Definitions of Oral Contracts
A verbal contract, sometimes referred to as an "oral contract", is one that is told or assumed between the two parties rather than being written down. It relies on conversations or actions not necessarily in writing. The term may also be used to refer to a contract that is partially in writing, such that key terms of the agreement are not included. Verbal contracts may be enforceable, but only under certain conditions. While oral contracts can often be more informal, there are also situations in which they can be legally binding. Generally, however, it is wise to have everything in writing .
Verbal contracts create obligations similar to those of formal written contracts. If one of the parties simply does not follow through with the agreement, the other party then has a right to pursue damages or specific performance. The term "verbal contract" is often used interchangeably with the term "oral contract", even though verbal technically relates to words and oral to speech. However, some experts use the definition of verbal contract to categorize those agreements that are partially in writing, such as when only a portion is written down.
The Legality of Oral Contracts in the State of Texas
Verbal contract law in Texas generally falls under the same statute of frauds law for written contracts under Tex. Bus. & Com. Code §§ 26.01-26.04 and Tex. Civ. Prac. & Rem. Code § 16.051. While the statute does provide certain exemptions, the most common contentions fall under a statute of frauds provision. Texas law has a long history of upholding oral contracts, and this is reinforced by the statutes. As today, oral contracts will be enforced and upheld as long as they do not fall into a category that must be written down before they are enforceable.
Contracts that must be written down to be enforceable: Contracts that do not need to be written down: Note: It is important to remember that these categories are not exhaustive and there are many exceptions (usually evidentiary) under the Statute of Frauds.
However, it is important to remember that the majority of the enforceability issues with oral contracts arise due to the relative difficulties of proof regarding contract terms, and not necessarily because the contract or agreement should have been written down. Assume there is an oral contract to employee a plumber to fix specific piping in a construction site. The plumber performs the work and then sends a bill for his services. Unfortunately, there is a dispute over the scope of the work performed, but the employer refuses to pay the entire bill from the plumber for the work performed. The plumber sues. The issue is not the fact that the contract is unenforceable due to the Statute of Frauds, but whether the contract terms can be proven and whether the parties’ actions are consistent with the terms of the agreement. There are many factors that speak to the enforceability of a verbal contract beyond the statute of frauds.
When Oral Contracts are Applicable
Common situations in Texas where verbal contracts are binding include the following:
1) Sale of goods and services
Purchases made in stores and with service providers typically consist of dozens of oral contracts each year. Consumers rarely stop to read the fine print or ask a manager for a written agreement. However, you can be sure that the store and the service provider keep excellent records of their oral contracts. After doing business with someone many times, your history of interactions can become a verbal contract by itself.
2) Employment
Employers and employees rarely sign written documents every time there is a conversation about work. Promotions, bonuses, warnings and layoffs are often verbal contracts until the final separation of employment, when a final agreement is reached.
3) Repairs and maintenance
Homeowners and tenants frequently enter into verbal contracts with repair and maintenance personnel with no further discussion of a written agreement. While these contracts may be more informal and less specific in their scope, they are contracts nevertheless.
4) Construction projects
Contractors and subcontractors often decide on a number of project details through verbal contracts, including scope and specifications. Even if the contractors later end up signing a detailed written contract, the oral details prevail.
5) Commercial leases
Landlords and tenants do not typically have a signed lease before moving into an apartment or office lease. The contract has been created through verbal agreements.
6) Automobile purchases and repairs
Car salesmen and repair personnel routinely have oral contracts with customers. Not only do these verbal contracts occur at the point of sale but also throughout the period of ownership. Ongoing maintenance such as tune-ups, oil changes and tire replacement occur through oral contracts.
Disadvantages of Enforcing Oral Contracts
One of the most typical challenges with verbal contracts is simply proving their existence in the first place. Without some objective proof that an agreement exists, the other party may be able to claim that no verbal contract was formed. This can, in some cases, be a valid claim—sometimes people think they have a verbal contract when really they only have an intent to enter into a contract at some future point, in which case no actual contract exists. This creates an evidentiary issue in the event that a dispute arises in court over whether or not a contract was formed. The plaintiff, who generally has the burden of proof in a contract dispute, will need to demonstrate that a contract does exist. This can often come down to testimony from either party regarding the existence of a verbal agreement, obtained through depositions or during the trial itself. Even if the plaintiff is able to prove the existence of an agreement, doing so does not automatically mean the contract is enforceable. The plaintiff must then prove the terms of the contract, including the specific promises made. Again, this frequently requires witness testimony. If, for example, a contractor enters into a verbal agreement to renovate a kitchen, the question becomes what kind of renovations the contractor was supposed to perform. In cases without written contracts, judges are often left to determine the terms of an agreement based on testimony and circumstantial evidence, such as messages between the parties or evidence regarding how they behaved after forming the agreement. The lack of any written proof of what the agreement entailed can lead to significant difficulties for plaintiffs trying to recover damages related to a non-fulfilled verbal contract. If the judge or jury finds that not enough evidence exists to determine what the terms were or if those terms were violated, it may be unable to award damages. A common defense strategy is to argue that a verbal contract has been fully performed, and therefore no further obligations exist on behalf of either party. Since the plaintiff still has the burden of proof, it’s crucial for them to gather all relevant evidence before filing their lawsuit, as they may need to use it in court to prove the verbal contract existed and that there were deficiencies in the defendant’s performance.
Exceptions to Oral Contracts in the State of Texas
While verbal contracts are generally enforceable under Texas law, certain exceptions prevent the enforcement of an otherwise valid contract. As discussed below, the exception we deal with most frequently, is the Statute of Frauds.
Texas has a Statute of Frauds that lists a number of types of contracts that are not enforceable unless they are in writing and signed by the person being sued. Generally, an agreement to sell real property or to pay a debt that is owed by somebody else or to do something that is not capable of being performed within one year must be in a written agreement signed by the party who is being sued.
Under the Statute of Frauds, a verbal agreement to buy or sell land does not have to be in writing and signed , but may still be enforced if the party seeking to enforce the contract has either partially performed under the agreement or has given partial payment, and if the other party has accepted performance.
While in many cases you can enter into a verbal agreement to buy or sell real property, real estate agents and brokers in Texas are required to prepare written agreements for real estate transactions. Failing to properly employ an agent or broker to sell or buy real property can subject the buyer and/or seller to liability.
In Texas, the general rule is that you can have verbal contracts, however, the exceptions and potential liability create hazards that make it risky to try to enforce a verbal contract. The best way to protect yourself is to always have essential agreements in writing and signed by both parties.
Protecting Yourself with Oral Contracts
Even if a verbal contract is legally binding in Texas, that doesn’t mean you should enter into one without a solid plan to protect your rights and freedom should the other party not hold up their end of the agreement.
Protecting yourself when entering into a verbal contract in Texas does require extra effort and diligence on your part, but it’s well worth it to save yourself from any unpleasant surprises later in life.
The best way to protect yourself is to document as much as you can of the verbal agreement. It’s usually a good idea to put your contract terms in writing, but even if you choose to forego the written contract, at least create a paper document showing what the agreement terms were and detailing exactly how both parties fulfilled their obligations. This gives you a good chance of winning a lawsuit in the event the other party ends up reneging on the deal.
In order to properly protect yourself, you need to maintain open lines of communication with the other party throughout the course of the contract. Keep up to date on everything they’re doing to fulfill their responsibilities. Document, document, document. The more evidence you have of a proper contract execution on both sides, the better off you’ll be if they try to argue otherwise later on.
Finally, find a third-party witness with no vested interest in the contract. This is only a precautionary measure in the event things don’t go according to plan, and it doesn’t need to be much. Ask a friend or family member to sit in on a meeting with you and the other party to witness the contract creation. They could also sign a document with you confirming the terms of the contract so you have an additional witness.
Real Life Examples of Oral Contract Cases
While Texas law regarding verbal contracts is clear and has several exceptions, real-world examples can shed light on how oral contracts are often evaluated in litigation.
- Winner v. Toole: Timmis Winner and Lloyd Toole were involved in the business of building homes. In 1994, they entered into a joint venture for the construction of multiple houses. When it came time to divide the profits of the venture, Winner and Toole could not agree on how to divide the income. Winner believed he had a 40 percent interest in the profits and Toole thought he was entitled to 70 percent. In 1997, Winner brought suit against Toole, seeking an accounting and distribution of profits. The trial court held that there was no enforceable contract. On appeal, the Texas Court of Appeals for the State Sixth District affirmed. It found the evidence was legally insufficient to prove any agreement giving Toole a 70 percent share of the profits, but sufficient to conclude there was a contract giving Winner a 40 percent share of the profits.
- Burrell v. McJunkins: In Burrell, the Texas Court of Appeals also found that the appellee had proved the existence of an oral contract. Appellee Barbara McJunkins purchased real property from Al Burrell, who was also the contractor for all construction and maintenance on the property. After a disagreement on the payment for Burrell’s work on the property, Burrell filed suit against McJunkins for breach of contract and quantum meruit. At the trial court, Burrell proved his breach of contract counter-claim, but the court found that the entire contract was void for failure to comply with the Statute of Frauds and ruled in favor of McJunkins. On appeal, the Texas Court of Appeals reversed, finding that the appellee offered evidence of an agreement, supported by substantial evidence from witnesses who were not parties to the contract. It held appellee satisfied her burden of proving the existence of the contract.
- Champion v. Apex Land and Minerals, Ltd.: In Champion, an oil, gas, and mineral owner granted an oil operator the right to explore, develop, and produce from a tract of land owned by Champion. The lease also provided that Champion would be entitled to "25% of the Lessee’s share of the first $2,000,000.00 net proceeds of sale of oil and gas produced from the above tract." After the wells began yielding production , the lessee sent Champion a check that covered its share of the proceeds for the first production period. The lessee continued to pay Champion its dividends from the wells. Then, after new wells were drilled on the property, the lessee decided to pay Champion its share in installments of 25% of total revenues from the sale of oil and gas, instead of 25% of net proceeds. Champion sued the oil company for breach of contract. At trial, the court ruled in favor of Champion. On appeal, the Texas Court of Appeals affirmed the judgment. It found that the character of the proceeds could be determined from reference to the whole agreement. The words "net" and "dividend" were noted as not having been defined in the document. The appellate court ruled that the words should be understood in their ordinary, popular, and generally accepted sense. It construed the unambiguous and definite language as intending for Champion to receive 25% of the first $2,000,000 from sales (not dividends) of oil from the first wells drilled. It affirmed the decision against the lessee.
- Flores v. Andrade: In Flores, Rudy Andrade and Joe Gonzalez entered into an agreement for Andrade to work the land of Gonzalez’s father, for which he would be paid 50 percent of all profits Andrade made. The deal was renegotiated later to 55 percent. Gonzalez alleges that this percentage was increased when Andrade started working land further East and began netting a larger income. Later, however, the two men had a dispute over an oil pipeline running through Andrade’s portion of the property. Gonzalez, knowing that Andrade intended to tear down the pipeline, paid him $200,000 for the pipeline and received a quitclaim deed to Andrade’s half of the property. Four months later, Gonzalez tried to rescind the agreement, and Andrade filed suit to quiet title in contradiction to Gonzalas’ claim. Andrade claimed Gonzalez’s payment satisfied his obligation to pay 55 percent of his net income. In its opinion, the Texas Second Court of Appeals in Fort Worth held that the documents did not contain an enforceable agreement concerning the pipeline. Therefore, Gonzalez could not claim he had provided an exchange for that part of the pipeline. The Court of Appeals further stated that even if such a contract had been in place, Gonzalez did not prove he had a right to enforce such an agreement.