When it comes to business matters and contract law, a question we are often asked is: are verbal agreements legally binding?
What is a verbal agreement?
A contract is an agreement between two parties that is intended to be enforceable by law. Verbal agreements are contracts that have been agreed by spoken communication.
In contrast, a written contract is an agreement that is recorded in writing and is signed by the parties to evidence their agreement.
There are certain types of contracts which must be in writing, and this includes contracts for buying or selling houses, or buying a car from a licensed dealer or trader.
When is a verbal agreement legally binding?
In order for any contract to be binding, there are certain elements which need to be satisfied. These elements are as follows:
- Offer and Acceptance: an offer is made which is accepted by another party;
- Consideration: there must be something of value exchanged for a promise (note, this does not always have to be money);
- Intention: there must be an intention by the parties to make a legally binding agreement; and
- Capacity: the parties must have legal capacity to enter into the contract.
There are certain circumstances in which a contract may be found to be void in situations of duress, undue influence, unconscionable dealings or if there is a contract to commit a crime.
How to prove a verbal contract?
The issue with verbal agreements is that it can be very difficult to prove their existence, and to prove what the agreed terms are. There are also issues with parties having different recollections of what was agreed or a party may be untruthful about the terms of the verbal agreement.
Without a written agreement, it is often the word of one party against another. We therefore recommend avoiding verbal agreements. However, if you do enter into one, we recommend that you follow up with an email or letter to the other party confirming the agreed terms. The more written documentary proof you have, the better your chances will be of enforcing a verbal agreement.
Is a recorded verbal agreement legally binding?
As discussed above, it can be difficult to prove verbal agreements. Accordingly, recording the agreement could be used as evidence in support of the agreement. The agreement would be binding, so long as all of the elements of contract formation have been satisfied. Of course, we recommend that you always gain the permission of the other party prior to recording any conversation.
Written Agreement vs Verbal Agreement
Another issue with verbal agreements is that some people in their discussions may be put on the spot and enter into agreements, without having properly thought through all the details and the consequences of the transaction. Generally, a written agreement gives each party the chance to read through the terms of the agreement prior to signing and entering into that agreement. It is for this reason, and the reasons discussed above, that we always recommend a written agreement as opposed to a verbal agreement.
There can be serious consequences for breaching a contract, whether verbal or written. Accordingly, if you are unsure about any terms and do not fully understand your rights or obligations, then we recommend that you seek legal advice prior to entering the agreement.
- All agreements should be recorded in writing in a properly drafted contract. Verbal agreements should be avoided at all costs.
- In the event that you cannot avoid entering into a verbal agreement, make sure you keep records of correspondence and file notes about what was agreed and then follow up the other party with an email or letter confirming the terms.
- When entering into discussions about an agreement, make it clear what you do and do not intend to be bound by your discussions until a final agreement has been reached.
- Always seek legal advice prior to entering into an agreement if you do not understand the terms of the agreement.
For further guidance, please feel free to contact one of our LegalRocket crew on 1300 615 705.