Are Oral Contracts Binding: Everything You Need to Know
Are oral contracts binding? When two parties reach a verbal agreement without recording their duties and expectations in writing, can the it be enforced?3 min read
Are oral contracts binding? When two parties reach a verbal agreement without recording their duties and expectations in writing, can the courts enforce such an arrangement?
Are Oral Contracts Enforceable?
Most lawyers recommend written contracts. While writing down your contracts offers several practical benefits, an oral contract is no less legally binding. Before a party can sue over a breach of contract claim, these three elements must be present:
- The existence of a valid contract between the parties.
- It must be established that the defendant breached the contract.
- Damages caused by the defendant's actions.
The validity of a contract is not dependent on whether it was written down or oral. It is only in situations where the statute of frauds is applicable that a contract must be in writing before it can be enforced. An oral contract which does not fall into this category is enforceable.
The Statute of Frauds
The statute of frauds is a concept pioneered in Great Britain in the 17th Century. During that time, it was impossible for a contracting party or their spouse to testify during a lawsuit over disputes arising from the contract. This led to the use of witnesses to commit fraud by giving false testimonies of the contract provisions despite not being party to the terms of the agreement. In 1677, the British Parliament enacted the statute of frauds to eradicate this problem. To eliminate the fraud, the statute of frauds outlines six categories of oral contracts including:
- Contracts with terms stating that the assets of a will's executor should be used to pay a debt of the estate.
- Contracts for marriage purposes (like dowry)
- Contracts which cannot be performed within one year after its formation.
- Contracts for land sales
- Contracts where a party serves as a guarantor for another party's debts.
- Contracts for selling goods worth a minimum of ten pounds sterling.
From 1677 onwards, the courts stopped entertaining parties seeking enforcement of any contract that can be categorized as any of the six above. The functions of the statute include:
- Reduce the incidence of fraud in the courts
- Discourage contracting parties from entering into these types of agreements.
- Enable contracting parties to choose wisely during negotiations.
The United States adopted English common law after it became an independent nation, although the law has been modified to meet the peculiarities of American life. The statute of frauds was one of the laws the new nation adopted from its former colonial master.
Meanwhile, the statute of frauds has almost been expunged from modern English law, save for a requirement which says that only written contracts can be used to guarantee the debt of another party. Except for this single scenario, English courts will enforce all other types of oral or written contracts. However, the United States judiciary takes a different approach. Almost every state in the country have variations of the statute of frauds.
Lawyers often advise their clients to have their contracts in writing as it makes it easier to prove the terms of the agreements in court. A written contract is its evidence if a dispute arises over its performance. However, it can be difficult or almost impossible to prove oral contracts due to different perceptions, memory issues and the integrity of witnesses. Also, the statute of limitations for oral contracts is four years as memories can become weak quickly compared to the six years statute of limitations for a written contract.
When Is an Oral Contract a Legally Binding Agreement?
An oral contract is enforceable if it has the three elements below:
- An offer
- Acceptance of the offer
- Consideration, i.e., the imposition of an obligation.
To illustrate this concept, here is an example. As a woodworker, you make an offer to help a homeowner build a new kitchen cabinet for $5,000. The homeowner accepts your $5,000 offer in exchange for a new kitchen cabinet. A contract is in place without the need for writing. So long as the three elements of a contract exist as in the case above, the contract is valid and enforceable.
However, one of the parties to an oral contract may forget or feign ignorance of having an agreement with you, making it difficult to prove and get your just compensation. To avoid such problems, you can get a third party to witness the conclusion of the original agreement or the execution of the contract. But the witness may not be available when disputes arise over the contract, or might not be credible.