What is an Oral Agreement
A verbal agreement is defined as "an informal agreement both parties accept, but do not put in writing or have a formal oral discussion about." In essence, a verbal agreement is implied instead of expressed, and can be either legally binding or not, depending on the contract’s subject matter. The Standard Industrial Classification Manual clarifies the distinction between written and oral—"Written contract—materials showing the details of an agreement between two or more parties. Oral contract—all contracts which have not been reduced to writing or are not subject to the Statute of Frauds." This definition is also upheld by the Ohio Revised Code: "Commitments made verbally are usually referred to as oral contracts, although a ‘contract’ is not strictly necessary. (If some evidence of the oral contract exists, such as a receipt for partial payment or rendering of services, then the term ‘verbal contract’ may be used.)"
Although this definition appears straightforward, discerning when an agreement is considered verbal as opposed to written is often a source of confusion. Because written agreements can be mandatory under California laws regarding sales of businesses and transfer of real property, determining whether a document falls under this definition is an important issue when attempting to secure legal rights under the law.
It helps to consider whether the law requires the agreement to be in writing as a fundamental.
- Statute of Frauds One of the oldest rules on the books , the Statute of Frauds law states that all agreements for the sale of property over $500 must be in writing and signed by the party against whom enforcement is sought.
- Real Estate Transfer Laws California Civil Code Section 1624 further expands the Statute of Fraud’s requirements on real estate contracts by requiring that transfers of real property- sales, leases of longer than one year, etc.- be in writing and signed.
- California Franchise Laws Under California Franchise Investment Laws, an offer of a franchise to a resident of California must be in writing.
- California Commercial Code California Commercial Code 2106 specifies that almost any form of communication qualifies as a ‘writing’ for a promissory note, including electronic forms such as emails or text messages.
That being said, oral agreements can contribute to new contracts or written agreements between the same parties. In Keithly vs. Int’l Business Machines Corp., the plaintiff presented testimony that, in negotiations between IBM and his company, IBM representatives attempted to gain plaintiff’s agreement to submit an employee claim to IBM’s internal dispute resolution process. The trial court found in favor of IBM. On appeal, the court affirmed the trial court’s finding of no error.
The Enforceability of an Oral Contract in California
The legal standing of verbal contracts in California can be tricky. In order for a verbal contract to be legally binding, it must contain the same basic terms set forth in a written contract. California Law requires that written contracts contain certain critical details and when it comes to verbal contracts – they still contain the same required elements. This usually means that a verbal agreement is enforceable if the terms can be clearly identified by the contract formation process; this is typically established by overt actions and communication between the parties. In California, oral agreements are typically enforceable if the terms of the agreement can be determined within a reasonable time period without having to almost entirely depend on memory or the testimony of witnesses. If the parties can mutually explain or come to an agreement vocally on certain details that are required elements of a contract then oral agreements will likely be enforceable. This also means that certain contract elements require the written agreement. For example, if one party pays a deposit for services that are completed over a long period of time, the contract often must be in writing and cannot be memorized or restored with significant degree. However, even if the contract specifically requires certain elements to be in writing, partial performance of agreement terms can create a situation where the contract is deemed both partially oral and partially written and enforceable.
Exceptions to a Verbal Agreement
However, there are multiple legal exceptions to this rule. The most notable is the Statute of Frauds, which requires certain types of agreements to be in writing. In particular, Section 1624(a) of the California Civil Code sets forth six categories of contracts which must be in writing to be enforceable, including:
- An agreement that is incapable of performance within one year from the date it is made.
- An agreement for the sale of an interest in real property.
- An agreement for the sale of goods for a price of $500 or more.
- An agreement to answer for the debt or default of another person.
- An agreement made in consideration of marriage.
- An agreement authorizing an agent or broker to purchase or sell real estate.
The statute does not apply if the transaction is complete, in the sense that whatever type of performance was expected has been completed.
Another exception to the enforcement of oral agreements is set forth in Section 1625 of the California Civil Code. This section prohibits "the introduction of any testimony in proof of [an oral] agreement by the testimony of a party to it, of a subscribing witness to the same, or of any other witness." In other words, if one person has a written contract and the other person has not executed it, the person with the contract cannot use that contract to prove an oral agreement. This rule does not prevent the person without the contract from offering evidence of the agreement with third parties, such as witnesses or emails.
There are also numerous other exceptions to the general rule that oral agreements are enforceable. Section 1622, for example, indicates that the enumeration of contracts in Section 1624 is not exclusive.
Proving an Oral Agreement
Evidence of an Agreement without Writing
Even if a contract did not clearly define the terms of the verbal agreement, there may be other evidence that can help establish its terms. Witnesses to the agreement can provide key testimony in a legal proceeding. In addition, any contemporaneous emails discussing the topic can help support the claim. For example, if two people are discussing the offer mentioned above, and one sends an email later that day to say "Thanks for your offer," this can often help demonstrate that the agreement was accepted.
In these examples, the two parties have likely taken action that demonstrates agreement on the terms. If both parties intended to accept the agreement, the actions they took, and the terms discussed in emails, will likely help establish the agreement in court.
Disadvantages of Using a Verbal Agreement
While verbal agreements can be legally enforceable under California law, relying on them can come with a host of problems and risks. It is easy to think the terms of a deal are understood even when they are not. However, real disputes can arise among parties who believe they have an agreement when they do not, or who think an agreement means something different than it actually does.
Without a written record of any kind, oral bargains are inherently vulnerable to differing interpretations and misunderstandings. A party may believe that he made a verbal agreement to start working on a project for a person at a certain date and time, while the other party thinks they made no agreement at all, or that they agreed only to negotiate an agreement later. If a dispute arises over whether an unenforceable agreement has been made, the court will look to what the parties said and did in order to determine the terms of any agreement and the content of the plaintiff’s reasonable expectations.
Because California law excludes contracts except those that can be performed in less than one year from any statute of frauds limitations, a court may not be able to enforce an alleged contract unless a lot of money has changed hands . In addition, litigation over the terms of what should have been an enforceable record may turn into a fight about whether a verbal agreement or an unenforceable agreement should be enforced.
But the potential for litigation is not the only risk that comes with oral bargains. Verbal bargains also leave out all of the legal language that can help protect a party against liability and loss. For example, there is no language regarding a severability clause if part of the agreement turns out to be unenforceable; without this language, the entire agreement could collapse. There are also no assignment, arbitration, or merger clauses, all of which can provide protection and limit legal liability in ways that the parties wish to agree to beforehand.
Finally, verbal agreements may actually cost more money to enforce in court than their benefit is worth. This is because proving the existence of a verbal contract usually takes so much time, money, and effort that it is often less expensive to simply satisfy whatever obligations a person had under the alleged verbal contract or to re-do the work on another basis.
Tips to Strengthen a Verbal Agreement
Although a verbal agreement may not be legally binding, there are steps you can take to strengthen verbal agreements when speaking with another party. These steps include: Documenting the discussion: When you speak with someone and agree to terms verbally, send an email the next morning that summarizes what the conversation was about; use the same language that you did in the discussion; and be sure to thank the other person for the conversation. Although one might assume that an email would not be enough, this type of follow up is considered evidence of the fact that someone agreed to a particular thing (that this is what it was), and it will assist you in establishing what the terms were. Involving an attorney: Another way to strengthen a verbal agreement is to bring an attorney into the equation. Although some attorneys charge a lot for their services, others do accepts hourly fees or contingency fees. You might be surprised by how many attorneys will be willing to work for a lower, hourly rate just to obtain your business, or one that they might already have to help solidify. It cannot hurt to ask around. Acquiring a mediator: If the other party does not want to talk with an attorney, perhaps a mediator would do the trick. Your goal is to find someone who will sit down with both you and the other party and have you discuss what has been discussed, what both parties understand the situation to be, and to solidify your agreement. Again, you might assume that this also would be too costly. However, some attorneys are willing and able to mediate at a lower rate. Whether or not that is true for you, you should try. In most circumstances, a mediator will have experience and be able to take control of the situation.
Other Options Instead of a Verbal Agreement
In the absence of a written contract, another option is a digital agreement. Digital agreements are those recorded electronically in one manner or another. For example, there are several platforms, both free and paid, available that allow two parties to sign their names electronically. These written signatures and the digital texts can usually be stored in the cloud. While the particular terms of a digital agreement may vary, the primary characteristics are that the agreement must be written and signed by both parties. As with traditional written contracts, digital agreements should be as clear and unambiguous as possible, with no room for different interpretations. There is some advanced technology which can bolster the enforceability of a digital contract, such as a blockchain. However, like every other form of paper or digital contract, digital agreements can only be enforced if there is a meeting of the minds (offer and acceptance) along with consideration and an intention to create a legal relationship.
Speak to an Attorney
Consulting with an experienced attorney who focuses on contract law can help you understand where you stand and what your options are with respect to enforcing a verbal agreement. Further, consultation with a lawyer can help you know whether a verbal agreement you are asked to perform under is enforceable . While verbal agreements can be valid and may be enforced in California court, they can be hard to prove. This makes it even more important to talk to a lawyer to understand your rights and obligations.