Once you agree to do something, people generally expect you to do it—but are you legally obligated?
When two or more parties come to an agreement without any written documentation, they create a verbal agreement (known formally as an oral contract). The authority of these verbal agreements, however, can be a bit of a gray area for those who aren’t familiar with contract law.
Most verbal contracts are legally binding. However, there are some exceptions, depending on the construction of the agreement and the purpose of the contract. In many cases, it’s best to create a written agreement to avoid disputes.
For instance, employers, employees, and independent contractors may find it invaluable to document the terms of their agreements in an Employment Contract or Service Agreement. Although an oral agreement may be legally enforceable, it can be tough to prove in court.
What are the elements of a valid contract?
Depending on your source, there can be anywhere from four to six elements that make a contract legally binding. Some sources consolidate elements under the same title. The six potential elements are:
- Offer and acceptance
- Lawful purpose
- Lawful consideration
- Certainty and completeness of terms
- Free consent of the parties
For a verbal agreement to be binding, the elements of a valid contract need to be in place. To illustrate how the elements of a contract create binding terms in a verbal agreement, we’ll use the example of a man borrowing $200 from his aunt to replace a flat tire.
Offer and acceptance
In a valid contract, one party makes an offer and the other party accepts. This is commonly known as a “meeting of the minds” because both parties agree to these terms. In our example, the aunt offers to loan her nephew money on the condition that he pay it back within a reasonable time frame. The nephew accepts her offer and promises to pay her back in full after he’s purchased his new tire.
The purpose of the contract must be lawful. In our example, the nephew’s reason for borrowing money from his aunt is to replace a flat tire on his car. As such, the contract between them is of lawful purpose. However, if the nephew wanted to borrow money to modify his car illegally (such as getting lights installed to imitate a police car), the purpose becomes unlawful and the contract is void.
The parties must exchange something of value (monetary or otherwise), known as consideration. Plus, the exchanged item must be legal. In our example, the $200 and the promise to return it are both examples of lawful consideration. The nephew could not, for instance, substitute his repayment of money with illegal drugs.
Certainty and completeness of terms
The terms of the contract cannot be vague, incomplete, or misrepresented. In other words, there should be agreement on who the parties to the contract are, the obligations of each party, the price to be paid, and what the subject matter of the contract is. The terms between the aunt and nephew are very clear; the aunt loans the nephew $200 for the purchase of a new tire (and nothing else) on the condition that he pay her back the $200 at a specific time (such as when he gets his next paycheck).
Free consent of the parties
The parties, both being of sound mind, should consent to the terms of the agreement freely, meaning without undue influence, coercion, duress, or misrepresentation of facts. The nephew and aunt both consent to the terms of the contract without pressuring each other and with the intention of fulfilling their obligations.
The parties must have the capacity to enter the contract, meaning they are above the age of majority and are of sound mind. In our example, the nephew and aunt are both over 18 years old, are not under the influence of mind-altering substances, and do not have cognitive impairments such as dementia.
When are verbal agreements not binding?
If an oral contract misses one or more elements of a valid contract, a court or tribunal will likely rule the agreement to be void and unenforceable. Many states have regulations for certain contracts to be in writing which deems that verbal agreements are insufficient.
These rules can differ from state to state but generally, a written contract is necessary:
- For the sale or transfer of an interest in land or real estate
- When the terms of the contract outlast the lifetime of one of the parties (e.g. copyright)
- When selling goods valued greater than $500
- In marriage or divorce agreements that promise an exchange of consideration
- If the terms of the contract will take longer than one year to carry out
- If the contract involves someone’s promise to pay someone else’s debt
Be sure to check your state’s laws or Statute of Frauds if you’re unsure whether or not you’ll need a written agreement.
Read more: Your Guide to Signing Legal Contracts
Verbal vs. written contracts
Many verbal contracts are legally binding but the possibility that a party doesn’t fulfill their obligation still exists; this is why people often prefer to get their agreements in writing.
Let’s continue with our imaginary scenario: if after getting his new tire, the nephew decides not to pay his aunt back when he gets his next paycheck, the aunt can take him to court.
In order to win the case, the aunt must prove with evidence that her nephew borrowed the money with the intention of paying it back, while the nephew must prove he agreed to no such thing. Without documentation of the agreement, it becomes a matter of he-said-she-said. In the end, a judge decides which party’s case is more probable.
Although the aunt can prove she loaned her nephew money with bank statements showing $200 transferred to her nephew on the day in question, she still doesn’t have physical evidence of him agreeing to pay it back. He might even deny he made such a promise (committing perjury in the process).
Without a witness to the agreement, the aunt could be out $200—and a decent relationship with her nephew.
When in doubt, write it out
Just like the aunt in our imaginary scenario, you are probably better off documenting an agreement in writing. Something as simple as a Promissory Note detailing the nephew’s promise to pay his aunt back could have prevented any disputes about their agreement. After all, it’s less awkward to ask family members for a written loan agreement than it is to take them to court.