Is A Verbal Agreement Legally Binding?

A verbal agreement is binding when there are witnesses and documents to meet the elements of a valid contract.

By Brad Nakase, Attorney

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Are Verbal Agreements Binding?

Although it is possible for a verbal agreement to be binding, not all types of contracts can be created verbally and upheld. Despite being harder to enforce, verbal contracts can be legally binding if they have the elements of a valid contract.

When an individual agrees to perform a certain service or deliver a specific good, he or she is generally expected to do so. However, even if people expect the task to be completed, is the individual legally obligated to do it?

When parties reach an agreement and do not provide any written documentation of the contract, they create what is known as a verbal agreement. It may also be known in a formal sense as an oral contract. However, the authority, or power, of verbal agreements forms somewhat of a grey area in the field of contract law.

The majority of verbal agreements, or contracts, are legally binding. This means that they are enforceable by a court of law. That said, there are notable exceptions, and these depend on the structure of the agreement and the intent of the contract. Often, it is best to form a written contract to avoid legal disputes about the terms of existence of a verbal contract.

For example, employers, employees, and independent contractors might find it critical to record the terms of their contracts in an Employment Contract or Service Agreement. While a verbal agreement may be binding, it can still be difficult to prove its validity in a court of law. For more information, please get in touch with our California business litigation attorney for breach of contract for a free consultation.

What Are the Elements of a Legitimate Contract?

There are generally between four to six major elements for a verbal agreement to be binding. Some legal sources group elements under the same title. The six important elements of a verbal agreement to be binding are the following:

  • Offer and acceptance
  • Lawful purpose
  • Lawful consideration
  • Certainty and completeness of terms
  • Free consent of the parties
  • Capacity

In order for a verbal contract to be legally binding, the elements of a legitimate contract must be included. To demonstrate how the elements of an agreement create binding terms in a verbal contract, let us use the example of Lucy, who is borrowing $300 from her friend to have her laptop fixed.

  • Offer and Acceptance – In the creation of a binding verbal agreement, one individual makes an offer which the other party accepts. This kind of transaction is known as a “meeting of the minds,” because both individuals agree to the terms of the exchange. Let us refer to our example involving Lucy’s laptop repair. Lucy’s friend, Greta, offers to loan Lucy $300 on the condition that she pay it back within one month. Lucy accepts the offer of the money and promises to pay Greta back after she has repaired her computer.
  • Lawful Purpose – The intent of a verbal agreement must be lawful in order for it to be legally enforceable. Let us return to our example of Lucy, who is borrowing money from Greta to fund her laptop repair. The contract between the women is of lawful purpose because it is legal to repair a laptop. However, let’s say Lucy wanted to borrow $300 to buy software for the purpose of illegal computer hacking. In this case, the purpose becomes unlawful, and the contract is thereby unenforceable and void.
  • Lawful Consideration – The parties involved in a verbal agreement must exchange something of value. This exchange is known as consideration. The exchanged item must be of a legal nature. To return to our example, Greta’s offer of $300 and the promise to pay it back qualify as lawful consideration. For it to be unlawful consideration, Lucy would have to repay Greta with something illegal, such as illegal drugs.
  • Certainty and Completeness of Terms – The terms of a verbal agreement cannot be incomplete, abstract, or deceitful. Essentially, there should be an agreement on who the contract’s parties are, the obligations of each individual, the price to be paid, and what the subject of the contract is. In our example, the terms between Lucy and Greta are very clear and to the point: Greta loans Lucy $300 for the repair of her laptop on the condition that Lucy pays her pack $300 within one month.
  • Free Consent of the Parties – The parties involved in a verbal agreement should consent to the terms of the agreement under their own free will. This means that they agree to the terms without undue influence, by force, under duress, or deceit. In our example, Lucy and Greta both consent to the terms of their contract without pressuring one another and with the intent to fulfill their duties to one another.
  • Mental Capacity – The parties involved in the agreement must have the capacity to enter the contract. This means that the parties must be legal adults and of sound mind. In our example, both Lucy and Greta are over 18 years of age and are not under the influence of drugs. Nor do they have cognitive disabilities which may influence their judgment. If Greta had dementia, for example, then she would not have the capacity to enter a contract.

When Are Verbal Contracts Not Binding?

If a verbal agreement lacks one or more of the elements need to make a valid contract, then a court will probably rule that the contract is not binding. Many states provide regulations that state certain contracts must be in writing. They thereby deem verbal agreements insufficient in certain circumstances.

These rules vary depending on the state. However, in general, a written contract is necessary in the following situations:

  • The sale or transfer of land or real estate
  • When the terms of the contract last longer than the lifetime of one of the parties
  • When selling goods worth more than $500
  • In marriage or divorce agreements
  • When the terms of the contract will take longer than one year to fulfill
  • When the contract involves someone’s promise to pay another’s debt

It is important to check one’s state laws or Statute of Frauds to check whether a written agreement is needed or not.

How Do Verbal Contracts Differ from Written Contracts?

While verbal contracts are technically legally binding, there is always the chance that a party does not perform their obligation. This is the reason why many people choose to have their agreements put in writing.

Let’s say that Harry borrows $10,000 from his uncle George so that he can buy a new car. George agrees, but he asks that Harry pay him back within three months. The two men shakes hands on a verbal agreement thinking it is binding. However, when Harry does not pay his uncle back within the time allotted, George threatens to take his nephew to court.

To win a verbal agreement lawsuit, Uncle George would have to provide evidence that his nephew borrowed the money with the promise to pay it back within three months. Harry, by contrast, would have to prove that he never agreed to those terms. When there is no written documentation of the contract, the case can become a matter of “he said, she said.” A judge will decide which party’s case is the more likely.

While Uncle George can prove that he loaned his nephew $10,000 through the use of bank statements showing money transfers, he still does not have sufficient evidence of the promise to pay the money back. Harry may even deny that he made the promise to pay it back, which would be perjury.

If there is no witness to the verbal agreement, such as the handshake, then Uncle George may lose $10,000.

It is always a good idea to document verbal agreements in writing. Receipts or promissory notes can be extremely valuable in the event that someone fails to pay money back. Any written documentation makes a potential verbal contract dispute much easier to resolve.

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