As a business owner, you rely on contracts for well-rounded protection. These are legally binding agreements involving multiple parties. Contracts outline your key risks and responsibilities while also helping you feel confident that you’ll be paid on time. Your clients appreciate contracts as well because they clarify expectations, deliverables, and timelines. While contracts are, by definition, legally enforceable, confusion can emerge regarding what exactly qualifies as a legally binding contract. Many also question: is a verbal agreement legally binding?
The public perception of a contract involves a detailed, formal document featuring complex terminology and multiple signatures. In reality, however, these agreements can take many forms that can prove both valid and enforceable, even if they lack formality or legal jargon.
This is where verbal agreements come into play. Bypassing written documentation, these agreements are made through the spoken word. They may occur over the phone or during a face-to-face conversation, but they’re largely defined by what they lack: a paper trail. Despite this, they are often legally enforceable, as we’ll discuss in detail below.
Not sure which type of contract best serves your business and its clients? Keep reading to answer these common questions: Is a verbal agreement binding, and will it hold up in court?
What qualifies as a verbal agreement?
A verbal agreement uses spoken words instead of written documentation. This may also be referred to as an oral contract or a handshake deal. This type of agreement involves a clear offer made by one party, with the other party indicating (through spoken words) acceptance of the offer in question. The offer may include details about the scope, the timeline, and any compensation involved.
Although a verbal contract, by definition, emphasizes the use of spoken language, a verbal agreement should share the critical elements of any contract:
- Offer: Every agreement should include a clear proposal that highlights key terms and conditions. This could involve providing a product or completing a service. There’s no room for ambiguity, even if the agreement is verbal.
- Acceptance: For an agreement to be valid, it should be evident that the person receiving the offer agrees to its terms, without trying to change them. Acceptance is, by definition, clear and unconditional.
- Consideration: Every agreement should involve contributions from both parties. This concept is known as consideration, suggesting that both sides must provide something of value. These contributions could involve goods, services, or money.
- Mutual assent: Known casually as the “meeting of the minds,” the concept of mutual assent suggests that all parties involved in a given agreement are willing to accept its terms. Also referred to as “mutual intent,” this ensures that both sides fully understand the implications of the specific agreement.
- Legal capacity: Whether written or verbal, agreements are not valid unless both parties hold the legal capacity to enter into the contract. This means both parties must be of age (typically at least 18 years old) and mentally competent enough to understand what the agreement involves. All agreements should be made knowingly and voluntarily, free of intoxication, duress, or other impairments.
To qualify as a verbal agreement, a contract should not only satisfy the requirements outlined above, but it also must exclusively involve spoken words. If they’re recorded in writing (for example, in emails or formal documents), these contracts no longer qualify as verbal.
Why are verbal agreements difficult to enforce?
So are verbal contracts valid? In most cases, yes—if a verbal agreement addresses key elements such as an offer, acceptance, consideration, and mutual assent, it should qualify as a legitimate contract and be legally binding.
Despite this, verbal agreements can be challenging to enforce. These difficulties largely stem from the lack of written documentation. As a result, verbal agreements rely on trust and memory, which can spark ambiguity or uncertainty. Common concerns include:
- Memory issues: Because verbal agreements are not recorded in writing, they require that both parties clearly recollect the precise terms. Furthermore, both parties must share the same memories. Unfortunately, human memories are prone to distortion or may simply fade over time.
- Informality: Some people enter into verbal agreements because they find the casual nature of these arrangements appealing. Unfortunately, this informality presents additional risks, potentially causing well-intentioned individuals to overlook important details. This can lead to disputes surrounding the scope of work, timelines, or payments.
- Intent: When people sign contracts, there’s a stronger indication of their legal capacity and mutual assent. With verbal agreements, however, these essential elements may be difficult to prove, due to the simple lack of evidence that both parties anticipated being legally bound.
There’s no easy way to answer the question of whether a verbal agreement is legally binding. That said, verbal agreements can often be enforced. This often takes extra effort and may require supporting evidence, which, without written documentation, can be tricky to obtain.
A lot depends on the jurisdiction in which the agreement is contested. In some situations, witness testimony can help, as can follow-up documentation such as payment records.
Why do businesses enter into verbal agreements?
Given the increased risk that comes with verbal agreements, it’s worth questioning why anyone would enter into such an agreement in the first place.
In spite of written contracts’ enhanced security and reliability, verbal agreements do offer a few potential advantages:
- Speed: Written contracts take time to draft, complete, and sign. Verbal agreements, however, can be made in a matter of minutes, or even seconds. This approach makes it possible to commit on the spot. As such, verbal agreements may seem appealing during phone calls or momentum-filled negotiations.
- Convenience: Some businesses or clients show an aversion to red tape in all forms, including written contracts. They appreciate the convenience of verbal agreements, which require only a simple conversation.
- Informality: In casual environments, written agreements may seem overly formal. For example, if a business owner and client have known each other for several years, they may feel awkward about introducing a formal contract into their already-established rapport.
- Misunderstanding: Many people enter into verbal agreements without recognizing that these arrangements qualify as contracts. Despite the need for acceptance and mutual assent, these poorly understood verbal agreements may still be valid, simply because the basic elements of a contract have been satisfied.
- Trust: Verbal agreements often rely on a sense of mutual trust. The individuals or businesses entering into these agreements may have already worked together for years and may regard written contracts as unnecessary.
Keep in mind that these advantages are largely subjective. In reality, written agreements do not always take long to complete, nor are they too formal or excessive. If anything, close trusting relationships have even more of a need for written agreements, which can preserve strong rapport by actively preventing misunderstandings.
How to make a verbal agreement
While written contracts are easier to enforce, understanding the process of entering into a verbal agreement can limit the potential for misunderstandings. This process typically involves a few key steps:
- Define the terms of the agreement. Both parties should discuss (in detail) what is being agreed upon: the services and products involved, along with the scope of the work, the timeline for completion, and the payment details.
- Acknowledge mutual understanding and consent. Both parties should clearly explain that they understand the stated terms and are fully willing to enter into the agreement in question. This verbal confirmation could involve a simple statement referencing the type of service, the expected date of completion, and the agreed-upon payment details.
- Clarify contingencies, if relevant. Many contracts include contingencies—specific conditions that must be met in order for the agreement to be deemed valid. These contingencies should be explained in clear, succinct language.
- Restate the agreement to confirm understanding. It can be helpful for one or both parties to summarize the verbal agreement, as this provides the chance to spot (and correct) any potential misunderstandings early on.
Some agreements, although made verbally, may be followed by written summaries that detail what the parties agreed to and why. These summaries may be recorded by text message or email, although some parties may also summarize their agreements privately for their own records.
What is the statute of frauds?
In many situations, verbal agreements are valid and enforceable, albeit not necessarily ideal. Exceptions exist in oral contract law, however, and in select scenarios, written contracts may be required.
A legal doctrine known as the statute of frauds outlines the situations that call for written contracts, which must be signed. This generally applies to sales of land, along with agreements in which a purchase of goods exceeds $500.
The benefits of written contracts
At first glance, written contracts may appear to require far more effort than their verbal counterparts. Often featuring detailed and formal language, written contracts may seem time-consuming or complex. Keep in mind, however, that a few added steps at the outset can save both parties a lot of trouble down the road.
Simply put, written contracts are valuable because they’re easier to understand and enforce. When agreements are clearly documented, disputes are less likely. Written agreements can serve as a blueprint or point of reference, allowing both parties to revisit the terms for clarification.
These benefits can enhance both parties’ legal protection, offering a paper trail that could make all the difference in the event of a breach or dispute. Above all else, written contracts provide peace of mind—a must for today’s proactive business owners.
Solutions for addressing enforceability concerns
Due to enforceability challenges and general confusion surrounding verbal contract law, this approach is not recommended. When agreements are made through the spoken word, seemingly small oversights could lead to major disputes or even spark a breach of the verbal contract. Instead, business owners and their clients should record all of their agreements in writing.
Written contracts should include all of the critical elements discussed previously: offer, acceptance, consideration, mutual assent, and legal capacity. Ideally, these will be signed to indicate that all parties agree to the outlined terms.
This process does not need to feel challenging or inconvenient. Contract templates provide a helpful framework, highlighting the details that business owners or their clients may outline to clarify their expectations and prevent disputes. These templates take many forms and may be personalized to reflect any party’s specific needs or preferences.
Safeguard your business with written contracts
Why take a risk on verbal agreements when Honeybook’s templates are so easy to customize? Use our online contract solutions to streamline the drafting process so you can protect your business.
We’re pleased to offer many types of templates, including independent contractor agreements. Our interactive guides can also help you walk your clients through the process so they feel confident every step of the way.
Check out our templates and discover how we can help you run your business on your terms.
Disclaimer: The advice featured in this guide and on the blog is for sharing general information and knowledge. For specific legal advice, please consult an authorized professional.
