What Is an Oral Contract
An oral contract is a contract that does not have to be written down at all. What are those essential terms of a contract? Traditionally, those terms are the parties to the contract, a description of the subject matter of the contract, the quantity of the subject matter, the price or how the price will be paid and when, how the contract will be performed, and when the contract needs to be performed. Those are your essential terms. If those essential terms are in writing, then assuming it is the type of contract that is needed to be in writing under the statute of frauds, and usually contracts over a certain value are, then what you have is a legally binding written contract. Other than that, you have a verbal contract. You have a verbal , or oral, contract if you can come up with those essential terms and you have the third thing, which is a meeting of the minds, or mutual assent. That means that the two parties have agreed to those essential terms; they both understand those terms; and they have both agreed. They have done it in such a way, together, that it makes some sort of coherent business deal. That creates a legally binding oral contract. It doesn’t need to be written down. In fact, most of the time, for a legally binding oral contract, you don’t need a writing. It can be all verbal. It can be done over the phone. There are no formalities. The law is that if you and I are in agreement over those terms, and we can prove it, we have a legally binding oral contract.
Legal Requirements for an Oral Contract to Be Binding
The mutual consent doctrine is the most fundamental legal requirement for a binding contract. To be binding, a contract requires a meeting of the minds; specifically, the present intention to enter into the agreement. To illustrate, if one party offers a type of product or service at a specific price, and the other party accepts that same type of product or service for that same price without additional terms, a binding contract is formed as long as the other legal requirements are satisfied. Regardless of the type of contract—whether for goods or services or a combination thereof—compelling evidence of a meeting of the minds is apparent where the terms of the contract are clear and definite.
Consideration, also known as the element of exchange, is likewise essential to the formation of a binding contract and requires the existence of a benefit conferred upon one party and a corresponding detriment incurred by the other. For example, a valid offer to sell a home for $500,000 is not legally binding unless the buyer communicates acceptance for the price. Further, this agreement lacks consideration—it is a valid offer, but unless the homeowner accepts the buyer’s one-million-dollar offer, the agreement is otherwise unenforceable. But if the homeowner accepts the buyer’s offer for $500,000, the agreement will be binding because the buyer will receive the home and the homeowner will receive the predetermined amount. Consideration is typically not a contentious issue in oral agreements.
Without the benefit of documentation demonstrating mutual consent, intent to be bound, and the element of exchange, the enforceability of an oral contract at the district court level may become more complicated. At the same time, parol evidence rules or statutes of fraud probably will not come into play at this stage because questions about the existence or intent of an oral agreement at the district court level can affect the outcome at the trial court level. For instance, suppose two parties sign a written document outlining a specific agreement. If one of the parties is persuaded—either intuitively or through interpersonal relations—to enter an oral agreement that contradicts the document or makes ambiguous the intention of the document, the trial court will almost certainly find that the oral agreement does not reflect a contractual understanding because the parol evidence rule does not apply.
Oral Contracts That Are Not Valid
Exceptions to the Rule
While oral contracts can be as enforceable as written contracts, there are exceptions to this rule. For example, contracts that fall under the Statute of Frauds must be evidenced in writing to be legally binding. Contracts that are subject to the Statute of Frauds include contracts involving the sale or transfer of land or real estate, contracts for the sale of goods worth more than $500, contracts that cannot be performed within a year and contracts that answer for the debts of another party.
An example of a contract for the sale of goods worth more than $500 that falls under the statute of frauds is a contract to buy a car because the car is worth more than $500. Similarly, a contract to pay the rent on a house for three years would also need to be in writing because it applies to real property and is not to be performed within one year. Alternatively, the defense of the statute of frauds is only applicable to the involved parties. This means that even if the defendant can provide evidence of the statute, this does not invalidate the contract between the two parties.
Establishing the Existence of an Oral Contract in Court
Once an oral contract is formed, parties are legally bound to the terms and conditions of that contract. However, if a dispute later arises, how can you prove that an oral contract ever existed? To help solve such problems, many states have written laws that make it easier to prove a party’s intention to enter into an agreement without a formal, written or signed contract. The challenge often lies in you (or your attorney) being able to provide compelling evidence of exactly what was agreed upon by both parties. After all, not only must you prove that a contract existed, but also that it had specific terms and conditions. In general, oral contracts may be proven by documents or testimony showing that: •a contract was actually made •the other person accepted the contract’s terms, and •the specific or material details of the agreement Potential types of evidence that may be helpful include: •write down your recollection as soon as possible after a verbal agreement is reached •objective evidence such as emails, letters, meetings minutes, calendars, bank statements, diary entries, receipts, etc. •samples or receipts for goods provided •evidence of partial performance such as having paid for partially-completed goods •independent witnesses from the community having knowledge of the specific situation •independent corroboration of conversation, e.g., by someone who overheard both parties on the phone •widely-accepted industry standards or practices •conduct of parties after contract formation •common sense and reasonableness
When Oral Contracts Can Pose Risks and Rewards
A consideration commonly weighed when evaluating a potential agreement is whether a contract should be oral or written. The idea of an oral agreement, or one that does not set terms down in writing, can be attractive for individuals and businesses alike. It is easier, perhaps, to talk through terms and conditions than to document them. But as simple as oral agreements are in theory, they present their own risks, as well as some benefits.
Depending on the terms of the oral agreement, a business may have greater flexibility to change terms as negotiations (perhaps only ones) come to an end. In addition, there may be less exposure to liability if a provision is unclear or does not end up being enforced. A business may also feel less pressure to perform on an agreement it believes does not reflect its understanding. But there are downsides to oral agreements as well.
Without a written contract, oral agreements may not cover enough detail to allow a business to gauge its performance or to determine whether the other party has breached its obligations. Nor may it give the parties confidence to know they have a fully enforceable agreement. Without a written contract , there may be no certainty that a contract has been formed at all. Oral contracts can also be particularly susceptible to fraud in order to effectuate a party’s interests. This is particularly true when forming agreements that involve buying or selling of goods in large quantities and/or valuable transactions.
In addition, even if an oral contract does not result in a breach, there is no guarantee that a party considering whether to enter into a similar agreement would be able to do so. A contract formed orally may be unenforceable based on certain requirements of state statutes that are not satisfied, particularly with respect to contracts involving the sale or lease of certain kinds of property. Although such statutes tend to require contract terms that are less detailed than what would be expected on a written agreement, they may still require some minimum terms. Without consideration of these requirements, a business may be engaged in costly litigation to enforce an agreement, even if it did not experience an actual breach of the contract. More generally, there is also the threat of litigation to resolve disputes over an oral agreement, and such disputes can be lengthy and expensive.
Thus, while the comparative ease of entering into an oral agreement may be tempting, it is important to weigh the risks before committing to any such agreement.
How to Make Oral Contracts More Enforceable
Strategies to Enhance Enforceability of Oral Contracts
As has been noted earlier, the absence of a written contract does not mean that an enforceable agreement or contract does not exist. Certainly, parties can agree to legal and binding obligations that are legally enforceable by even the purest oral agreement.
However, an oral agreement is more difficult to prove than a written agreement. For example, while a written contract may be "self-authenticating" (i.e., it is presumed to be what it is without any additional testimony or evidence because there is a statutory presumption that the signature on the contract was signed by the proper person at the appropriate time), an oral contract generally requires other evidence (such as a witness who heard what the parties said to each other) in order to prove the terms of the contract. So, to have an enforceable oral contract, you make make the following efforts:
By making these concerted efforts to accurately reflect the terms and conditions of the oral agreement after it has been made, the likelihood of proving up an oral agreement is significantly enhanced.
Examples of When Oral Contracts Are Used
Mongolas v. Duran was a New York State (Manhattan) ruling in 1970 that proved just how powerful an oral contract can be. Sofia Mosher appointed two men as executors of her estate in 1959. One of the executors was dead six years later. Then Sofia decided to revoke the will and leave everything to the third man, José Duran. Surprise! Despite what the deceased intended as a new will, a probate court couldn’t find evidence of testamentary intent. So the court had to take a look at whether an oral contract was legally binding. The oral contract was the most important evidence that proved that Soria intended to give her property to Duran – the other two executors basically told the judge, "Hey, we agreed to give our share of the estate to this guy," per the attorney for Duran. And just in case you were wondering, the lawyer for Sofia’s estate even defended the attack on Sofia’s intent. The attorney thought that the oral contract was so credible, he counseled against bringing the case to trial. In McKiernan v . City of New York, a New York State court case in 2001, a New York City police officer was accepted into a seven-year training program to study medicine. At the end of the training (three years), he would have been responsible for one-fourth of the salary of the police officer he learned the medical skills from. In the program outlined above, an oral contract existed between the police officer and the city. Despite the officer’s claim that his acceptance into the program constituted consummation of the contract, a state appeals court said differently. If you’ve ever been involved in a contract dispute about the terms being satisfactorily completed, you probably know that just because one side claims payment, doesn’t mean the other side doesn’t have evidence in its favor. The city had evidence of service performance, while the officer may not have carried out some of the requirements of the program. The lesson? Just because you don’t sign your name on the dotted line does not mean that you don’t have an enforceable contract.
