Is a verbal agreement legal?
The Notorious Oral Contract
Most of us have at least heard of the terms "verbal agreement" or "oral contract". It means exactly what it sounds like - two or more people enter a contract with nothing more than a handshake and have no written document to evidence their agreement. The general rule is this - oral contracts are legal. Most of the transactions we enter on a daily basis do not require a writing to be legal. I'll give you a few examples (although the possibilities are infinite):
- I see my neighbor using an old push-mower on his yard and I want it. I yell to him across the street "Hey, I'll give you $75 for that mower." He yells back "Sure! $75 sounds great for this old thing." We have entered a legally enforceable contract.
- After I get the push-mower, I see the neighbor's son across the street and yell to him "If you mow my yard with your pop's old mower by the weekend, I'll give you $20." He doesn't say a word because he's a brat. The kid starts thinking he could use some cash for the weekend so he comes over on Friday while I'm out and mows my yard. We've made a contract.
- My other neighbor, a sweet old lady that makes the best peach cobbler west of the Mississippi, needs her yard mowed. I say to her, "I'll mow your yard for one of those peach cobblers." She says, "I'll have it baked by the time you're finished." We've got a tasty contract.
As you can see from the above, nearly any agreement two people enter constitutes a contract, whether written or not. There are some major exceptions I'm going to talk about below. Oftentimes the biggest problem with oral contracts is proof. An old saying about verbal agreements is "they're as good as the paper they're written on." This can be true.
Take example one above. Suppose I decided I didn't want that mower after all. The neighbor pushes the mower across the street to my yard, knocks on my door, and says "here's the mower - I'll take cash or check." I look at him and say, "Nah, I don't want it anymore."
"BUT WE HAD A DEAL!"
"I don't want it anymore, sorry."
The neighbor and I did have a deal. I've breached our contract. But how can he prove that we ever had a contract? He can't.
The situation is different with example two. If the son comes over and mows my yard, and then I try to back out of the deal, I wouldn't be able to because he performed. Teenage brats don't mow yards for free. He would have sufficient evidence of some kind of agreement. He wouldn't be able to prove how much I offered him though - I could say, "I only offered $15 - he's crazy saying $20."
Or, flip it around, suppose the kid mows the yard and then says "I'll take my $40." How can I prove I only offered him $20? I can't.
I know these sound silly, but oftentimes much larger deals are struck with nothing more than a handshake and the same problems crop up. A business is sold on a handshake for thousands of dollars; the person pays; and then the seller only conveys 2/3 ownership of the business. The buyer now has to fight an uphill battle proving he bought all of it instead of 2/3.
Bottom line is that if you're making a deal of sufficient value or a deal that has multiple parts - get something in writing evidencing what you're doing - no matter how well you know or trust the person you're dealing with. (I just finished a case where two brothers sued each other over a verbal contract. The agreement was worth $400,000 so I would probably sue my brother too if he didn't pay up!) It doesn't have to be fancy - it can be on a cocktail napkin but it needs to be signed by the person you're dealing with.
If you're not going to get something in writing, another simple way to help prove the agreement is to have a witness (or two) to the transaction. With a witness, It's not just you're word versus their word - you now have additional corroborating evidence of the agreement in the form of witness testimony.
The Statute of Frauds
The general rule is that verbal agreements are enforceable. An exception to this is when the Statute of Frauds applies. When the statute of fraud applies, there has to be a writing signed by the parties sought to be bound. I've got a hub on this specifically but generally, the Statute of Frauds applies to contracts dealing with:
- Interests in land (including leases and easements for more than one year)
- Promises in consideration of marriage ("If you marry my son, I'll buy you two a car.")
- Promises to pay another's debts - suretyship ("Sell him the boat and if he doesn't pay you, I will."
- If an executor promises personally to pay estate debts.
- A promise that by its terms cannot be performed within one year.
- Goods priced at $500 or more
I hope you now have a working understanding of verbal agreements and their legality. Be sure to read my hub on the Statute of Frauds because it also has exceptions.