What is are Verbal contracts and when to use them

There are situations in which you and another party come to a verbal agreement about services to be rendered. Often, it’s because time is of the essence and there’s no opportunity to hash out the details. While verbal contracts have their place, they should be used with caution.

In this guide, you’ll learn what verbal contracts are, how they’re applicable, the benefits they bring, and how to secure your interests with verbal contracts.

Defining Verbal Contracts

A verbal contract, also known as an oral contract, is a legally binding agreement made through spoken communication between parties. Unlike written contracts, which are documented and signed, verbal agreements are based on the spoken word and do not involve written records. Verbal contracts can cover a wide range of agreements, from simple exchanges to more complex business arrangements.

Legality and Enforceability:

The legality and enforceability of verbal contracts can vary based on jurisdiction and the nature of the agreement. In many legal systems, verbal agreements are generally considered valid and enforceable as long as they meet certain criteria:

1. Offer and Acceptance: There must be a clear offer made by one party and an unequivocal acceptance by the other party.
2. Consideration: Both parties must exchange something of value (consideration) as part of the agreement. This could be goods, services, money, or a promise to perform a certain action.
3. Intent to Create Legal Relations: Both parties must intend to create a legally binding agreement. Social or informal agreements usually lack this intent.
4. Capacity: Both parties must have the legal capacity to enter into a contract. Minors and individuals lacking mental capacity might not be able to form valid verbal contracts.
5. Certainty and Specificity: The terms of the agreement must be clear, definite, and specific enough for the court to understand the obligations of each party.

As you can see, the requirements are similar if not the same as the elements that make up any valid contract.

Core Components of a Verbal Contract:

There are a few moving pieces to a verbal contract. While they’re not as detailed as a written contract, they must still be present before the contract can be considered valid and enforceable.

1. Offer: One party proposes a specific arrangement, indicating their willingness to be bound by the terms if the other party accepts.
2. Acceptance: The other party agrees to the offer’s terms without adding conditions or changing significant aspects. This plays into the mirror image rule.
3. Consideration: Both parties must provide something of value in exchange for the agreement. This could be money, goods, services, promises, or anything with legal value.
4. Mutual Agreement: There must be a meeting of minds, where both parties understand and agree on the terms of the contract.
5. Intent to Create Legal Relations: Both parties must intend for the agreement to be legally binding.
6. Clear Terms: The terms of the agreement must be clear and specific enough to determine the parties’ obligations.
7. Competency: Both parties must have the legal capacity to enter into a contract.

While verbal contracts are valid in many situations, they come with challenges. The lack of a written record can lead to disputes over the terms and obligations of the agreement. Additionally, proving the existence and terms of a verbal contract can be more challenging compared to written contracts. It’s advisable to put important agreements in writing whenever possible to ensure clarity, evidence, and enforceability.

Applicability of Verbal Contracts

Situations Where Verbal Contracts Can Be Considered:

Verbal agreements can be considered in various situations, but their enforceability and reliability can vary depending on the jurisdiction and the nature of the agreement. Some situations where verbal contracts can be considered include:

1. Simple Agreements: Verbal contracts are often used for straightforward and uncomplicated agreements, such as buying groceries, grabbing a cup of coffee, or making small exchanges.
2. Social Arrangements: Agreements among friends or family for casual activities or social events might not be intended to be legally binding, but they can still represent verbal agreements.
3. Customary Practices: In some industries or communities, verbal agreements are considered standard practice for certain types of transactions.

Industries Where Verbal Agreements Are Common:

1. Small Transactions and Informal Agreements: Verbal contracts are commonly used for small transactions, such as purchasing items from a garage sale or arranging informal trades between individuals.
2. Everyday Scenarios: Buying Goods, Hiring Services: Some smaller transactions don’t require a written contract or the contract may be more expensive than it’s worth. Buying goods from a market or hiring services from a local provider (e.g., lawn care, house cleaning), often rely on verbal agreements.
3. Fast-Paced and Urgent Situations: In fast-paced environments, like auction houses or competitive markets, verbal agreements may be used due to the urgency of the situation.

It’s important to note that while verbal contracts can be legally enforceable, they come with challenges. Proving the terms and existence of a verbal agreement can be more difficult than with written contracts. In many cases, written contracts are preferred as they provide a clear record of the parties’ intentions and obligations.

It’s advisable to put important agreements in writing whenever possible to ensure clarity, evidence, and enforceability, especially for complex or high-stakes arrangements. Consulting with legal professionals can help you understand the legal implications of verbal contracts in your jurisdiction and industry.

Benefits of Verbal Contracts

Flexibility and Speed:

1. Flexibility: Verbal contracts offer flexibility as they can be established quickly and informally. This is especially useful for simple transactions and agreements that don’t require extensive negotiations or complex terms.
2. Speed: Verbal agreements can be made on the spot, making them well-suited for situations that require immediate action or decisions. This speed can be advantageous in fast-paced environments.

Simplicity and Ease of Formation:

1. Simplicity: Verbal agreements often involve minimal formalities, which can be beneficial for straightforward transactions. Parties can agree verbally without the need for drafting and signing formal written documents.
2. Ease of Formation: With verbal contracts, there’s no need to draft lengthy legal documents or involve third parties. This simplicity can make the agreement process smoother and more accessible.

Establishing Trust and Relationships:

1. Personal Interaction: Verbal contracts allow for direct personal interaction between the parties. This can help build rapport, understanding, and a sense of trust, especially in small communities or local transactions.
2. Informal Nature: In casual or social settings, verbal contracts may be seen as more relaxed and less intimidating, contributing to positive interactions and relationships.
3. Quick Decisions: Verbal contracts enable parties to reach agreements without the delay associated with drafting and reviewing written documents. This can be beneficial when opportunities or circumstances are time-sensitive.

While these benefits highlight the advantages of verbal contracts in specific contexts, remember that relying solely on verbal agreements can have drawbacks. Verbal agreements lack the clarity and evidentiary support provided by written contracts. Legal disputes may arise if there’s disagreement over the terms or existence of the agreement. In situations involving more complexity, substantial financial transactions, or long-term commitments, written contracts remain a preferred option. Consulting legal professionals can help you determine whether a verbal contract is appropriate for your specific situation and industry.

Potential Risks and Challenges of Verbal Contracts

Lack of Written Evidence:

1. Issue: Verbal contracts lack written documentation that provides a clear record of the terms and intentions of the agreement. This can make it challenging to prove the existence and details of the contract if disputes arise.
2. Risk: Without written evidence, parties may have difficulty demonstrating the terms they agreed upon, leading to disagreements and legal uncertainty.

Ambiguities and Misinterpretations:

1. Issue: Verbal agreements can be prone to miscommunication and misunderstandings. The lack of detailed written terms can result in parties having different interpretations of the agreement.
2. Risk: Ambiguities can lead to disputes and confusion, as both parties may have different memories or understandings of what was agreed upon.

Difficulty in Enforcing Terms:

1. Issue: Verbal agreements can be challenging to enforce if one party fails to uphold their obligations. The absence of written terms can make it harder to hold parties accountable.
2. Risk: In the absence of clear written terms, it may be difficult to prove the agreed-upon obligations and remedies if one party breaches the contract.

Compliance with Legal Requirements:

1. Issue: Verbal contracts must still comply with legal requirements such as capacity, consideration, and intent to create legal relations. Failure to meet these requirements can render the contract unenforceable.
2. Risk: Parties might unintentionally enter into contracts that are not legally valid, leading to unexpected legal consequences.

Though verbal contracts can be legally enforceable in many situations, their risks and challenges are significant. To mitigate these risks, parties can take steps such as:

• Documentation: If possible, follow up on verbal agreements with written confirmation or email exchanges that summarize the terms.
• Reducing Ambiguity: When making verbal agreements, be clear and specific about the terms, responsibilities, and expectations.
• Legal Consultation: Seek legal advice to understand the legal implications of verbal contracts in your jurisdiction and industry.
• Preference for Written Contracts: For significant transactions or agreements with complex terms, opt for written contracts to ensure clarity, enforceability, and protection.

Ultimately, while verbal agreements can have advantages in certain situations, they should be used with caution. Consulting with legal professionals is advisable to navigate the complexities of verbal contracts and minimize potential legal risks.

Legal Validity and Enforceability of Verbal Contracts

The “Statute of Frauds” is a legal principle that requires certain contracts to be in writing in order to be enforceable in a court of law. The statute varies by jurisdiction but generally covers agreements involving real property, contracts that cannot be performed within one year, promises to answer for the debt or duty of another, agreements for the sale of goods over a certain value (as per the UCC), and marriage contracts.

Burden of Proof:

In cases of verbal agreements, the burden of proof rests on the party seeking to enforce the contract. This means that the party trying to prove the existence and terms of the verbal agreement must provide evidence to persuade the court that a legally binding agreement was indeed made.

Evidence for proving a verbal contract can include:

• Witness Testimonies: Testimonies from individuals who were present when the agreement was made.
• Correspondence: Any written communication or emails that reference the verbal agreement.
• Performance: Evidence that one or both parties have performed their obligations under the agreement.

It’s important to note that while verbal contracts can be legally valid, their enforceability can be challenging due to the lack of clear written evidence. Parties should be cautious when relying solely on verbal agreements for significant transactions.

Tips for Safeguarding Verbal Agreements

Documenting Agreement Details:

1. Take Notes: Immediately after reaching a verbal agreement, jot down the key details, including what was agreed upon, the parties involved, and any significant terms.
2. Memorialize in Writing: Create a written summary of the verbal agreement, including important dates, quantities, and any conditions discussed. Keep this summary in a safe place.

Gathering Witnesses:

1. Involve Third Parties: Whenever possible, have impartial witnesses present when the verbal agreement is made. Witnesses can provide testimonies if disputes arise.
2. Obtain Signatures: If witnesses are available, consider having them sign the written summary of the agreement to attest to its accuracy.

Follow-Up Email Confirmation:

1. Send a Confirmation Email: After the verbal agreement is made, send a follow-up email to the other party summarizing the key terms and confirming your understanding.
2. Request Acknowledgment: In the email, ask the other party to reply, confirming that they also understand the terms as outlined.

Remember that while these steps can help reinforce the validity of a verbal agreement, they are not a substitute for written contracts, especially in complex or high-stakes situations. The goal is to provide some level of documentation and evidence in case disputes arise. If the verbal agreement involves significant obligations or valuable transactions, it’s highly recommended to consult legal professionals and consider drafting a formal written contract to ensure proper protection, clarity, and enforceability.

Conclusion

Verbal agreements are generally valid and acceptable to use for transactions. The challenge is that they’re hard to prove in the case of a dispute which is why it’s important to take steps to document them and mitigate your risk.

This guide has outlined some steps you can take such as writing down key details, using email to follow up afterward, making sure witnesses are present when making the agreement, and more.

At the end of the day, it’s recommended that you create a written agreement, no matter how simple, to protect yourself and your interests.

Let me know what you think in the comments and don’t forget to share.