What are Verbal Agreements
A verbal agreement is an agreement not put into writing and is often made when it is unnecessary to put it into writing and a written contract is not required. Although verbal agreements can be legally binding, they are difficult to prove in court if there is ever a dispute. Verbal agreements are often used between friends or between family members. They are typically used for simple and clear agreements such as borrowing or lending money from one another but use of verbal agreements gives up the benefits of having an enforceable written contract.
Verbal agreements are often used between family members and friends because they don’t want to cause unnecessary controversy and it is usually understood between the two parties that the actions are a "favor" and not a legally binding contract. Verbal agreements may be used for a variety of things. An example of a verbal agreement would be: a party says they will sell their car to someone else, the seller calls, and requires the buyer to come over in July to buy the car. The seller does not require the transaction to be put into writing; the buyer, because that is customary with that specific seller, understands that his verbal acceptance of the purchase of the car is sufficient to lock in the contract. A verbal agreement is valid if at least two of the four elements of a contract are present. While a verbal contract takes two parties to enter into , the concept of invitation to treat should be noted. Invitation to treat is the most common way a verbal contract is entered into. The seller (roger), approaches the buyer (Jerry) with the concept of Jerry purchasing his car at a given price. In this situation, Roger is in the position of making an offer and Jerry is in the position of receiving the offer. Jerry must accept (in order for a verbal agreement to be legally binding) from that particular seller. Even if Jerry accepts the offer verbally, there would be no option for Jerry to back out of the deal because Roger solely approached Jerry with the offer. A verbal contract must have all four essential elements of a contract. Each of the four elements are required in order for a contract to be legally binding. The first element that must be present is that a legal offer is presented. A legal offer is clearly defined and contains all material terms. The next element that must be present is consideration. The term "consideration" is the value that is exchanged between the parties. A verbal contract must also have competent parties. Competent parties means that both parties must understand the nature of the contract and voluntarily enter into the contract. Lastly, the parties must have a mutual agreement. A mutual agreement means that the parties entered into the contract with the full understanding of what material terms are. Without all four of these elements, a verbal contract can be deemed void and unenforceable.
Legal Criteria for Binding Agreements
In order for any agreement, verbal or written, to be considered legally enforceable, certain criteria must be met.
Usually when a verbal agreement is entered into, the contracting parties are not looking for ways to break that contract. However, if one of the parties wants out, it is important for them to understand the criteria that must be met in order for this to happen.
First, the parties must mutually consent to the terms of the contract. Consent cannot be considered mutual unless both parties agree on the same thing. Differing opinions will void the contract from the start. Consent can also be considered coercion. If one party is under duress to sign an agreement, the contract will not be binding.
The subject matter of the contract must be lawful. A contract for an illegal subject matter is void from the beginning.
In order for any contract to be valid, the contracting parties must have the capacity to enter into it. Minors do not have the legal ability to enter into contracts by themselves. As well, if a party is considered insane or mentally incompetent at the time the agreement is made, the contract will not be enforceable against that individual.
All contracts must involve consideration. Consideration is the promise or performance of something that induces a party to enter into an agreement. Without consideration in a contract, that contract cannot be legally enforced.
When Are Verbal Agreements Enforceable
A verbal contract could be enforceable in the following circumstances, but again may be very difficult to prove:
Sales of goods of a specified value under a certain amount. This can be $500 or $1,000, depending on the state law. The sale of goods is governed by the Uniform Commercial Code, which essentially provides that any transaction for the sale of goods with a value of $500 or more must be in writing. Therefore, if a seller has an order for goods from a buyer, and the value of the goods is less than $500, an oral agreement for the sale of the goods would be enforceable.
Services. An oral contract to perform a service is enforceable if the service can be performed in the period of time allowed by the statute of limitations (generally 3 to 6 years). This is an important exception to the statute of frauds that generally requires a written agreement to be enforceable if it cannot be performed within that period of time. For this reason, it is always better to put your agreement in writing if you can.
Personal agreement. An agreement between two persons not in the trade or business of dealing with one another is not subject to the provisions of the statute of frauds that require a writing to be enforceable. For this reason, it is always better to put your agreement in writing if you can.
Example of an enforceable agreement. Suppose you go to the grocery store and buy groceries that total less than $500. The store’s employee tells you your total is less than $500, and you agree to and make that purchase, the agreement to purchase the groceries is an enforceable oral agreement.
Example of an unenforceable agreement. Suppose you call your neighbor on the phone and ask him to paint your house. Your neighbor agrees to do so and indicates he will paint the house for $5,000. The agreement between you and your neighbor is unenforceable because the value exceeds the $500 threshold.
Challenges in Enforcement of Verbal Agreements
One significant obstacle that arises with verbal agreements is the difficulty of proving or enforcing such contracts. When parties to a verbal agreement find themselves in disagreement, the dispute can often come down to which person’s version of the story is accepted by the court. An example will best illustrate this problem. Consider a case where two people had an agreement that one of them would hire the other to complete painting of their house. However, the two sides give contradictory evidence on how much work would be done and what actor was responsible for obtaining the specific paint, if any. In such a case, the burden of proving the terms of the agreement are generally on the person who is claiming that the contract was breached. If witness testimony regarding the verbal agreement cannot be obtained, then the court will generally require more convincing evidence before accepting one side’s story. Typically, this means that documentary evidence—which can include written communications, invoices, receipts, and other evidence of payments—must show the exact nature of the agreement. Additionally, business records are generally held to certain evidentiary standards, because such records are more likely to show how a similar transaction was handled in the regular course of business.
Finally, however, the burden of convincing the court that a verbal agreement was breached is on the person who claims breach of the verbal contract. Although a verbal agreement can be just as legally binding as a written contract, it is simply much harder to prove the existence and terms of such an agreement if there is no written proof of the verbal agreement.
Exceptions and Limitations
Despite the legal binding nature of verbal agreements, these types of contracts are not always enforceable. The most notable exception is the Statute of Frauds, which states that certain types of contracts must be in writing to be enforceable. For example, the Statute of Frauds requires that contracts concerning real property be in writing in most circumstances. Another limited exception is contracts that have been partially confronted. This means that if one of the parties has partially performed the terms of the agreement (for example , making a substantial deposit), the court may consider the contract to be enforceable. The rationale behind this exception is that if certain considerations have already occurred, it would be unfair to invalidate the contract by requiring more evidence beyond the partial completion of agreement. A verbal agreement or contract can also be contested for unconscionability or if it meets the requirements for a contract to be void for illegality.
Tips for Strengthening Verbal Agreements
While a verbal agreement can be challenging to enforce, there are certain measures that can help reinforce the validity of the claim, either at the time of contract formation or after the verbal contract has been breached. A key to creating a binding verbal contract is to minimize the number of parties to the agreement. In this way, potential "he said versus she said" scenarios are avoided and only two individuals are privy to the agreement. All parties to the contract should be adults and have the ability to form a legal contract. Additionally, while celebration to the contract with other people may not be able to independently witness the agreement, they can be helpful in the event of a subsequent dispute. Similarly, meetings should be scheduled on a day and time where everyone can attend. From a common-sense approach, the best way to make a verbal contract as clear and undeniable as possible is to ensure that there are witnesses to the agreement that are unrelated. The names of these witnesses should be recorded. To further strengthen the enforceability of the contract, a video or audio recording of the contract formation may be considered. Maintaining records of all communications related to the contract (i.e. verbal, emailed, text, etc.) can go a long way in avoiding a situation where there are any denials. This can be done by confirming an agreement immediately following the formation, either in writing or via email, and attaching it to any follow-up correspondence that may be necessary. Similarly, if a verbal contract is breached, it is important to be sure to note any related concerns, including the date, time and individuals involved in the discussion regarding the breach. These records can be used to strengthen the claim itself or provide evidence in the event a contract dispute moves on to a formal lawsuit.
Conclusion: Verbal Agreements in Practice
In this article, we’ve demystified the legalities behind verbal agreements, giving you a clear understanding of what these agreements are, when they can be legally binding and how they can be effectively utilized in business and personal contexts.
To recap the key points discussed, we talked about the definition of a verbal agreement, which is an agreement between two or more parties that is made through spoken communication rather than written documentation. We also explored the legalities of verbal agreements and why they can be difficult to enforce legally. We provided examples of legally binding verbal agreements and instances where a verbal agreement may not be enforceable . Finally, we offered some advice on how to avoid problematic situations, such as ambiguity and context dependence.
While spoken language is a powerful way to communicate and establish terms, we recommended that you don’t underestimate the other party’s need for clarity on the terms of the agreement, as well as your own. It’s best practice to document the agreement as soon as possible after it’s been made, even if that documentation doesn’t become the final contract that replaces the verbal agreement. It’s always better to have a written record, or at least objective witness testimony, that can be relied upon as a fallback.