Oral Contracts 101
Verbal agreements are a commonly used method of entering into contracts between two or more parties. As their name implies, these contracts are not written down and are often expressed orally. They are typically used in scenarios when two or more parties would like to finalize an agreement without the formalities or costs of entering into a written contract. For example, a verbal agreement may be used to create an agreement between two people that exchange goods or services. "I will clean your house every Saturday if you take care of my dog while I am on vacation", for example , is an example of a verbal agreement. Verbal agreements may be more likely to be utilized in informal agreements, rather than those with significant legal implications or costs. Parties may desire to enter into a verbal agreement as opposed to an alternative form because it is relatively simple, quick and inexpensive to do so. Examples may include an agreement between friends or family members or agreements between commercial parties, such as a supplier and a vendor. However, even though verbal agreements may lack the formalities of alternative forms of contractual agreements, their implications may be just as serious.
Are Oral Contracts Enforceable in California?
The presumption in California is that verbal agreements are legally binding unless one can show that they fall under any of the exceptions to the statute of frauds or if there is an affirmative defense to the enforcement of the contract. California Civil Code Section 1624 provides that agreements that relate to the sale of real property, or an interest in or concerning it, or leases longer than one year, are required to be in writing in order to be enforceable. Exceptions to this are if the contract is performed or if something is given up or received in connection with the contract. Verbal contracts for the sale of personal property are just as enforceable as written contracts. Agreements pertaining to the transfer of intellectual properties, such as copyright, patent and trademark, fall under the Uniform Commercial Code, which does not require a contract to be in writing.
The Statue of Frauds has been largely replaced by the Statute of frauds 1670.5 and the Uniform Commercial Code’s statute of frauds provisions specifically 2207(3)(a). This statute holds a contract that requires the sale of real property to be in writing to be enforceable. In many cases, verbal contracts are enforceable, such as a lawsuit for specific performance. Specific performance would mean that neither party would owe the other money. The rescission of the contract also does not require that a contract be in writing.
What Makes an Oral Contract Enforceable?
While book authors often contend with sliced onions and aged scotch, verbal agreement litigators curse the lack of precise definition in such promise contracts. As it turns out, though verbal agreements are the most challenging to enforce, they can still be accepted by California courts.
A verbal agreement is not necessarily legally binding in California. Some requirements must be met before an agreement can be enforced by a court. By law, there are five requirements for a contract of any kind to be legally enforceable. As regards verbal agreements and the concept of consent, there must be an acceptance of an offer, i.e. the defendant must have accepted the terms of the deal willingly and fully understood the details and scope of the agreement. The plaintiff must be able to prove that the other party understood it, or that the other party acted in a manner showing the terms of the verbal agreement were accepted. For instance, if the defendant agreed to provide a ride in exchange for ten bucks, the fact that he drove the plaintiff across town proves the defendant is probably aware of the deal. Furthermore, an enforceable verbal agreement must also contain an element of consideration, i.e. the agreement must be in the interest of both parties, who must be able to realize some sort of materialized benefit from the contract. In the example above, the consideration would be the quick drive across town for the plaintiff, and the cash in the hands of the defendant. Both parties are getting what they want to fulfill the terms of the verbal agreement and provide grounds for a win at trial. A verbal agreement is only enforceable – and only considered a contract – if both parties evidently intend on establishing the contract. If the defendant enters into the contract without the intent to fulfill his or her side of the deal, however, that creates grounds for the plaintiff’s court case. Another enforceable aspect of a verbal agreement in the eyes of the court is the ability of both parties to mutually understand the terms of the contract. If one side does not know the conditions of the verbal agreement, the court will not accept it, even if the defendant still fulfilled his or her side of the contract.
Enforceability Exceptions
As a general rule, verbal contracts are enforceable and binding on all contracting parties. However, there are notable exceptions and limitations where oral agreements fall outside the law and are not enforceable for legal purposes. For example, certain types of agreements and contracts must be in writing to be legally binding under the California Statute of Frauds.
The Statute of Frauds is intended to prevent fraudulent claims or lies, especially in real estate and financial transactions. It protects all parties involved in potentially high-dollar dealings from future problems that may occur if one contracting party tries to alter the terms of the agreement. Agreements that require a written contract or writing of some sort to be enforceable under law in the state of California include:
Some exceptions and limitations according to the Statutes of Frauds law include the following:
The Statute of Frauds law only applies to the property itself, not to the terms of the transaction. Verbal agreements to change the terms of a written contract can be admissible in court as long as those terms have already been in effect or are in dispute.
Proving an Oral Agreement
Establishing the existence and terms of a verbal agreement can be challenging, particularly in the absence of a written record of the parties’ dealings. When litigating a verbal contract, witness testimony is often the key to proving the agreement’s terms. For example, if the agreement was for one party to make improvements to another party’s property, a general contractor or equipment supplier may be able to provide testimony regarding the work performed based on invoices, payment records, and/or correspondence with the party who ordered the work. An expert may also be able to testify regarding general industry customs applicable to the work performed.
Witnesses may also be able to provide testimony regarding industry practice for the type of contract at issue. For example, if the agreement was for a business-to-business sale, a witness familiar with the industry may be able to testify that a purchase order and invoices are sufficient to establish the terms of the contract under prevailing industry custom. A promissory note and subsequent payments may be sufficient to establish the existence and terms of a promissory note and its repayment. If the dispute involves the sale of real estate , the existence of an executed grant deed may be sufficient to establish the terms of the sale and the transfer of title, and a witness may be able to testify regarding the parties’ intent to convey the real property.
Circumstantial evidence can also be helpful in establishing the existence of an oral contract. Although California courts have consistently held that parol evidence is admissible to prove the existence of an oral contract, the circumstances surrounding the agreement must clearly establish the terms and conditions of the agreement. Thus, it is best to have corroborating or supporting evidence, including testimonials from witnesses, emails, letters, and invoices.
Also, evidence of conduct by the parties following their agreement can be key to supporting a claim for breach of a verbal contract. For instance, a general contractor who is owed $10,000 for construction work may be able to recover on the basis of a verbal agreement if the work is completed and he has emails, phone records, and invoices demonstrating that the agreement was reached. In addition, evidence of a breach of an oral contract may support a finding of unjust enrichment or quantum meruit.
Safeguards for Your Oral Agreements
If a verbal agreement is to be created, it is important to ensure that the terms of the agreement are clear, concise and unambiguous. Otherwise, attorneys will likely have very different views about what was agreed upon and the courts will be required to settle those differences as discussed above.
There are a number of ways to enhance the finality of verbal agreements. A designated individual can take minutes of verbal negotiations and summarize the key points of agreement. At the conclusion of the verbal negotiations, that person can send that summary to all of the parties for their review and confirmation. If no one objects within a set period of time (three days is typically used), the summary can be considered final. In addition, the use of signatures of the parties in implementing the agreement itself can be helpful. Finally, if the parties trust a third party (i.e., an attorney) to act as an intermediary, they can ask that third party to send confirmation letters to themselves stating that a verbal agreement was entered into on a certain date and authorize such confirmation to be provided to the other party who was a party to the agreement. Although there is a six month statute of limitations on claims based on oral contracts, if the agreement does not qualify as a contract and the statute of limitations would apply to an alternative claim, the brief, three year statute of limitations for claims based on a contract also applies to any claims based on rights provided by the agreement.
Final Word: Weighing the Risks
The stakes for both parties need to be sufficiently high in order to justify the time and effort necessary to avoid the lengthier and more complex written contracts. Because oral and verbal contracts are potentially enforceable, parties may find that the benefits of entering into a verbal contract outweigh the risks involved. Handles v. Johnstone, supra, 87 Cal. App. 2d 584, 591-592 (1948) (the court permitted the oral contract to be introduced as a response to the statute of frauds defense); Lindholm, supra, slip op. at 5. The measure of risk will necessarily depend on the value of the contract. But for some transactions, the risks outgrow the potential reward . Students seem less prone to enter into a written contract with a roommate or fellow student and may have adequate discussion of the terms and an expectation of a good-faith relationship to rely on an oral contract. Individuals, who have a limited budget, seek a less expensive car or apartment by posting a sign or by word-of-mouth, and expect the seller or landlord to be a good-faith actor might get it right most of the time. Breach of a verbal contract can be devastating if the other party has withheld your payment, failed to perform, violated an employment nondisclosure clause, or notified the business license authorities of your intended activity. Few individuals with business formation, employment, or real estate transactions have the luxury of maintaining multiple backup contracts in case the other party fails to perform.