An oral contract is a spoken agreement that can be legally binding. Much like a written contract, the parties enter into an agreement to either do or not do some obligation.
The two primary differences between an oral and written contract are that an oral is obviously spoken, as opposed to written, and oral contracts are much harder to prove since the exact terms are not written down.
In order to form an oral contract, the following requirements are usually necessary:
- The words that create the contract must be valid and enforceable;
- The agreement must incorporate the elements of a basic contract (e.g., offer, acceptance, consideration, and mutuality or a “meeting of the minds”); and
- It must not violate any statutes that prohibit oral agreements, such as contracts that fall under the Statute of Frauds.
Although these additional elements are not required for the creation of an oral contract, it is generally a good idea to include them to be able to prove that such a contract exists:
- Having several witnesses present during the oral agreement;
- Saving or creating physical evidence concerning the oral contract, such as receipts, letters, e-mails, thank you cards, etc.; and
- Making sure the content of the agreement is something that is easily provable like an oral agreement to buy, sell, or carry out some kind of service as an end result of the prior statements made to form the agreement.
As previously mentioned, the main issue with oral contracts is that they can be hard to prove. Oral contract cases often require proof through the performance of one or both parties to demonstrate that there was a clear reliance on the agreement made.
A breach of contract occurs when there is a failure to fulfill the terms of the agreement. This means that if a party wants to sue for breach of an oral contract, the nonbreaching party will not only need to show that a contract actually existed, but also that the other party did in fact break that contract.
This is why having certain measures, such as witnesses, performances of some kind, and receipts are so important to the creation of an oral contract. These items make it that much easier for the nonbreaching party to support their case.
Additionally, an oral contract has to be enforceable to be able to sue for a breach. A contract is considered to be enforceable if a legal remedy can be offered in the event of a breach.
For example, suppose Party A orally agreed to sell Party B their textbooks for $400. Not wanting to miss out on the opportunity, Party B decides to immediately send Party A an electronic payment. If Party A never ships Party B their textbooks, then Party B will have a legal remedy to seek reimbursement for the $400 that they spent on textbooks that were never received.
Thus, while it is possible to sue for breach of an oral contract, these types of cases require a lot more proof than contract disputes that involve a signed agreement. As such, it may be helpful to hire a contract attorney for legal guidance and further assistance on matters regarding oral contracts.
An oral contract is unenforceable if it falls under the Statute of Frauds. This is because contracts that are governed by the Statute of Frauds require a signed writing. The following scenarios are examples of when it is necessary to have a written agreement:
- Consideration of marriage, including prenuptial agreements;
- Sale of goods above a certain value (usually $500, but amounts will 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 pay off a decedent’s debts.
Oral contracts are best suited for situations that involve simple agreements, which can be easily memorized and will provide plenty of evidence that such an agreement has been made.
As an example, Joe agrees to buy Jane a refrigerator if Jane gives Joe her television. Joe and Jane handshake on the agreement in front of their friends Bob and Elliot as witnesses to this agreement. Joe then purchases a refrigerator and keeps the receipt from the store where he bought it.
Although oral contracts can be useful in certain instances, there are other situations where a written contract would be much more favorable. Some of these situations might include when:
- The other party requests that the agreement be made only as an oral contract. If one party is insistent on not having a written contract, then this may be a sign that the person is not making the agreement in good faith;
- If the agreement is too complex, then it should be written down. Written contracts are specifically designed for complicated deals. In contrast, oral contracts should only be used for simple ones;
- Neither party has the time. Time should never be a factor when making a contract. Contracts are legally binding and thus carry legal consequences; and
- Both parties trust one another. Like time, trust is another factor that should not be considered when deciding whether or not to use an oral contract. If a dispute arises over an oral contract based on trust, it can have both legal consequences and personal ones because it will most likely destroy the parties’ relationship.
Although this is not an exhaustive list of reasons for when a person should not form an oral contract, it is a general guideline. Other reasons include some of the items mentioned above, such as when the contract falls under the Statute of Frauds and requires a writing, or when it does not meet the basic elements that are necessary to form a contract.
If you are involved in a matter where the other party breached an oral contract, the best action you can take is to informally resolve the situation by contacting the other party and discussing the issue.
If this remedy does not suffice, then you should contact a contract attorney for legal advice. They will be able to provide you with options for legal recourse, help you to gather any evidence, and can prepare your case if you should need to present it in court.