An oral contract is a verbal agreement that may be legally binding. Much like a written contract, the parties enter into an agreement to either do or not do some obligation.
There are two main differences between an oral contract and a written contract. The first and most obvious is that an oral contract is a verbal agreement. The second is that oral contracts are spoken, meaning there is no further proof that it was created other than the parties or witnesses who heard it.
As such, courts prefer that parties formalize their agreements in writing (i.e., a written contract). This way if a future dispute arises over the terms of the contract, then there is concrete proof demonstrating what the parties agreed to and potentially, what intentions were set when initially forming the oral contract.
What are the Requirements to Form an Oral Contract?
There are several requirements that must be met in order to form an oral contract. The following provides a basic list of oral contract requirements:
- The terms of the contract must be valid and legally enforceable;
- It must contain the necessary elements found in all contracts (e.g., offer, acceptance, consideration, and mutuality or a “meeting of the minds”); and
- The oral agreement must not violate laws or regulations that are meant to prohibit oral agreements, such as contracts that fall under the Statute of Frauds (i.e., those that must be in writing).
While these next set of factors are not required to create a valid oral agreement, it is generally recommended that the parties include them since they can be useful if they have to prove a verbal contract exists:
- During formation of the oral contract, it may be a good idea to have witnesses present for proof and future testimonial purposes;
- Create or preserve any physical evidence associated with the oral contract, such as e-mails, letters, receipts, etc.; and
- Oral contracts operate best if there is a tangible end result when its terms are carried out like an agreement to buy or sell some type of service or product.
What are Other Important Elements of an Oral Contract?
As with all contracts, the parties to an oral contract must have complete competency and the legal capacity to form a valid contract. A court will typically not enforce an oral agreement if one or both of the parties are not competent or do not have legal capacity to form the contract.
Some examples of when a court may not consider the parties to possess competence or capacity include when:
- If one or both of the parties were under the influence of alcohol or other incapacitating substances;
- If one or both of the parties was below the legal age to form a contract (usually 18 years of age, but age restriction will vary by state); and
- If one or both of the parties is mentally incompetent.
The other issue that frequently shows up when dealing with verbal agreements is the Statute of Frauds. Briefly, this statute requires certain types of agreements to be in writing. Thus, if the oral contract involves any of the subject matter required to be in writing by the statute, then it will not be legally binding. The statute of fraud subject matter will be discussed in further detail below.
Can Verbal Contracts Be Legally Binding?
As previously mentioned, the requirements that make a verbal contract binding are much the same as the ones for written contracts, such as:
- Offer and acceptance;
- Legal subject matter;
- Complete and clear terms;
- Voluntary consent by both parties; and
- Legal subject matter.
On the other hand, if the terms are very complex and hard to understand, one or both of the parties are not sure whether a contract actually exists, or the contract involves one of the matters that falls under the Statute of Frauds and thus needs to be in writing, the oral contract will most likely not be binding.
When are Oral Contracts Unenforceable?
An oral contract may be unenforceable if its subject matter falls under the Statute of Frauds. The reason for this is because contracts that are governed by the Statute of Frauds require a signed writing. The following are some examples that demonstrate when it may be necessary to have a written agreement:
- Consideration of marriage, including prenuptial and postnuptial agreements;
- Sale of goods above a certain value (usually $500, but amounts can vary by state);
- Transfer or sale of land ownership;
- Contracts that cannot be fulfilled within a year;
- Promises to pay another’s debt (“surety contracts”); and
- Executor agreements to satisfy the debts of a decedent.
What is a Breach of a Verbal Contract?
In general, a breach of contract may occur when there is a failure to fulfill the terms of an agreement. This means that if a party wishes to sue for breach of an oral contract, the non-breaching party will not only need to show that a contract actually existed, but also that the other party breached the terms of their contract.
As previously discussed, the biggest issue with oral contracts is that it is usually hard to prove that one exists. Oftentimes, cases that involve a breach of an oral contract will require proof of performance of either one or both parties in order to show that there was clear reliance on the agreement.
For instance, suppose Party A verbally agrees to sell Party B a textbook for $400. Party B verbally accepts the agreement and sends $400 to Party A. If Party A does not ship the textbook to Party B, but keeps the $400, then Party A has breached their oral contract. Thus, Party B can sue Party A for breaching their agreement and to recoup the cost of the textbook that was never received.
Basically, breaches apply to oral contracts in much the same way as they do to written contracts. Again, the only difference being that one is written and the other is verbal, and of course, that oral contracts are much harder to prove.
What Should I Do If I Want to Sue for Damages for a Breach in the Oral Contract?
As previously mentioned, it can be very difficult to prove that a party breached an oral contract. However, a person should consider suing if they can provide clear proof, such as reliance on the agreement, if there were witnesses around when the agreement was made, and documents or written evidence that show the agreement existed.
If the non-breaching party has ample evidence and believes that their oral contract is valid and legally enforceable, then they should consider suing the breaching party. If they are not sure, then they should contact a contract attorney for assistance.
A lawsuit is only one consequence of breaking a verbal contract. Others may include having to go through an arbitration or mediation, paying associated legal costs, having to remedy the situation without counsel, and losing a business contact, customer, friend, etc.
Basically, suing for a breach of an oral contract will usually only be worth the effort if concrete proof exists, there is enough supportable evidence for the claim, there was clear reliance on it, and the oral agreement is enforceable. Regardless, a non-breaching party should speak to a lawyer to ensure they have considered all options for recovery.
Do I Need a Lawyer If Someone Breaches an Oral Contract?
If you are a party to an oral contract and you believe that another party has breached the terms of your agreement, the first step you should take is to contact them and discuss the issue. If the other party refuses to speak to you or you cannot resolve the issues on your own, then the second step is to contact a local contract lawyer for guidance.
Your lawyer will be able to explain your legal options and can discuss which ones may work in your favor to obtain a remedy for the breach. Additionally, your lawyer can help you prepare your case, gather evidence, file any necessary legal documents, and answer any questions you may have. Lastly, your lawyer will also be able to provide representation on your behalf in court if necessary.