In business, a handshake can mean you have made an agreement with another party without actually signing a contract. Outside of business, we make verbal agreements all the time—with or without the handshake. Struck a deal to have your lawn mowed? That’s an oral agreement. The same goes when you hire a contractor to do landscaping work, and so on.
Generally, in everyday life, as long as you have a “meeting of the minds,” you have a deal. If it’s not in writing, then you have a verbal contract.
What is a Verbal Contract?
An oral contract is a type of contract that you and another party create or modify verbally, i.e., the contract is not expressed in a written agreement. For example, Michigan homeowners can rent out their property for less than a year without a lease agreement.
Are Verbal Contracts Binding and Enforceable?
Yes, verbal contracts are binding and enforceable, provided that they have the elements of a valid contract, and you can prove the same to a court in the event of a lawsuit. (Consult a good contract lawyer to evaluate your chances of winning a suit for a breach of a verbal contract.)
The elements of a valid contract are:
- An offer that is clear and unambiguous will be the basis of the enforceability of a contract. For instance, ABC is offering for sale a particular lawn mower for $1,000.
- An acceptance of that offer refers to a party’s agreement to the terms of the offer—a definite “Yes! I will take that for that lawn mower” and not a “Maybe, I’ll think about it”.
- Consideration is what a party gives up in exchange for something. “This for that.” For example, you give up $1,000 and ABC gives up the lawn mower.
In addition, verbal contracts must not violate your state’s statute of fraud or the Uniform Commercial Code, both of which basically spell out which types of contracts must be in writing to be considered valid. More on this below.
When are Verbal Contracts Unenforceable?
Verbal contracts have a shorter statute of limitations because they require fresher evidence and witness testimony. Statute of limitations is the maximum amount of time a party has to file a lawsuit for breach of contract. Beyond this period, the disadvantaged party won’t be able to seek legal remedy in a court of law and the verbal contract is no longer enforceable.
In addition, verbal contracts are limited by the Statute of Frauds, which requires certain types of contracts to be in writing to be enforceable. In Michigan, the following agreements must be in writing:
- Contracts that cannot be performed in under a year.
- Contracts for the sale of good worth $500 or more.
- A special promise to answer for the debt, default or misdoings of another person.
- Marital settlement contracts, except mutual promises to marry.
- A special promise made by a personal representative to answer damages out of his or her own estate.
- An agreement, promise or contract to pay a commission for or upon the sale of an interest in real estate.
- An assignment of things in action, whether intended as a transfer for sale, for security or otherwise.
- An agreement, promise, contract, or warranty of cure relating to medical care or treatment (this does not affect the right to sue for malpractice or negligence).
There are exceptions to the Statute of Frauds. So, you should always consult a lawyer to determine if your verbal contract falls under any of these exceptions:
- “Partial performance accepted” happens when the parties cannot be returned to their pre-contractual positions. For instance, when a buyer has already moved into a house and paid part of the contract price, the court may order that the parties fulfill the remainder of the contract.
- Under the Uniform Commercial Code, if a seller has accepted payment or the buyer has accepted delivery of goods covered by an oral contract, then the agreement is enforceable.
- When there is promissory estoppel. That is, the disadvantaged party, the party who detrimentally relied on an oral promise by the promisor, may seek recovery from the promisor, and the promisor is estopped by a court from denying the existence and validity of the contract.
Again, consult a good contract lawyer to see if you have any chance of successfully filing a suit for breach of contract.
Should You Bother Having a Written Contract When a Verbal Contract Will Do?
Although completely legal, oral and verbal contracts are very risky. When things go south and you end up suing the other party for breach of contract, you’ll need to prove the terms of the contract or that a contract even exists in the first place.
In verbal contracts, the disadvantaged party has the burden of proof. They need to convince the court that a contract exists and prove its specific terms by providing legally sufficient evidence. However, when all or most of the terms of the contract are not in writing, this is often challenging to do. Follow-up emails containing the terms of the contract and the other party’s agreement to those terms, witnesses to the verbal agreement, proof of services rendered, payments received, and other evidence that a deal was struck between the parties may sway the court in your favor.
However, don’t bank on this. As the old legal saying goes: “Verbal contracts aren’t worth the paper they are written on.” Your best defense against any breach of contract is to put your agreements in writing.
Formalize Verbal Contracts with Your Lawyer
There are contracts that start out as verbal agreements, but they should not stay this way for long. You’ll want to formalize oral agreements in a written contract to avoid headaches later on. Lawsuits are expensive and cumbersome. Yes, you can claim relief for breach of an oral agreement, but many problems associated with verbal contracts can be eliminated if the agreement was put in writing in the first place.
If you need help drafting or reviewing a contract, contact a lawyer. A lawyer will ensure that the terms included in the contract are not detrimental to your interests, and assuring your rights are protected. In addition, a lawyer will explain your obligations, duties and any other terms and conditions in the contract that might be difficult to understand.