Everyone makes an oral contract, verbal agreement, or handshake agreement at one point or another. But it's important to understand whether oral contracts are legally valid and enforceable—they may be in some situations but not in others.
If you're creating one as part of your business, it's particularly important to understand the rules concerning oral contracts.
Competency As the First Requirement
For any kind of contract to be valid, the parties who agree to the contract must be competent and able to create a contract. This means the parties must be:
- Age 18 or older. Minors are not able to enter into most contracts unless it is for food, lodging, or necessities.
- Neither mentally ill nor mentally disabled. The parties must be considered legally mentally competent.
- Sober. People under the influence of drugs or alcohol are not mentally competent and cannot enter into a contract.
Lucrecia Johnson, an attorney at LPJ Legal PLLC, says that the competence requirement doesn't mean that a party cannot agree to an oral contract and then say, 'I didn't know what this meant.' It is expected that if you have the capacity to agree, "You had the ability to figure out what it means via your own research or hiring an attorney," she says.
Contract Elements and How They Work Together
To be valid, an oral contract must contain all of the following elements, which are required in any other type of contract:
- Offer. The offer is the promise to do something—or to not do something—in exchange for what the other party is providing.
- Acceptance. This is the unconditional willingness to do what the other party has proposed and a promise to do so. It can't be conditional.
- Consideration. Consideration is what the other person gives you in exchange for what you have offered them. It's usually money, but it could be something else, like another product or service.
- Meeting of the minds. Both parties must fully understand the terms of the contract and agree to them.
- Legally enforceable. Contracts that go against public policy—such as a landlord requiring business tenants to sign a contract that they will not serve people of color—are not enforceable. Contracts that are unconscionable, meaning grossly unfair or between parties with drastically uneven bargaining power, may also be unenforceable.
According to Johnson, parties should follow the following process to establish an oral contract:
- The offer. The initial communication between parties, when a deal is suggested.
- Acceptance. This occurs when a party agrees to the suggested deal. If that party says "yes, but," that is a counteroffer, not an acceptance.
- Consideration. What a party is asked to do or give in exchange for something else (money, a product, a service, etc.)
- Meeting of the minds. This happens when an offer and the consideration for it is agreed to by both parties.
Johnson notes that if one of these elements is missing, there is no contract. For example, you can't shovel someone's sidewalk and go to their door and ask for $20 because they didn't make you an offer. Once you have offer, acceptance, consideration, and meeting of the minds, you have a contract. Failing to meet the terms that were agreed on is a breach of contract.
When Oral Contracts Aren't Valid: the Statute of Frauds
An oral agreement can be legally enforceable if it is in compliance with something called the statute of frauds. The statute of frauds sets out certain types of contracts that must be in writing to be valid. "The reason for the statute of frauds is that generally speaking, these rights are ... so important that they should be in writing to protect the interest of the parties," Johnson said.
For this reason, the following contracts are never valid if:
- Prenuptial and postnuptial agreements
- Sales for products over a certain price limit—which varies by state but is often $500
- Sale or transfer of land
- Contracts that take more than a year to fulfill
- Agreement to buy someone else's debt
- Agreements by executors to resolve debt owed by someone who died
Ways to Prove an Oral Contract
If you're in a position where you need to provide evidence that an oral contract exists, the following evidence can be useful:
- Call up witnesses to the oral contract. "If there are any witnesses to the contract formation or [people who] have knowledge about the contract negotiations, they could provide valuable information about the terms of the deal," Mario Iveljic of Mag Mile Law LLC in Chicago, says.
- Actions either or both parties took that are in compliance with the contract
- Receipts, email, texts, bills, or other documents that back up the terms of the contract
When to Use Oral Contracts
According to Zachary Hanby of Fisher Stone, P.C., "Oral contracts are better for everyday, miscellaneous things. 'I'll pay you 20 bucks for gas if you drive me to the airport.' Any serious business shouldn't be using oral contracts and should always get the agreement in writing, even if it is more work. Oral contracts are incredibly hard to prove and just as hard to enforce."
Iveljic added, "At a minimum, a party to an oral contract should confirm the terms of the deal in writing. For instance, one side to an oral contract can send an email to the other side with the material terms and not act on the contract until the other side responds to the email confirming that the terms are accurate. Without [being in] writing, the oral contract can be easily disputed by either side, and it will be very hard, and potentially costly in court, to prove what the deal actually was."
Oral contracts are a common way of doing small, casual deals. But if you're creating a contract related to your business, writing is best.