Are Verbal Contracts Legally Binding?

Last Updated: October 12, 2023

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Key Takeaways:

  • Despite being harder to enforce, verbal contracts can be legally binding if they have the elements of a valid contract.
  • Sometimes, written contracts are required, like when entering into a Prenuptial Agreement.
  • Written contracts are superior because verbal ones can lead to more misunderstandings and legal disputes.

Verbal contracts are a common part of our everyday lives. We make agreements with people all the time without putting anything in writing. But what happens when a dispute arises and there's no written contract to refer to? Is a verbal contract legally binding?
The answer is more complex than you might think. In this article, we'll explore the validity and limitations of verbal contracts, as well as the risks of not putting agreements into writing.
But first, let’s define a verbal contract.

What is a verbal contract?

When two or more parties come to an agreement without any written documentation, they create a verbal contract. A verbal contract is also known as a:
  • Verbal agreement
  • Oral contract
  • Handshake agreement
  • Spoken agreement
  • Informal agreement
  • Unwritten contract

Are verbal contracts binding?

Verbal contracts can be legally binding, meaning there are some exceptions. Despite being considerably harder to verify and prove, some verbal agreements can hold the same legal weight as written ones.
Like written ones, verbal contracts must include the elements of a valid contract to be enforceable and legally binding. In case you need a refresher, the required elements are as follows:
  1. Offer and acceptance
  2. Consideration
  3. Intention
  4. Legality
  5. Capacity
But we can’t just stop there with our answer because it’s a bit more complex. Although verbal contracts can be enforceable, is doing away with written contracts the right answer? Is there a time and place for verbal agreements?
In the next section, let’s discuss some important exceptions that exist.

When are verbal contracts not permitted?

Sometimes, a verbal contract is not permitted because a written one is legally required.
Going back as far as the 17th century, common law developed a legal principle called the statute of frauds. If you create a contract covered by this statute, you and the other party must put it in writing and sign it for it to be enforceable.
Most states have adopted a modern-day statute of frauds and the goal remains to prevent fraud and other injury.
Since the statute of frauds differs from state to state, the requirements for written contracts vary. After checking your state’s requirements, you may find that the following contracts must be put in writing:
  1. Contracts for selling real estate , such as a Real Estate Purchase Agreement , Mortgage Agreement , or Contract for Deed
  2. Contracts for selling securities (i.e., stocks or bonds), such as a Stock Purchase Agreement
  3. Contracts for selling goods over a certain value (e.g., $500) which varies by jurisdiction
  4. Contracts where marriage is the consideration in a contract , such as a Prenuptial or Postnuptial Agreement
  5. Contracts that cannot be performed within one year from the date of the agreement (e.g.,copyright)
  6. Contracts in which one party agrees to pay someone else’s debt

When are written contracts suggested (but not legally required)?

In certain instances, verbal agreements are insufficient even though written ones aren’t legally required. Not having a written contract creates unnecessary risk for the parties involved. One of the main issues is that the precise terms of verbal agreements are difficult to prove in court.
In all of the cases listed below, having a written contract in place can provide legal protection for both parties in case of a dispute, saving time and money in the long run:

When are verbal contracts appropriate?

Verbal contracts can be appropriate in some situations, especially in cases where the parties involved know each other and the risk of loss is small.
Here are some examples of situations where a verbal contract might be appropriate and sufficient:
  1. Small and personal transactions : For instance, if you're buying a second-hand item, such as a used television, from a friend and not paying a lot, you likely don’t need a written agreement.
  2. Short-term or informal arrangements : When it comes to informal arrangements or short-term agreements, such as babysitting or pet-sitting, it’s probably reasonable to rely on a verbal contract.
  3. Trusted relationships : In some instances, verbal agreements can work well in relationships that have well-established trust, such as those between parents and their adult children.
Even in the above cases, writing up some type of receipt or record is never a bad idea. Outside of these examples, it's generally best practice to use written contracts. For more complex or important transactions or arrangements, using written contracts will help you avoid misunderstandings and costly legal disputes.

Do verbal contracts hold up in court?

Yes, verbal contracts can hold up in court, if a court determines there is sufficient evidence to prove the existence and terms of a binding agreement.
If one party breaches a verbal contract and the wronged party sues, the legal outcome depends on a number of factors, including:
  • The specific terms of the verbal agreement
  • The evidence available to support the claim
  • The applicable laws in the jurisdiction where the dispute occurred
As stated above, a verbal contract can be enforceable under the law, just like a written agreement. But, proving the terms of a verbal contract is more challenging than proving a written one because there is no physical document that outlines the agreement terms.
Suppose the wronged party can provide sufficient evidence to support their claim that a verbal contract existed and that the other party breached that agreement. In that case, they may be able to win a lawsuit and receive damages or other legal remedies.
The evidence used to support a claim may include:
  • Witness testimonies
  • Correspondence or other documentation that refers to the verbal contract
  • Any actions taken by either party that are consistent with the claimed contract terms

When in doubt, write it out

While verbal contracts can be legally binding in certain situations, written ones are more reliable and enforceable. Relying solely on verbal agreements can lead to misunderstandings, disagreements, and legal disputes, which can be costly and time-consuming.
To avoid potential legal issues down the road, it's always best to have significant agreements put in writing, even if it seems like a minor deal at the time.
Ultimately, taking the time to create a written contract can save a lot of time, money, and headaches in the long run.