Are Verbal Contracts Legally Binding? (With Definition & When to Use)

In business and personal agreements, verbal contracts are more common than you might think. Whether you’re making a deal with a friend or closing a business transaction, you may wonder: Are verbal contracts binding? This question often arises when parties rely on spoken words rather than written documents to finalize an agreement.

Understanding the legal validity of verbal contracts is crucial for protecting your interests. In this article, we explain what constitutes a verbal contract, discuss its legal standing, and provide challenges in proving it. We also explore effective methods to substantiate verbal agreements and offer insights to navigate these complex legalities.

What Is a Verbal Contract?

A verbal contract (also known as an oral contract or a parol contract) is an agreement that two parties make through spoken communication. People may informally refer to them as “handshake deals” because the parties don’t record them in writing. Instead, the parties use vocal communication to establish the terms of their arrangement.

Is a Verbal Contract Legally Binding?

Even though verbal contracts lack a physical document, they can be legally valid and enforceable if they meet specific criteria: [1]

1. Offer: One party proposes terms for an agreement.
2. Acceptance: The other party agrees to the proposed terms.
3. Consideration: Both parties exchange something of value.
4. Competency: All parties involved must be of sound mind and legal age.
5. Legality: The agreement must have a lawful purpose.

The parties must also be able to prove the existence of a verbal contract for it to be enforceable.

However, some types of contracts must appear in writing to be legally binding, which we discuss further below.

When Can I Use a Verbal Contract?

Verbal contracts are useful in specific situations, such as when the parties know and trust each other and the associated risk of the arrangement failing is insignificant. Here are some specific cases when a verbal contract might be sufficient:

• Simple transactions: When the agreement is undemanding. For example, you may use a verbal contract to facilitate the trade between you and a neighbor for household decor.
• Short-term agreements: When the parties will fulfill their obligations quickly. For example, you may use an oral contract to hire a neighbor to mow your lawn one time while you’re on vacation.
• High-trust relationships: When you have a high level of trust and familiarity with the other party. For example, you may use a verbal agreement to sell power tools to a close family member.
• Informal settings: When spoken communication can sufficiently express mutual understanding. For example, you and another party may agree to share a workspace through a verbal conversation.
• Situations where written contracts aren’t legally required: When you and another party want to agree to something that doesn’t legally demand a written contract, such as a basic service agreement or a small personal loan.
• Situations requiring immediate action: When you need to make a quick deal and don’t have time for formal documentation.
  • For example, suppose you own a small business and urgently need to have your storefront sidewalk pressure-washed for a big event the next day. You call a local pressure washing company and verbally agree over the phone that they will pressure wash your storefront sidewalk by 7 AM the next day for $300.

When Are Written Contracts Preferred Over Verbal Contracts?

Written contracts are preferable in many situations because they provide a higher level of security and clarity by clearly documenting the agreement’s terms and the parties’ rights and responsibilities. They also let the parties review and discuss each provision before finalizing the agreement.

This transparency helps avoid misunderstandings and disputes that may arise when the parties solely rely on verbal communication or memory.

Here are some instances when it’s strongly preferred (but not legally required) to use a written contract instead of a verbal one:

• Hiring employees or independent contractors
• Sharing confidential information
• Terminating a contract
• Renting a property
• Borrowing or lending money
• Providing services
• Selling an item
• Separating from your spouse

When Is a Written Contract Obligatory?

Oftentimes, a written agreement isn’t just preferable—it’s required by law. The statute of frauds mandates that parties must put certain contracts into writing for them to be legally binding. [2]

Here are some cases when you must have a written and signed contract:

• Contracts that take more than one year to complete
• Agreements by executors to pay debts from their own funds
• Agreements to purchase another party’s debt
• Prenuptial agreements
• Postnuptial agreements
• Sales for products exceeding a specific amount (varies by state but is often $500)
• Transfers or sales of land

Most states have adopted the statute of frauds, so the above instances will likely require a written agreement no matter where you live. Review your state’s laws for other cases in which a written agreement is necessary. For example, Texas requires oil and gas leases to be in writing. [3]

How to Prove a Verbal Contract

Proving a verbal contract can be challenging, as written evidence is lacking. Furthermore, the situation may result in a “he-said-she-said” scenario, meaning the parties tell different versions of the agreement with conflicting details.

Despite the unreliability that a verbal contract can pose, you may be able to prove it via the following methods:

Gathering Evidence and Documentation

You may be able to strengthen your case by documenting details related to the verbal contract. For instance, you can record the agreement’s time, date, and details as accurately as possible. You can also collect texts, emails, and other written communications referencing the verbal agreement to prove its existence.

Having Witnesses Present

Have witnesses present during the agreement, as they can testify that the agreement exists and relay its details. The credibility of witnesses and the consistency of their accounts may influence a court’s decision to enforce a verbal contract.

Showing Partial Performance

Partial performance of the verbal contract can also indicate its existence. Partial performance refers to one party taking actions that exclusively refer to the agreement. For example, initiating work based on the verbal agreement can serve as evidence of its existence and terms.

Protect Your Interests With a Written Contract

Even though oral contracts can hold up in court, pairing them with written ones is advisable. Once you and the other party come to a verbal agreement, you should record the terms in a written document and obtain signatures. This way, you have tangible evidence of the agreed-upon terms and conditions.

Always seek legal counsel if you’re unsure about creating a contract or enforcing one you already have. While it’s best practice to have a written agreement, a lawyer specializing in contract law may be able to help prove the existence of a spoken contract.