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Are Verbal Business Contracts Binding?

Are verbal contracts binding?

Only 32% of companies use a contract management tool. This leaves the door open for the majority of businesses to make casual and verbal contracts. For agreements that go smoothly, this may not be a big deal but are verbal contracts binding?

However, not everything goes perfectly, and when things go south, you need a way to prove the terms of your agreement. If you have verbal agreements in place for your business, you need to know if they’re enforceable.

This guide will help you determine if you have viable and enforceable verbal contracts.

What Is a Verbal Contract?

A verbal agreement contract needs to have all of the elements required to make a contract between two parties. It’s done through speaking and actions and not written down.

Are Verbal Contracts Enforceable?

The verbal contract that you make may or may not be enforceable. The first hurdle is the jurisdiction that you’re in. You need to make sure that your verbal agreement complies with the laws of the state that you’re in.

Statute of Frauds

Additionally, there’s a thing called Statute of Frauds. It requires that certain agreements or contracts must be in writing if you want to enforce them. The specific contracts that fall under the Statute of Frauds will vary based on the state you’re in.

Common contracts that fall under this requirement are contracts for the sale of land, marriage contracts, contracts where one party agrees to be liable for the debt of another, and contracts that can’t be completed within one year.

Uniform Commercial Code

You may also find that your business contracts full under the governance of the UCC. This includes contracts that are for the sale of goods. Any contract for the sale of goods over $500 must be in writing to be enforceable.

Statute of Limitations

While the first two stipulations pertain to the subject matter of the contract, this one applies to the amount of time you have to seek recovery. You only have so much time to seek recovery or relief if you’re wronged by the other party.

For verbal contract law, this time limit is much shorter than written agreements. The exact amount of time will vary based on where you’re located. The reason for the shorter time period is because verbal contracts depend on evidence and witness testimony.

The sooner you seek recovery, the easier it is to gather this information. Whereas with a written agreement, you always have the paper contract to refer to.

Enforcing a Verbal Contract

If you feel that there was a breach of verbal contract and that your agreement is enforceable, you’ll need to prove that your verbal contract is valid. Whether it’s express or implied, there are certain elements you need to show that are present.

Offer and Acceptance

One party needs to make an offer and know they’re making an offer. The other party needs to understand that they’re receiving an offer and accept it. You cannot have an offer if the one party doesn’t know they’re making an offer or if the other party doesn’t accept the offer that’s made.

Consideration

The agreement between the two parties needs to involve consideration by each party. Consideration is where each party gives something of value. For most business contracts, the consideration is one party supplying a good or service and the other party providing payment.

The consideration needs to be a meaningful amount and of actual value. It cannot be a symbolic or recitation of consideration.

Meeting of the Minds

Both people need to have the capacity to create a contract. This means that they are old enough (over 18) and are of sound mind. They then need to have a meeting of the minds.

Both parties need to know they are making a contractual agreement and intend to make a contract.

Proving the Elements

If you used one of the contract templates from ApproveMe or another online contract template service, then you’d have an easier time proving the elements. The offer, acceptance, and consideration are built into the contract.

However, without a written agreement, you’ll have to find evidence to support the elements. You could provide email conversations that support the facts of your claimed agreement. Or you could provide proof of action.

For example, you could provide proof that you delivered the requested product, thereby fulfilling your duties of the agreement. Or you could provide proof of the other party’s acknowledgment of an invoice, thereby proving their agreement to pay.

You can also have employees and witnesses testify to their witnessing the verbal agreement. The problem with this is that people’s perceptions and memories can vary greatly, which provides inconsistent facts.

The Trouble With the Terms

When you have a written agreement, the court can take the physical contract and use it to decipher the agreement. This is called the four corners test. Only the terms that are within the four corners of the contract are enforceable.

The theory is that the parties took the time to write down the agreement, so they should have included everything. If it isn’t in the paper, it’s not a part of the agreement.

However, with a verbal agreement, there are no four corners to limit the terms. This means that both parties can claim there were terms that may or may not have been in the original agreement. As long as they can show some sort of proof, they could introduce several additional terms.

This means that while you could successfully enforce the verbal contract, you may also get held to terms you didn’t originally agree to.

Protect Your Business Today

If you find yourself trying to decide between a verbal agreement vs. written contract, always skip the verbal contract and put it in writing. Having your business agreements in writing helps to avoid disagreements, potential breaches, and further litigation.

If there’s a breach, a written contract is much easier to enforce because you have everything in writing versus looking at the question, “are verbal contracts binding?”. You can bring a document to the court with supporting evidence and have a much easier time recovering.

Browse our other articles for more information about running a successful business.