Is a verbal contract binding?
Verbal contracts, sometimes called handshake agreements, are legally binding, with a small number of exceptions.
Just because oral agreements are difficult to prove, it is advisable for all parties to sign a written document and seek professional legal advice.
This article covers the basic components of verbal contracts and the requirements for the contract to be legally-binding and admissible in court.
What is a verbal contract?
A verbal contract is a type of agreement (between two or more parties) that is 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 in the example above, but both parties agreed on a price and accepted the agreement when payment was exchanged.
What makes a contract legally-binding?
A binding agreement must include the following components:
1. 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.
3. Acceptance of the offer
The party then accepts the offer of $100 and agrees to repay the full amount in the future.
4. 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.
Consulting with a contract lawyer is beneficial at this stage.
5. 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.
6. The terms must be certain
The terms of the agreement have to be clear and understandable. If they are vaguely worded, then the contract is unlikely to hold up in court.
7. 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.
If any party does not agree of their own volition, the agreement does comprise a legally enforceable contract.
When is a verbal contract not legal?
A verbal agreement is 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, irrespective of whether or not an oral agreement contains all of the elements of a contract.
The rules vary in different jurisdictions, states, countries and even between different types of contracts, but in the U.S. the following agreements require a written contract to be valid and are covered by federal law:
- When the contract entails one party covering another’s debt obligations.
- Transferring or selling real estate or a plot of land.
- Sale of goods over $500.
- Marital and divorce agreements.
- When the contract will take more than one year to complete.
- If 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 goes wrong and a contract dispute arises, 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 and a breach of contract occured.
As such, most legal services providers and experts familiar with contract law will usually strongly advise a written contract. This brings us to the signature part of a contract.
Why should I sign a contract?
If you want an airtight valid 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, you and each party can add signatures at the click of a button, making the contract legally sound.
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 properly-written legal documents signed by all parties, preferably with the assistance of a law firm or professional template, and supported by a dedicated document management app.