When Is an Oral Contract a Legally Binding Agreement?

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. Of course, there are times when an oral agreement just will not suffice.  Under certain situations an oral contract itself, even when done properly and has everyone on board, will not be enforced.  As a result, these agreements do require a written contract.  There are a few instances requiring a contract such as promising to pay another person’s debt, pre-nuptial agreements, and agreements lasting for more than one year. Another such example is where a written contract is required deals with buying and selling real estate. Any agreement involving the buying and selling of real estate must be finalized with a written agreement and normally with prescribing witnesses including a notary’s signature to effectuate the transfer of title.  So, without a written agreement, these particular agreements will not be enforced should the need arise. So, while one does not generally need a written document to formulate an agreement, written agreements do provide more assurances for the parties involved.  Of course, written agreements should be drafted correctly.  This is where the expertise of an attorney becomes necessary. Regardless, if you are ever in the unfortunate position of having to use an oral agreement, take heart in knowing they are enforceable so long as you can prove their existence and they do not fall into one of the exceptions to enforceable oral agreements. Related articles: Can an Email Exchange Be an Enforceable Agreement? Leasing Contracts: Not All Are Equal Did Your Independent Vendor Meet Expectations? Gov’t Contracts for Hispanic Businesses