Is a verbal contract binding?

A verbal contract is a type of agreement, made between two or more parties, typically made through spoken words rather than a written document. An example would be if you were at a yard sale and offered to buy a piece of furniture or an article of clothing for $100 and the yard sale host accepted your offer.

No written agreement is produced, but both of you agreed on a price, and accepted agreement when payment was exchanged. This sounds simple, and while verbal contracts are typically legally valid, enforcing them can prove to be difficult.

So, is a verbal contract legally-binding? Or is it naive to think they are admissible in court?

In this article, we’ll cover the necessities to form a verbal contract and the requirements for the contract to be legally-binding.

What makes a legally-binding contract?

To make a verbal or oral contract binding, there are a number of elements that must be included. They are:

An offer

An offer of some sort of good or service must be made by one party. For example, when you lend your family member or friend $100 to pay for a car repair.

Acceptance of the offer

The party then accepts the offer of $100 and agrees to repay the full amount in the future.

A law-abiding purpose

The reason for the contract needs to be lawful. Using our example, the $100 can be used for the car repair, but not for an illegal act.

Law-abiding consideration

Something of value needs to be exchanged between those involved in the agreement. This could be money, or something else. So, the $100 in cash is legal, but $100/worth of illegal paraphernalia would not be legal.

The terms must be certain

The terms that make up the contract have to be clear and understandable. If they are vaguely worded, then the contract is unlikely to hold up in court.

All parties must agree on their own free will

Everyone involved in the contract must enter the agreement without coercion, in full comprehension of the terms, and with the intention of complying with the stated terms.

When is a verbal contract not legal?

A verbal contract is normally legally valid provided that the basic foundations of a binding contract are in place. However, there are cases where a physical written contract is necessary for the agreement to be legally-binding.

The rules vary in different states and countries, but in the U.S. the following agreements require a written contract to be valid:

  • When the contract entails one party covering another’s debt obligations.
  • Transferring or selling real estate or a plot of land.
  • A sale over $500.
  • Marital and divorce agreements.
  • When the contract will take more than one year to complete.
  • It the contract terms go beyond the lifespan of any of the parties involved (i.e. copyrighted materials).

Why do you need a written contract?

While some verbal contracts are clearly valid and will hold up in court, the most sensible course of action when making a serious agreement is to use a formal written contract. The reason being is it’s far easier to prove what was agreed upon when it exists in writing.

If an agreement was to go wrong, like if money was lent with the verbal promise of repayment and the recipient failed to do so, then the case may go to court. The lender would then have to prove that the transaction took place and the recipient did not pay the money back to resolve the dispute legally.

If there was a written, signed contract then there would be a lot less stress, uncertainty, and cost when trying to prove the agreement exists. This brings us to the signature part of a contract.

Why should I sign a contract?

If you want an airtight contract that is legally-binding, it should be written and signed by all parties. A signature proves that the signer accepted the terms of the contract. There are typically two ways to sign agreements – physically and electronically – and both are legally valid.

Physical signatures are the traditional method and are still widely used today, but the process can be time-consuming to print, sign, scan and send contracts. This is particularly true if there are multiple parties signing and if you send a large volume of contracts everyday.

Electronic signatures are digital forms of physical signatures that don’t need to be printed and can be processed quickly. With the right software, such as PandaDoc or DocuSign, you and each party can add signatures at the click of a button, making the contract legally sound.

Written is always best

So, even though verbal contracts are sometimes legally-binding, you are taking an unnecessary risk by relying on an oral agreement for anything important. It’s always best to play it safe and draft a properly-written contract, signed by all agreeing parties.