What is a Verbal Contract?
A contractual agreement does not always require you to have a written document establishing the relationship. Sometimes you will find yourself in a situation where an agreement is reached verbally, creating what is known as a verbal contract.
A verbal contract is essentially a verbal or oral contract, which is a binding agreement that is reached without the use of written documentation.
Although these contracts imply that there may be no tangible evidence of the existence of the agreement, they still legally bind both parties to the terms of the contract. It is important to understand that these contracts are still legally binding , meaning that you could easily find yourself in legal trouble if you breach them.
Verbal contracts tend to be present when the terms of the contract are primarily simple in nature, or if the parties involved are known to one another and trust each other not to break the terms of the contract.
Between two business owners, for example, a verbal contract might exist between them when they agree to provide each other with services like carpentry or design work at a later date down the road. As long as those two people verbally agree to provide those services to one another, they have established a verbal contract—but it’s not necessarily in writing yet.
Are Verbal Contracts Legal in Texas?
In Texas, verbal contracts, also known as oral contracts, are generally enforceable unless a specific exception or statute of frauds applies. For example, under the Texas Statute of Frauds, an enforceable contract must be in writing when it concerns the sale of real estate, a lease to convey real estate for a period longer than one year, the sale of goods priced more than $500, or if required to be in writing by some other applicable law (as for example contracts for the sale of goods covered by the Uniform Commercial Code). Generally, civil contract law will apply in Texas unless state contract law specifically applies (as for example included in Chapter 26 of the Texas Business and Commerce Code). Also, as explained below, verbal contracts can present specific problems with the Statute of Frauds if they involve the kind of matters that the Statute of Frauds singals out for special treatment. In Texas, verbal contracts are not illegal or fraudulent. However, Texas law recognizes that misunderstandings can be common when contracts are not in writing. A Texas appellate court explains the principle behind the Statute of Frauds as follows: The purpose of the statute is to provide certainty and predictability in the contractual relationship. The statute also protects citizens from occupational fraud by those who practice deceit through ambiguous or intentionally vague oral contracts. In certain situations, the mere entry into a verbal contract can result in the loss of important rights. In one Texas case, a court explained how the Statute of Frauds applies to verbal contracts: In Texas, the Statute of Frauds provides that no action shall be brought upon a contract for the sale of land unless the agreement is either in writing and signed and the contract is not to be performed within one year from the date of making. . . . Because the Statute of Frauds is concerned with contracts for the sale of real estate, it addresses claims that seek to establish or declare an interest in land; not claims that pertain to the enforcement of a pre-existing contract . . . As such, [the party] did not need to file a written contract to comply with the Statute of Frauds. . . . In the situation described above, the verbal contract was enforceable in Texas despite the Statute of Frauds, because it was not a claim to establish or declare an interest in land itself. Without this contract, the seller and buyer could not have recovered the earnest money deposited with the title company. Similarly, the Statute of Frauds does not prevent a court from ordering performance of a verbal contract, or awarding damages for a breach of contract, for one of the many contracts that are not yet required to be in writing.
The Elements of a Valid Verbal Contract
Key Elements of a Valid Verbal Contract in Texas
Just like an enforceable written contract, a verbal contract must contain several essential components. For the purposes of this discussion, let’s note the elements that would be present in an enforceable verbal contract:
In a verbal contract, the offer can be in the form of verbal communication, which is the most common method. However, the offer could also be made through conduct. For example, a verbal agreement to paint an office might be implied when one painter enters another painter’s office with a paint brush in hand and begins painting.
The next step is the acceptance, which must be unequivocal. An unequivocal acceptance means that the responder accepts the offer exactly as stated, without any adjustments. For instance, if someone offers to paint your house for an amount of money, and the painting party responds with an offer of $100 less, then the counter-offer is a rejection of the original offer, and there is no valid contract. An unequivocal acceptance occurs only when one party mirrors the original offer without modifying it.
The final element of a verbal contract is consideration. Consideration is defined under Texas contract law as the benefit or detriment of a transaction. In simple terms, consideration is the benefit that one party receives from the other. Acceptance of a verbal contract means acceptance of this offer, which is usually a sum of money in exchange for services rendered.
In the office painting example, there is consideration (money) exchanged for work (the painting of the house). If you wanted to paint someone’s house, and you offered it for $100, you would expect $100 in consideration for the painting. It is important to remember that verbal contracts don’t necessarily have to bear the same consideration. The amount of money doesn’t have to be equal to the services provided.
So how do you prove the existence of the two aspects of a contractual relationship that we covered above for a verbal contract? It is the difficult aspect of proving that a verbal contract exists that has led many people to not pursue them in the first place. In the painting example above, you could prove that the painter painted the office to a point by using photographic evidence. However, you can’t prove the deal because it was verbal. This is where the testimony of the parties comes into play as critical evidence to that type of agreement. The best advice would be to seek legal counsel on any verbal agreements that you plan to enter into before you engage in any actions that may imply an agreement has been made.
Issues with Enforcing a Verbal Contract
One of the biggest challenges in pursuing a verbal contract is the proof. Although this can be done, it is often difficult. Certainly there are numerous frays and holes in two parties’ stories that we see oftentimes when dealing with verbal contracts. A good example is when a verbal contract is created between parties who are friends. When things go bad between those parties, they usually have different versions of the "same" agreement.
Another example is that it is not uncommon for one of the parties to claim that specific portions of the contract were never discussed and thus never existed. Strategic arguments are made by other parties at times that their business might be negatively impacted if a verbal contract was enforced. Lastly, at times, people just don’t remember things as they really are. This is not to say that they are lying, but rather their recollection is altered by the outcome.
One thing that is critical for the outcome of any restriction on liability in verbal or written contracts is that it must be signed by an authorized individual for the company & it must have clear language that states that the agreement cannot be changed verbally. I like to call these "magic words." That does not mean that we can get around it; however, it does make it more difficult.
Exceptions Regarding Verbal Contracts
Despite the general enforceability of verbal contracts, there are several key exceptions in place under the Statute of Frauds where a verbal contract is insufficient and a written contract is required for enforceability. The following is a list of such agreements in which verbal contracts are prohibited:
Not every agreement that falls into these categories is required to be in writing in order to be enforceable . The Statute of Frauds only requires an agreement to be in writing "if it is not to be performed within one year from the date of making." In such circumstances where a verbal agreement will be performed within one year, no writing is required.
Similarly, the Statute of Frauds does not apply to agreements to sell goods if the goods are valued at less than $500. In these cases, verbal agreements are enforceable as long as certain requirements are met (e.g., acceptance by both parties, a signature, or partial performance).
How to Make a Verbal Contract Stronger
While written contracts are the most readily-enforceable types, verbal agreements are not void ab initio as some might say. While, generally speaking, the court prefers to see a contract in writing, verbal agreements are enforceable if certain steps are taken to ensure that there is reasonable proof of the parties’ agreement. Such steps include: To help strengthen your verbal contract’s validity, each party should have an independent witness who can testify as to the existence of the agreement, as well as each party’s intent and capacity to enter into the agreement. To further protect your verbal contract against enforceability issues, it is wise to document the agreement by sending a "confirmation" email or text to the other party, or by confirming with a receipt or text, further building up the evidence that a valid contract existed. Furthermore, while parties may agree to various types of contracts with one another, not every agreement is legally binding and enforceable. For more information about contracts that are not legally enforceable in Texas, please see our article on "Non-enforceable Agreements in Texas."
Legal Action You Can Take for a Breach of a Verbal Contract
If there is a breach of the verbal contract, the person who feels harmed must make a good faith effort to work things out with the other party. If the other person refuses to acknowledge the agreement, then Texas Rule 47.1 allows the injured party to file suit against the other person to enforce the verbal contract.
In small claims court, the injured party can ask for monetary damages or for the performance of a service. Since small claims court is designed for people who are not lawyers, the injured party will be held to the same standards as the party bringing the suit. So, if the harmed party has a verbal or written contract that the other person has denied, the injured party will be required to: To win, the injured party must provide at least some evidence relating to the verbal agreement, including witnesses or documentation of what was discussed .
The verbal agreement does not have to be signed by the individuals, and instead it can be inferred by the facts and circumstances surrounding the parties’ relationship at the time. The injured party will be able to show how the action taken by the other party was not consistent with a previous course of consistent action. For example, say that a real estate agent and a home owner have been friends for years. The realtor has sold numerous homes for the owner without charging a commission. The owner wanted to sell his home privately, without multiple marketing efforts. In this example, since they had a verbal agreement for years, his neighbor listed the home for him without charge. Later, the neighbor believed they had an agreement that he would sell the home without charge in exchange for installing a fence and landscaping two weeks before it was sold.