It’s not uncommon for a verbal agreement to be made rashly or without all the details properly sorted through. This is a problem when you realise that a verbal agreement can be legally binding with the same force as a written agreement.
However not all verbal agreements (or written agreements for that matter) will be legally binding and constitute a contract. So what makes an agreement (verbal or written) a legally binding contract?
A “contract”, is just a fancy name for a verbal or written agreement that satisfies certain criteria thereby making it enforceable at law. These criteria are:
- offer and acceptance;
- all of the terms must be agreed upon;
- the parties must intend to be legally bound; and
- consideration, that is, something of value must be exchanged in the transaction.
Offer and acceptance
There cannot be a contract without an offer being made by one party and accepted by the other.
This can come in many different forms, such as the offer to buy or sell a product or service, an offer of employment, or an offer to lease or sell land.
All of the terms must be agreed on
If the agreement is incomplete, in other words, if the parties have not agreed on all of the essential terms of the agreement, or have agreed on some terms but are still negotiating or discussing others, there will be no legally binding agreement.
For example, John has offered to sell his yacht to Jim, and Jim has agreed to buy it – it’s a fine vessel! John later decides that he doesn’t want to sell the yacht after all – to Jim’s frustration as he begun making arrangements to purchase it. Jim wants to force John to sell the yacht based on their initial agreement. However, the court would not recognise the agreement as a legally binding contract, because all the terms of the sale were not agreed upon, such as the purchase price, and other essential items.
In other words, the agreement must be “complete.” All of the terms of the agreement must be decided and agreed upon by the parties.
The parties must intend to be legally bound
The parties must intend to create legal relations – this prevents people otherwise being held accountable for every promise they make.
Although determining a person’s intention can be understandably tricky, a court will look at the circumstances surrounding the transaction as a whole, including the actions of the parties, to assess this criterion. For example, if the parties started performing their agreed obligations under the agreement, or exchanged money or other valuable items or services, then the court might understand that the parties did indeed intend to be legally bound and establish legal relations.
Consideration – something valuable must change hands
Consideration is the payment of something of value, in exchange for the promise of the other party.
The consideration may be monetary, such as a cash deposit or transfer of funds, or it may be goods or the performance of services.
The trouble with verbal agreements
Although on the face of it, verbal agreements are effective and can be enforced as valid and legally binding contracts, there is a downside.
Verbal agreements are notoriously difficult to prove which makes the enforcement of a verbal agreement time consuming and challenging. Not only do you need to prove the verbal agreement exists (and each of the criterion set out above), but you also need to evidence just what the actual terms of the agreement are, which, in the absence of written documentary evidence, can boil down to one person’s word against the other.
For this reason, we recommend putting all agreements in writing. Carefully identify and address each of the terms and conditions of the agreement so both parties have the same understanding and intention.
This helps to limit any misunderstandings and disputes further down the track which paves the way for a more harmonious working relationship. It also provides an accurate record in case the other party fails to live up to his or her side of the bargain, in which case you may need to enforce the agreement in a court of law.
In some businesses or professions, agreements are made frequently on the basis of verbal discussions and/or email correspondence (or may be part verbal and part written communications). Examples include purchase orders and stock broker buy or sell instructions.
If it is not possible or convenient for you to enter into a written agreement then as a minimum you should keep a detailed record of all your discussions and negotiations with the other party, and copies of all correspondence between yourselves. This will at the very least provide a much needed paper trail should things go wrong and save you the stress of having to rely on memory and a “he said / she said” scenario.
Ian Macleod is the CEO of the legal publisher RP Emery and Associates. They provide cost effective legal contract kits for Individuals, SME?s and the legal fraternity.