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

Email  |  Call (888) 600-8654

Have a quick question? I answered nearly 1500 FAQs.

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.

Have a quick question? We answered nearly 2000 FAQs.

See all blogs: Business | Corporate | Employment Law

Most recent blogs:

What Is a Gap Analysis

What is a Gap analysis?

Gap analysis helps businesses compare current performance with desired goals, identifying inefficiencies. This method aids in developing action plans to bridge performance gaps.
SWOT Analysis Example

SWOT Analysis Example

Conducting an HR SWOT analysis helps identify strengths, weaknesses, opportunities, and threats within and external to an organization. This process aids in developing strategic HR actions aligned with the company's objectives.

Costco Hot Dog Price Story

The story about Costco $1.50 hot dog price began in 1993 when the Costco merged with Price Club. Costco's $1.50 hot dog price remains unchanged in 2024.

Request for Production of Documents, RPOD, CCP 2031.280

Starting January 1, 2020, California's civil litigants face stricter discovery rules under Cal. Civ. Pro. § 2031.280(a). All produced documents must now be labeled by request number, impacting both new and ongoing cases.
What is a default judgment

What is a default judgment

A default judgment is issued when a defendant fails to respond to a lawsuit, allowing the plaintiff to win by default. Understanding this process is crucial for both parties involved in litigation.
What is a quitclaim deed

What is a quitclaim deed

Quitclaim deeds offer a quick way to transfer property ownership without guarantees, distinct from warranty deeds. Ideal for non-sale property transfers among family or into trusts, they require careful legal consideration.
Sole Proprietorship Business License

Sole Proprietorship Business License

Sole proprietorships offer simplicity and fewer formalities for new business owners, with benefits like no separate taxes. Remember, personal and business assets aren't distinct, impacting liabilities and the need for proper licensing.
What is the most important part of your business plan

What is the most important part of your business plan

The executive summary shines as the pivotal element of a business plan, serving as a decisive factor for readers to delve deeper. A comprehensive guide on crafting an impactful business plan, focusing on unique strategies and essential components.
Easy Businesses To Start

Easy Businesses To Start

Unleash your entrepreneurial spirit with these straightforward home-based business ideas, from e-commerce to creative pursuits. Embrace the flexibility and potential for financial independence with diverse options suited for various interests and investment levels.
What is the standard deduction

What is the standard deduction

Understand the IRS standard deduction, a straightforward option for reducing taxable income without needing detailed documentation. Delve into eligibility, amounts for 2023-2024, and considerations for itemizing versus standard deduction.
How to get a business license

How to get a business license

Grasp the essentials of obtaining a business license in California, focusing on local and state-level requirements. Uncover specifics on when and why different types of business licenses are needed.
Why Do Businesses Fail

Why Do Businesses Fail?

Uncover the key factors contributing to small business challenges, including financial obstacles, inadequate management, and flawed marketing strategies. Understand the role of a comprehensive business plan in ensuring long-term success.
What is a BOC 3

What is a BOC 3

Understand the essentials of a BOC-3 filing for transportation businesses in California, detailing the designation of process agents for FMCSA certification. Learn the requirements, costs, and benefits of choosing the right process agent for your business.
Standard deduction vs itemized deduction

Standard Deduction vs Itemized Deduction

Understand the key differences between standard and itemized deductions to effectively reduce your taxable income and potentially save on taxes. Choose wisely to maximize your tax benefits based on personal financial details.
How to calculate net income

How to calculate net income

Unveil the significance of calculating net income for business profitability, a key indicator for financial health and decision-making. Understand the formula and practical applications for determining net earnings.
Itemized deductions

Itemized Deductions: What they mean on a tax return

Optimize your tax return by understanding the differences between itemized and standard deductions, crucial for minimizing tax liability. Learn the benefits and challenges of itemizing to make informed financial decisions.
What are intangible assets

What Are Intangible Assets

Discover the value of intangible assets like patents and trademarks in your business, crucial for strategic and financial planning. Learn how to manage and amortize these non-physical yet essential resources.
What is accounting

What Is Accounting

Understand the importance of accounting in monitoring financial activities and making informed decisions for your business. Gain insight into accounting fundamentals and its role in legal and tax matters.
Dysfunctional family

Dysfunctional Family: Key traits and impacts

Explore the impact of growing up in a dysfunctional family, where constant conflict, neglect, and various addictions shape childhood experiences. Understand common traits, the consequences on children, and the cycle of unhealthy parenting behaviors.
When Was the Great Recession

When Was the Great Recession?

Delve into the Great Recession's timeline, an era of financial distress from December 2007 to June 2009. Understand the causes, including the 2007 housing bubble crash, and worldwide effects.
When Was the Last Recession in the US

When Was the Last Recession in the US?

Review discussions on America's most recent downturn, comparing the impacts and definitions of Covid-19 and the Great Recession. Analyze the significant effects of past economic crises on US policy and business approaches.
What to Invest in During a Recession- 4 Ideas

What to Invest in During a Recession: 4 Ideas

Uncover effective strategies for investing during a recession, assessing personal goals and current market situations. Examine four robust investment approaches to manage through economic declines effectively.
Will the US Get Hit with a Recession in 2024

Will the US Get Hit with a Recession in 2024?

Experts debate the likelihood of a 2024 US recession, analyzing factors like the yield curve and consumer confidence. Predictions vary, with a focus on interest rates and tech layoffs impacting the economy's future.
How Long Do Recessions Last

How Long Do Recessions Last?

Learn about typical US recession lengths and influencing factors, noting recent trends with shorter durations averaging 10 months. Investigate how external factors and government decisions affect recession timelines, comparing historical data.
When Will the Recession End

When Will the Recession End?

Economists predict a mild US recession with limited impact on employment and spending. The duration and impact of the recession depend on Federal Reserve policies and business cycle patterns.

Contact our attorney.

Please tell us your story:

0 + 4 = ?