What is an Oral Contract?
So, what is a verbal contract exactly? As with written contracts, verbal contracts also have requirements. They need to include the purpose of the contract, the amount being paid, the deadline, and the responsiveness of the other party. It’s important to note that the other party needs to be legally allowed to submit the goods or services; for example, a minor isn’t allowed to and if a company goes bankrupt, they can’t supply the goods and services as promised either.
The general characteristics of a verbal contract are the same as those of a written contract. If two parties make a verbal agreement about services or goods—whether in person or over the phone—they are bound by this legal contract. The terms of a verbal contract are inherently informal and the terms may not be set in stone. This is because verbal contracts are often short-term, which is why they don’t need to be particularly formal. However, the boundary of how long a verbal contract can be is not defined. This is because laws about verbal contracts differ between states .
As with written contracts, verbal contracts do not have any limitations when it comes to the rewards you may receive by delivering on the contract. For example, if you sell your old car to someone and they agree to pay you $3,000 by next week, your reward is the payment you are supposed to receive. And if they don’t pay you on time, you have a legal case to get your money.
Verbal contracts are often used when people are making small agreements because it’s relatively quick and easy to make these agreements. Because of this, verbal agreements are often used by people for small items such as hiring a babysitter, visiting the dentist, or the "yes" of a friend to go to a concert on the weekend.
In certain areas, verbal contracts are not enforceable at all and in others, they are less common than they used to be. Still, they can stand up in a court of law and can be enforced in the same way as a written contract. Verbal contracts are legal in all states, but they have to fulfil legal requirements such as an exchange of consideration.
The Enforceability of Oral Contracts
The question of whether or not verbal contracts are legally binding grows out of common law and the Statute of Frauds, a statute still in force today. Under the Statute of Frauds, about a dozen distinct categories of contracts must be made in writing to be enforceable. If one of these categories applies to a contract that is not in writing, then the contract is not enforceable in a court of law. However, all other contracts which do not fall under the Statute of Frauds can be oral contracts and are just as enforceable as written contracts.
Even if the contract is not in writing, it is still binding on both parties. The agreement is enforceable as long as it has legal purpose and both parties voluntarily entered into the contract. The most common types of oral contracts are lease agreements, contracts for purchase of goods and services and contract for sale of real estate. It should be noted that lease agreements that are for a year or more must be in writing to be considered valid. Other than that particular category of the Statute of Frauds, most verbal contracts are valid unless specifically excluded.
Contracts that are invalid and unenforceable in court include all contracts that are not made for legal purposes. For example, if two people agree to rob a bank, this specific verbal contract is invalid in court. Only legal contracts are valid.
Requirements for a Valid Oral Contract
So, what do you need to actually create an enforceable verbal contract? Without a written document, are your claim of damages against the counterparty protected? For a verbal contract to really be legally binding, these elements need to be present:
- Offer: A verbal contract is created through offer and acceptance. The offeror must make a clear verbal offer, for example, by making an offer of sale or providing a service.
- Acceptance: Acceptance of a verbal contract involves a commitment from the other side. For instance, if your verbal contract is for the purchase of a product, the other side should be willing to pay for the item.
- Intention to Create Legal Relations: All parties involved need to have the intention to enter into a legally binding agreement.
- Consideration: Consideration forms the bedrock of a legal contract, including verbal contracts. It is the tangible benefit that each party will receive from the agreement.
Example:
You call your neighbourhood dry cleaners and ask "how much does it cost to dry clean suits?" The counterperson states "$75 per suit and $50 to alter."
Next day, you go into the dry cleaners and hand over two suits with a request to alter them. You say "you said it would be $75 for both suits to be dry cleaned and $50 to alter them."
The counterperson sells you the service that you requested. It is precisely because the counterperson had intention to create legal relationship, and your agreement clarified all the materials terms that legally binds the dry cleaner to the verbal contract.
When Oral Contracts Are Not Enforced
While the general rule is that oral agreements are enforceable, some contracts must be in writing to be enforceable. Certain agreements have special requirements set out in the Statute of Frauds, which is a state statute that requires certain contracts to be in writing to be enforceable. The following are examples of agreements that require a written contract:
- Governs contracts concerning an interest in land;
- Requires under contract that the sale of goods must be $500 or more and that the contract must be signed by the party to be charged;
- Requires under contract that the sale of personal property valued at $500 or more must be in writing; and
- Requires under contract that a lease agreement or agreement to remain in possession of land for a year or more be in writing.
There are other contracts that are considered unenforceable under the Statute of Frauds. Individuals should keep in mind the Statute of Frauds when drafting contracts. If a contract is covered by the Statute of Frauds, it must contain certain elements to be valid and enforceable. It also must be signed by the party against whom it is to be enforced.
Proving the Existence of an Oral Contract
When pursuing a verbal contract in court, it’s not simply a matter of proving the contract existed – you must also demonstrate its terms, its performance, and your own performance after the alleged contract was formed. This can be especially difficult if you are trying to show that a verbal contract exists after the fact, as the court must believe that you were providing services, goods, or other valuable information under the expectation of reciprocity – that you provided them with value that they must return. One of the best ways to support your case is by finding witnesses. A witness could be any person who views or hears you entering into a verbal agreement – whether it is someone in the room while you are communicating or even a person who witnessed the other side accepting your terms. Make sure that the person you call as a witness acts independently , represents both parties fairly, and can validate what occurred. You may also have evidence of performance, which is the primary evidence that will potentially support your claim. The evidence of performance may include documentation of the terms of the agreement, communication that proves the acceptance of the terms, and evidence of performance of the terms on both sides. The more evidence that you have to offer, especially confirmation from the other side of the terms and performance, the stronger your case may be.
Advantages and Disadvantages of Oral Contracts
Through the absence of written documentation, verbal contracts can help keep the negotiation process informal and flexible. Too strict of a formal adherence to terms can destroy negotiations with obstacles; if negotiation parties are not flexible, the common practice is to simply move on to the next offer. Negotiations are inherently an exercise in flexibility, and strict written agreements can inhibit this process. It is the business norm, for example, to use verbal contracts for labor arrangements. They are done quickly and let workers know they are in a temporary position. If they are used correctly, for well-defined situations, verbal contracts can be beneficial. However, misusing verbal contracts in certain situations can cause extensive headache, losses, and legal battles.
Verbal contracts’ informality and flexibility can have several unexpected negative consequences. Although verbal contracts can promote a sense of trust, if the contract terms are ambiguous, the parties are often exposed to denial and endless litigation; case law is filled with examples where contract terms and conditions were disputed. Litigation costs can be considerable over even small claims with high legal fees, expert witness fees, and court costs. In addition, verbal contracts require significant sacrifice of time and opportunity, as each party must repeatedly try to remember the details of the verbal contract and must often rely on memory, which can be very unreliable. Verbal contracts can be especially dangerous in close personal relationships, where emotional entanglements can be used to manipulate the parties, causing even more damage. Thus, in practice, most business professionals, project managers, engineers, and architects would never use verbal contracts for regular, normal business agreements. It always best to clearly document agreements in writing.
How to Make and Fulfill a Verbal Contract
While it’s important to recognize the limitations and risks associated with verbal contracts, there are strategies you can use to make a verbal contract work to your benefit. First, be clear in your communication. This includes both parties being on the same page, as well as how the contract will be performed. While it can be difficult to establish the terms of a verbal contract before it’s agreed upon, it’s not impossible. Discuss the details before you shake hands on the deal and make sure that both parties understand each other. Second, carefully document the circumstances of the agreement. This can come in many forms, whether it’s a paper trail of emails or text messages, a contemporaneous letter or even a recording of the phone call in which the agreement was made. Take good notes during the negotiation process that note every important detail of the agreement and make sure that both parties have access to this information after an agreement is made. Finally, if the agreement is particularly complicated, it’s recommended that you at least get written confirmation from both parties that they acknowledge the terms of the contract. An email or text message that simply says, "I accept" is sufficient. While a verbal contract can be binding in court, you’ll make it much easier for yourself if you at least secure written confirmation of the terms from both parties.
Final Words on Oral Contracts
To conclude, so long as the necessary elements of a contract exist, a verbal agreement can be legally binding. But proving the terms of the contract can be a different story. This is why written contracts are preferable. A written contract provides proof of the terms agreed upon, the parties involved, and signatures of all parties involved . It is also much easier to provide evidence of an existence of a contract if it is in writing or emailed.
If you have additional questions about a verbal contract or other real estate matters, please seek help from a qualified attorney.