a vehicle – The Consumer Credit Act requires that customers are provided with information about certain features of a hire agreement for a vehicle. The supplier is also required to provide a particular kind of document to the customer.
Building agreements – The Housing Grants, Construction and Regeneration Act 1996, as amended, contains provisions that require a written contractual and sub-contractual information exchange.
Other special contracts – It may also be a term of a contract that it must be in writing to be legally binding. For example, it may be a term within the contract itself that the contract will not come into force unless it is signed by a party, or the parties may require the contract to be in a certain form.
Pros and Cons
Convenience is a hallmark of verbal agreements, which require no more than spoken assurances. This quality is both a benefit and a down side, however. While convenience is an obvious advantage, the lack of documentation means there is also nothing to consult later on. If one of the parties forgets or denies certain terms, the agreement may become challenging to enforce. The result can vary from disagreements over a small detail to a total failure to fulfill obligations under the contract.
The flexibility of verbal contracts is another dual edged sword. It means parties can often forge agreements without needing to satisfy legal formalities. While this factor makes informal accords like these more accessible, it also creates the risk of miscommunication. Terms might be left open, subject to varied interpretations or simply ignored by one of the parties. In all these cases, it is vital to have a professional attorney review your contract prior to entering into an arrangement.
Key Element for Enforceability
To begin with, most enforceable verbal agreements contain standard elements that come into play in a traditional contract. In order to be enforceable, the terms of the contract must involve some degree of offer, acceptance and consideration. In most instances, the acceptance hinges on whether or not the acceptance of the offer by one party is communicated to the other party and the offeror. When an offer is made via a verbal agreement, the terms do not need to be explicitly spelled out, but they must clearly convey that there is mutual assent between the two parties. In the event that one of the parties fails to follow through on their terms, the successfully executed contract may be honored if the offer was made, the offer was accepted by the other party and both parties agreed to what appears to be the broad strokes of the contract. It is also important to note that verbal agreement contracts must involve a legal purpose, as well as an articulate description of the scope and duration of the contract, along with appropriate and responsible consideration. Actual performance is another key element for veracity and enforceability.
Issues with Proving Oral Contracts
When a verbal contract is brought to court, one of the biggest challenges is proving its existence and terms. A verbal agreement may be for an ongoing service with payments made over time, or it may be as simple as an agreement to purchase certain goods on a future date. It can be very difficult to prove that an agreement of this nature was made and the terms to which the parties agreed.
Common evidence that is often included in the portfolio when a party claims that an oral contract exists includes: Under Section 41 of Evidence Act 1995 (NSW), a claim that an oral contract was reached by a party will be presumed false unless that party calls at least one witness to support that claim. The Courts have a number of ways to bypass Section 41. A party may enter into an agreement in front of a witness and then coerce that witness to be mute in Court . In this situation, the judge will likely infer that such coercion was used and presume the contract existed. Other Circumstantial Evidence may be presented as proof including: Having said this, proving the existence of a verbal contract is one thing. Proving the contents of a verbal agreement is an even more arduous process. An example may be that a party has agreed to purchase something of value from a supplier on a particular occasion. When the time comes, the supplier does not deliver the goods and the buyer makes no payments. If summons is issued, onus will be on the buyer to demonstrate that the oral agreement took place and additionally demonstrated what was to be exchanged. At a minimum, the likely value of the goods or service in a hypothetical market.
How to Fortify a Verbal Agreement
While the law does generally recognize oral agreements, you can take simple steps to increase the likelihood that the courts will enforce your agreement. Along with a reputable attorney who specializes in business law, consider these tips: Witness Corroboration: One way to make your oral agreements more enforceable is to involve a neutral third party as a witness. What could further establish the agreement than a friend or a surrogate for the parties to the agreement? Having such a witness not only helps to ensure that all parties to the agreement are acting in good faith, but also increases the chances that the witness would be able to corroborate the agreement if called to testify in court. Follow-Up Communications: It is always a good idea to memorialize oral agreements to the greatest extent possible. If you have a verbal agreement with a party for a real estate transaction, for example, follow up with an email stating the terms of the agreement and any conditions or contingencies. Showing a history of the communication helps provide back-up evidence in the event of a dispute down the road. Partial Written Confirmations: While it is not possible to put a verbal agreement in writing in its entirety, you can record certain essential terms. For parties to a purchase agreement for real property, for instance, it may be beneficial to put the purchase price, the deposit amount, and even the timeline in writing even if it does not seem relevant to the heart of the agreement. Obtaining the other party’s signature on such a document will go a long way toward ensuring that the parties do not have conflicting memories in the event of a disagreement.
Verbal Contract Examples and Case Studies
Examples of Verbal Agreements in Action
Oil Alyeska Pipeline Service Co. v. OEA, Inc. (Anchorage, Alaska, Anchorage No. 3AN-89-7651 Civil) is an example of a case where the use of verbal modification of a written and recorded lease was involved. In this circumstance, a corporation and the previous land owner’s successor in interest agreed to pay a certain figure for an easement on a parcel of land. The cost to be paid to settle the original landowner was based upon a certain formula as was the cost to be paid for new easements. The successor in interest contended that this amount did not include the new easements because this had been modified verbally prior to the signing of the easement contract. The federal court in Alaska agreed with this position, stating that the parties have a right to orally modify their written agreement. The reason given being that the agreement could have been signed by the successors in interest to the original party. The court viewed this case with shallow eyes, finding that just because the original land owner and the oil company executed the easement modifications did not make them binding on the successor in interest. Garg v. Garg, 160 N.E. 2d 5 (Ill. 1959). The question whether the terms of a contract are sufficiently clear cannot be decided as a matter of law if the contract is susceptible to more than one construction. Smith v. The Metzenbaum Chemistry Co. (N.D. W.Va. 1965), 243 F. Supp. 993. In the case of US v. Hayes International Corp. 121 F.R.D. 102 (W.D. Texas 1988), the court found that: [B]efore a contract is deemed to be ambiguous it must be determined that the language, taken as a whole, is susceptible to two or more constructions. Where a contract provision is reasonably susceptible to two construction, an ambiguity exists which precludes a summary judgment. Smith (citing James Talcott Inc. v. Franklin National Bank of Long Island, 544 F. 2d 1271 (2nd Cir. 1976).
When to Stay Away from Oral Contracts
While verbal agreements can be legally binding in many situations, there are certain circumstances when it is wise to avoid them at all costs. If you suspect that the other party would deviate from the terms of the verbal agreement or if the transaction is of a particularly high value, you should avoid such agreements and protect yourself with a written contract. When entering a real estate transaction, written contracts are not only preferred; they are required by law . Selling a house can be extremely complicated if a verbal agreement was used. Real estate deals of any kind are complex and should always be protected by a strong written agreement. In the case of a dispute, it can be difficult to prove that a verbal contract existed. Relying on a verbal contract can be especially difficult in areas of the law that are highly specialized. Call upon the expertise of a lawyer to sort out your dispute over a verbal contract in these cases.