When Is an Oral Contract a Legally Binding Agreement?

oral contracts

When thinking of contracts, most people don't realize an oral contract can be a valid agreement

 

When thinking of contracts, most individuals think about a written document.  

The document includes all the important features like the parties, what each party’s requirements are to the contract, and even penalties for failure to abide by the terms of the agreement. 

It is a common belief a contract means a written agreement and, thus, a document is necessary to have a binding arrangement between two or more parties.

Unfortunately, this common belief is a misconception. 

While enforcing the provisions of an agreement and even proving the existence of an agreement are better with a written contract, oral contracts (i.e., unwritten or verbal contracts) are just as enforceable. Though, understanding the enforceability of contracts requires delving into what makes a contract.

A contract requires three parts:  

  1. An offer
  2. An acceptance of the offer
  3. Conferral of a benefit/imposition of a burden (i.e., known in the legal world as consideration). 

To understand the concept let’s use an example. 

Let’s say you’re a painter.  You make an offer to a building owner to paint his building for $10,000.00. The building owner accepts the offer for you to paint his building in exchange for paying you $10,000.00.  As a result, contract has been made.  More importantly, the contract illustrates the main point… a writing was not required. 

The example, while it could have been in writing (and maybe should have been in writing), did not require a written document to be enforceable. So long as the elements exist regarding a contract (i.e., offer, acceptance, consideration), the oral agreement in the example is valid and enforceable.

Some of you reading this article may be thinking to yourselves, “Hey, this is great! Now, I can save on paying an attorney and along with the time in writing a contract. I can just enter into deals verbally and shake on it!”  Sounds like a great concept, right?  Unfortunately, there are reasons why most people use written contracts and avoid oral contracts whenever possible.

Let’s return back to our example of the painter. 

Say you’re the painter and complete your end of the contract and paint the building. You now go to the building owner to collect payment.  However, the building owner does not remember ever entering into such a deal, much less with you.  You show the building owner the job you did but the building owner was not present when you painted the building. 

As a result, the building owner refuses to pay you for the work you did considering he does not remember the agreement and does not know if you were the individual that painted the building. 

What do you do? 

This is one of the perils of oral contracts; there is usually no proof of such an agreement.  Further, you have to hope the other party has a good memory and is an upstanding person.  Otherwise, you could be putting yourself in a very vulnerable situation if you were to follow through with the contract. 

Now, you could get a witness to be present for the finalization of the original agreement and/or while work is being performed.  Though, there is no guarantee this witness (or witnesses) will be available when you need to prove the existence of the contract, if it becomes necessary.  And, of course, there is the issue of finding a credible witness which may be difficult in and of itself. 

All of these points to the difficulties involved with oral contracts. They may be easy to create but they are difficult in terms of proving its existence and, subsequently, enforcing it.

Next- There are times when oral contracts will not suffice

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About the author

Senen Garcia

Senen Garcia operates SG Law Group LLP a thriving law practice in multiple states assisting clients with their corporate, real estate, estate planning, and property insurance claim needs.  Additionally, Mr. Garcia has accounting practice assisting small businesses with tax and accounting needs.  Along with his work with SCORE, Mr. Garcia has also provided assistance with the local Small Claims Clinic that provides assistance to individuals filing small claims cases. Mr. Garcia has spoken on a variety of topics such as:  How to start a business, Communication within your organization, Importance of Capital Accounts, What’s in Business Name Anyway?, and Stock Purchase Agreements vs. Asset Purchase Agreements.

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