What Makes a Verbal Contract Valid

A verbal contract is valid when contractual elements are satisfied, such as evidence of an offer, acceptance of the offer, and consideration which is an exchange of value between the parties.

Author: Brad Nakase, Attorney

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What Is a Verbal Contract?

A verbal contract is an unwritten but legally binding agreement between parties that includes all the regular elements of a contract and follows the Statute of Frauds. Oral contracts can be complicated because of the fact that they are not recorded in writing. If there is an argument about the terms of the contract or its existence, then there is no written record to study to solve the argument.

Rather, the terms of the agreement often have to be determined by testimony offered by the parties involved. Witnesses may also help reconstruct the terms of the contract, as well as the conduct of the parties after the deal was created.

Because most verbal agreements are created by trusting individuals, unfortunately, the arguments that result from breached verbal contracts tend to be emotional affairs.

Despite their drawbacks, verbal contracts are still used in California. Sometimes, this is due to business necessity, as can sometimes happen when a deal is struck and there is no pen or paper. Other times, parties may strike a deal and seal it with an unwritten “handshake.” Both situations rely on trust between the parties.

What Are the Elements of a Verbal Contract?

Although it is preferable to get a contract in writing, oral and verbal contracts are valid in the state of California. For a verbal contract to be considered valid and legitimate, it must contain te following three elements of an enforceable agreement:

  • An offer
  • An acceptance of that offer
  • Consideration

If any of the above elements is not present in an oral agreement, then the agreement is not legally binding and, thereby, there is no enforceable contract.

Also, verbal contracts must comply with the California Statute of Frauds. This statute provides that verbal contracts are not to be used in certain situations.

What Is the Offer?

The first element of a verbal contract is known as the offer. An offer happens when one party suggest terms that are clear enough for a reasonable person to understand and follow. Not all of the terms must be included for the contract to be enforceable by law. The only terms that must be included are those that are material, or important, for the particular contract. Such terms may include the following:

  • The parties of the contract
  • The services or goods that are to be provided
  • When the services or goods will be provided
  • The price

Sometimes, the person who is receiving the offer will reply with an offer of their own. That is, they might not accept the terms of the original offer and prepare a counter. Offers and counter-offers in verbal negotiations can happen quickly, sometimes within only seconds. The specific words used, and the context surrounding them, can make a difference. This is part of the reason why verbal contracts are hard to enforce. When parties dispute a verbal contract, they will often debate the precise wording of the offer, with one party claiming that no contract existed.

What Is the Acceptance?

The offer, in addition to any counter-offer, need to be accepted for there to be a legally-binding contract. Acceptance happens when a party agrees to the terms of the offer. With a verbal contract, acceptance can be very simple. In fact, it can be as simple as saying the following words:

  • “Agreed.”
  • “I accept.”
  • “Sure.”
  • “Let’s do it.”
  • “Sounds good, you’ve got a deal.”
  • “I don’t like it, but alright.”

As is the case with an offer, the specific phrasing of an acceptance can be important. If there is an argument between parties, then each party will provide their own version of what happened. It is very difficult to prove what actually occurred.

Many verbal agreements are often sealed with a handshake as a way of indicating that a deal has been reached. The handshake is a strong signal that the parties involved wish to be bound by the terms of the deal. That said, in a court of law, even a handshake can be disputed by a party trying to prove that no deal existed. In order to help show that a handshake occurred, it it helpful to have a witness to the event.

What Is the Consideration?

A legal term, consideration refers to the idea that both parties involved in a deal are giving up something in exchange for the contract. In most verbal contracts, the consideration will be the exchange of money for services or goods.

If only one side is offering something, then the agreement is likely a gift instead of a contract. If the agreement is a gift, then there is no valid contract that gives each side rights and obligations.

Are Verbal Contracts Enforceable by Law?

Verbal contracts between parties are enforceable by law in the same way that written agreements are, providing that they do not violate the Statute of Frauds. Similar to written contracts, oral agreements simply need to meet the requirements of a legitimate contract to be enforced by a court. If the contract meets the said requirements, then both verbal and written contracts are enforceable.

That said, it is far more complicated and challenging to prove the terms of a verbal agreement than a written one. When parties are arguing about a written document, the terms of the agreement may be found in a physical document for reference. However, when there is no document to refer to, it is harder to determine the rights and obligations of each party. The terms of the agreement, and whether or not there even was an agreement, must first be settled. This situation often turns into a “he said, she said” argument. Each side will present their version of events, trying to prove themselves more credible.

How Can a Verbal Contract Be Enforced?

Enforcing a verbal contract will depend largely on the particular circumstances of the case. That said, many cases involve the following elements:

  • The behavior of the parties following the creation of the alleged contract
  • Prior behavior between the parties
  • How similar agreements are normally conducted
  • Testimony of the parties involved
  • Witness testimony
  • Each party’s credibility

Evidence such as that described above will help a court determine the basic terms of the contract, as well as whether the contract was breached.

How Does One Prove the Terms of a Verbal Contract?

To prove the terms of a verbal contract, often there must be testimony from both parties as well as details of their conduct before and after the agreement was made.

It is true that the testimony often turns into a “he said, she said” situation, however any inconsistencies in one’s side story can be a sign they are not credible or reliable. This would provide evidence that an agreement was not structured the way they said it was.

In general, the behavior of the parties before and after the supposed contract is the most telling and is more reliable than any testimony. For instance, if one party paid the other, this acts as evidence that there was an agreement of some kind. If a good or service was provided sometime around this payment, then the terms of the verbal contract become a little clearer.

Other written documentation may prove useful, even if not an actual contract. For example, invoices, emails, letters, and text messages can offer indirect evident of a verbal agreement. Perhaps there was a text message asking, “when will the item be delivered?” This kind of message would show that one party believed there to be an agreement.

On occasion, a witness may be called to offer eyewitness testimony. Witnesses might include third parties who were present at the time a contract was established. Evidence may also be gathered from individuals who were unknowingly a part of the agreement, such as employees of one of the parties. These individuals can testify what they believed the agreement to be, if it existed, based on how their job duties changed before, during, and after the verbal contract was made.

As is evident, it can be quite complicated to determine the nature of a verbal agreement. Determining the details of the contract involved a lot of indirect and circumstantial evidence from many different sources.

What Is the Statute of Frauds?

When a verbal contract argument arises, one issue that may come up is the Statute of Frauds. The Statute of Frauds is a law that says certain type of contracts must be in writing in order to be enforceable. Under the California Statute of Frauds, the following types of contracts must be in writing to be enforced:

  • Agreements to pay from an individual’s estate
  • Agreements to answer for the debt of another individual
  • Agreements concerning marriage
  • Agreements for the sale of land or any interest in land
  • Any agreement that is not fulfilled within one year of the making of the agreement

If any of the above contracts is not put down in writing, then the contract is not enforceable by law. The same rule applies under the Uniform Commercial Code (UCC), which concerns the sale of goods over $500 in value.

The purpose of the Statute of Frauds is to prevent individuals from making up verbal agreements concerning important types of transactions. This protects innocent parties from being dragged into difficult disputes to protect their assets.

Are Verbal Amendments to Written Contracts Enforceable?

Sometimes, parties may agree to a written contract and then later decide to verbally amend it. In this situation, verbal modification to a contract is treated as any other verbal contract. In that sense, it has the same restrictions and enforcement problems as typical verbal contracts.

Many written contracts even have a clause that requires any amendments be made in writing. Individuals should be aware of this potential provision because such a clause can make verbal modifications unenforceable. Such a clause would protect the rights and obligations of the original contract.

Sometimes, there may be a verbal change to a written contract, however the original contract falls within the Statute of Frauds. In this rare instance, oral modifications to the original contract may be enforced, but only if the verbal change regards the performance of the contract rather than a material term. If the verbal change addresses a material term of the written contract, then it will not be enforceable in court.

What Happens If a Verbal Contract is Unenforceable?

If a verbal contract is deemed to be unenforceable, or if it violates the Statute of Frauds, this is not necessarily the end of the road. While an individual may not be able to enforce the terms of the original contract, he or she might be able to pursue an “equitable” solution in court.

An equitable remedy is similar to a promissory estoppel or unjust enrichment. It is a claim that value was given to the other party, and as a result, it is unfair for that party to have that benefit without paying for it. An attorney can provide proof of the value given to the other party, and an individual can seek monetary damages as compensation.

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