Are verbal contracts legally binding?

Verbal agreements happen all the time in business – yet, their enforceability is often the subject for debate, with many assuming the lack of written contract renders them void or without legal standing. However, while there are some exceptions such as Settlement Agreements and Conveyancing contracts, the law considers verbal agreements to be legally binding in most circumstances.

Naturally, written contracts are advised in all business dealings – after all, the phrase ‘to put it in writing’ exists to allude to the formality and physical proof that a written agreement provides. When two parties enter into an agreement such as the exchange of payment for a service, the lack of a written contract will naturally give both parties less security. Should they find themselves disagreeing on the finer details of their arrangement, there will be no legal text to refer to.

Nevertheless, it is also possible to establish a contract with others verbally or by conduct alone. Take the floor traders in the New York Stock Exchange: if verbal contracts weren’t binding, the stakes wouldn’t be so high. Similarly, the highest bidder at a public auction is legally bound to proceed with the purchase at the fall of the auctioneer’s hammer. Retracting your bid in this instance is not only considered Bad Bidding Etiquette, but a genuine breach of contract.

In business, verbal contracts are just as binding as written ones – the primary reason that they aren’t as advisable is that disputes arising from them can be messy and difficult to prove.

What is a verbal contract?

Verbal agreements are contracts that have been agreed by means spoken communication. Despite it not being in writing, a verbal agreement still counts as an enforceable contract, legally binding to all parties involved. Technically speaking, the term ‘verbal contract’ refers to any contract written or communicated in language – the correct term for an agreement made through spoken communication is an Oral Contract.

When is a verbal agreement legally binding?

To form a valid, legally-binding contract, the following four elements must be present:

  • an offer;
  • acceptance;
  • consideration; and
  • the intention to create a legally binding agreement

An offer is a pledge by one party to another, promising to enter into a contract on set terms. It has to be specific, complete and capable of being accepted.  Acceptance of the offer must be made unequivocally for a contract to be made – the most common dispute arises when one party seeks to renege on the agreement and denies the conversation took place at all.

With regards to consideration and intention, the courts apply an objective test in determining whether such intention exists. In commercial contracts, there is a rebuttable presumption that the parties intended to bind themselves when entering into the agreement.

The problem with oral contracts

With this in mind, oral contracts should be reserved for simple agreements – the simpler the contract, the less chance that both parties will find themselves in court disputing the unspecified details of a verbal arrangement. When it comes to complex business dealings between a business and an individual, it is unequivocally in the best interests of both parties to set it in stone by drafting in text a legally watertight contract.

Employment, for instance, should typically involve written contracts because they detail employee rights and company rules: once signed by both parties, it’s presumed that there is an all-round acceptance of the terms within the contract. Conversely, complex oral contracts are more likely to fall apart when held up to the scrutiny of a court, usually because the parties can’t reach an accord over the finer points of the agreement.

Complex agreements? Put it in writing.

Oral contracts may be legally binding, but the time, costs and fuss that can come from a dispute surrounding their validity is likely to be more trouble than it is worth. No matter the nature of your agreement, taking the time to negotiate the terms of the contract and drafting the supporting contract is the best way to avoid ambiguity and minimise the risk of a costly dispute.

Prior to writing a contract, it’s a good idea to have your lawyer produce a Head of Terms document that sets out the key points addressed in the agreement. In doing so, both parties will be on the same page prior to negotiations and there will be less room for surprises when the final document is created.  Within the contract itself, it’s wise to include a disputes resolution procedure that dictates exactly how the parties will act in the event of a disagreement, saving everyone time and money.

While you can draft a business agreement yourself, it’s highly advisable you consult with a specialist lawyer who has experience in drafting similar agreements and can spot legal red flags before it’s too late. With a properly drafted contract in place, you at least gain the surety that your contract is enforceable. Should the worst happen the judge will have the official documentation to evidence it.

Should you have any further questions on oral contracts or wish to speak to one of our commercial lawyers regarding the drafting of a business contract, get in touch on 0333 772 0826 or fill in the short enquiry form and we’ll get back to you as soon as we can.