Is a verbal agreement legally binding?

Business owners frequently make verbal agreements over the phone and in person. But are these types of agreements legally binding and easy to enforce?

In this edition of Ask the Expert, our business disputes solicitors explain when a verbal agreement might be legally binding, the potential pitfalls of relying on one, and when the Courts will enforce one.

How can I prove a verbal agreement exists?

Before you can enforce a verbal contract, you must prove that one exists. In the absence of a written contract evidencing the parties’ agreement, you’ll need to rely on other types of evidence, such as the following:

• Correspondence: emails, text messages, and letters referring to the agreement can be vital in proving its existence.
• Performance: evidence that the parties performed the contract, such as bank statements showing payments having been made and delivery notes evidencing the delivery of goods can be strong evidence that a contract exists.
• Witness evidence: your own account of the situation as well as any third-party evidence corroborating it, is crucial in establishing how and where the contract was made, as well as its terms.

Proving a verbal agreement exists can be tricky, but it’s not impossible. The more evidence you can gather, the stronger your position will be.

Are verbal agreements legally binding?

Yes, despite many business owners buying into the adage ‘a verbal contract is not worth the paper it’s written on’, a contract made verbally can be legally binding. 

The difficulty with verbal contracts is not that they are not legally binding, but rather that it can be tricky to prove that one exists and evidence its terms. When the parties enter a written contract, each party’s rights and responsibilities are hopefully clearly defined. Whilst the other party may dispute that they breached the agreement, they will have difficulty claiming they did not enter into it. With a verbal contract, if the other party denies ever having made the agreement, you will need to produce convincing evidence of the contract before you can hold them to it.

Are there any exceptions to this rule?

Yes, certain contracts must be made in writing to be legally enforceable. They include the following:

• Contracts for the sale of property.
• Guarantees.
• Intellectual property transfers.

Without a written contract, any agreement related to these types transactions will be unenforceable.

Can a verbal agreement override a written contract?

Yes, a verbal variation to a written contract can sometimes override the terms of the original agreement. The written contract will remain in force, subject to the parties’ verbal changes.

Any variation must be supported by consideration. In contractual terms, ‘consideration’ refers to an element of value that the parties exchange. Each party must provide valid consideration to the other. For example, in a sale of goods contract, the seller promises to provide goods, and the buyer promises to pay for them. 

Verbal variations to a written contract sometimes involve one party agreeing to accept an additional or different obligation under the contract. On the face of it, the variation would fail for want of consideration. The Courts take a fairly relaxed approach to this issue. Unless the party gaining the additional benefit secured the variation through economic duress or fraud, performing their original obligations will constitute valid consideration provided it confers a practical benefit on the other. That practical benefit can be as straightforward as saving them time or inconvenience securing replacement performance.

Many commercial contracts contain express clauses stating that any variation must be in writing and signed by the parties. Reviewing your contract for such a term is important if you propose relying on a verbal variation since the Court will likely uphold the clause if present, and your variation will be invalid. Even if your contract does not insist on variations being made in writing, it’s always sensible to do so to avoid the issues inherent in proving the existence and terms of a verbal agreement.

What are the risks of relying on a verbal agreement?

Whilst verbal contracts can be valid and enforceable, they come with several issues that are not present when you have a written contract in place. They include the following:

• The other party may deny making the agreement
  Without a written contract, there is always a risk that the other party will deny having made the agreement. Overcoming this issue requires compelling evidence of the types listed above, such as the parties performing the contract.
• There is no evidence of the contract terms
  Properly drafted written contracts will clearly detail each party’s rights and obligations. Verbal agreements, on the other hand, rarely have clearly defined terms, so proving the extent of the other’s obligations can be a challenge.
• The parties may interpret what was agreed differently
  Negotiating a written contract gives the parties an opportunity to explain their understanding of its terms and clear up any misunderstandings. Even when accepting the other party’s standard terms and conditions, you can read through them and raise any queries before you sign. Unfortunately, parties rarely give the same degree of thought to verbal contracts. When a contract is formed over the phone or through a handshake, the risk that there is a misunderstanding increases the potential for later disputes.
  
  Putting a written contract in place can help you avoid the potential issues that come with verbal agreements and reduce the risk of disputes. A well drafted contract will clearly detail the basis on which the parties have agreed to do business. Ideally, you should instruct commercial solicitors to prepare the contract for you. That way, you can be confident that it is clear, unequivocal, and protects your position.

What is required for a verbal agreement to be legally binding?

For a verbal agreement to be legally binding, it must fulfil the requirements applicable to all contracts. They are as follows:

Offer: One party must make an offer to the other that is capable of being accepted or rejected.

Acceptance: The other party must accept the offer in its entirety. Seeking to modify the offer constitutes a counteroffer.

Consideration: The parties must exchange something of value. This might be money, a promise to do something, or a promise to refrain from doing something.

Intention to create legal relations: The parties must intend their agreement to be legally binding. A signed written contract is a clear indicator of an intention to create legal relations, but the position is more complex when the agreement was made orally.

The Courts apply an objective test, considering whether a reasonable person would believe that the parties intended their discussions to constitute a legally binding agreement. For example, whilst legally binding oral contracts can be formed in a social setting, conversations in the pub are unlikely to satisfy the test.

How do the Courts determine the validity of a verbal agreement?

The validity of a verbal agreement hinges on the party wishing to enforce it being able to prove that the agreement satisfies the legal requirements referred to above. In the absence of a written contract, the Court will need clear evidence of offer, acceptance, consideration, and an intention to create legal relations. That evidence may take the form of correspondence, the parties’ conduct, and witness statements.

Can you enforce a verbal agreement in Court?

Yes, provided your verbal agreement is valid, you can enforce it in Court. However, enforcing a contract made orally is far more complex than when the agreement is in writing.

If the other party breaches their obligations under a written contract, the crucial piece of evidence will be the contract itself. Whilst there may be arguments over the interpretation of the terms, properly drafted commercial contracts should fulfil the requirements for a legally binding contract.

On the other hand, parties wishing to enforce verbal contracts must clear several additional hurdles. They must first satisfy the Court that a legally binding contract exists. Then, they must prove its terms. Only when the Court is happy that the parties have entered into a binding agreement and is clear on its terms can it assess whether the other party’s behaviour constituted a breach of contract.

How to enforce a legal agreement

To enforce a legal agreement, you must prove the following:

• There is a legally binding contract.
• The other party has breached their obligations under the contract.
• The breach occurred within the last six years.
• The breach caused you to suffer loss.

As we have explained, some verbal contract claims fail at the first hurdle because the party wishing to enforce cannot prove the existence of a valid contract.

The first step in enforcing any legal agreement is to speak to the other party about the issue and ask them to remedy it. If they refuse, you should seek legal advice.

Your solicitor will usually begin by sending a letter to the other party setting out details of the issue and informing them of the steps they must take to avoid legal action. Receiving a solicitor’s letter tends to focus the recipient’s mind and encourage them to comply with their obligations. If they dispute your claim, your solicitor may suggest you try alternative dispute resolution methods, such as mediation, to settle the matter without recourse to litigation. Mediation tends to be quicker and cheaper than Court proceedings and can produce positive results in the right circumstances.

If your dispute is still unresolved, you may need to consider litigation. Issuing a claim does not necessarily mean that your case will end up in Court. The parties’ legal advisors can continue settlement negotiations behind the scenes, and the large majority of cases settle before trial.

Summary

Contrary to popular belief, verbal agreements can be legally binding in the same way as written ones. Enforcing them can be an uphill battle necessitating extensive evidence. It is far better to ensure anything you agree in connection with your business is recorded in writing, preferably by way of a written contract signed by all parties. That way, there can be no doubt that a contract exists, and the parties should all have a clear understanding of their rights and responsibilities.