What Are Verbal Contracts?
A verbal contract is essentially an oral agreement in which parties discuss and reach a mutual understanding of their contract terms. "Verbal" is often misused to mean "oral," but technically, it is correct to use "verbal" when referring to a contract either written or oral. However, the vast majority of verbal contracts are oral agreements. Either way, all verbal contracts have the same basic elements: offer, acceptance, intention to create legal relations and consideration. When a verbal contract is created, an offer is made by one party to another and the other party then accepts the offer. The offer generally must be clear . Typically, if it is not clear the courts will work with you to make it clear and they will look at how the parties have performed the contract to understand what the party’s intentions were. Of course, verbal contracts are still legally binding contracts, and are still legally binding if they don’t get enforceable for some reason. However, that doesn’t mean that you should rely on verbal contracts outside of your contractual obligations. Having things down in writing provides opportunities to protect yourself in the event a misunderstanding occurs in the future. It is often perceived that verbal contracts are automatically invalid; this is not true.
Requirements of Verbal Contracts in Texas
Texas law regarding verbal contracts is somewhat predicated on the Uniform Commercial Code (UCC) Article 2, which governs both verbal and written contracts for the sale of goods worth more than $500. Under the UCC, a verbal contract that consists of an offer to sell and an acceptance of that offer may still be enforceable if there are two conditions that are met. The first is that there is written evidence of the terms of the agreement. This requirement may be satisfied by to-do lists and email correspondence, among other examples. The second requirement under the UCC is that both parties are considered merchants, which are defined as "persons who deal in goods of the kind or otherwise hold themselves out as having knowledge or skill particular to the practices or goods involved in the transaction." This, too, can be satisfied by various written correspondence and handwritten notes.
Texas law may consider exceptions to the statute of frauds that explain when verbal contracts are enforceable. If the elements of promissory estoppel are present, an oral contract could be found. Promissory estoppel applies when: 1) a promise is made; 2) the promise is reasonably relied upon to the detriment of the party who relied upon it; 3) the reliance on the promise was foreseeable; and/or 4) the reliance on the promise was enforceable in the interest of justice.
Other exceptions to the Texas statute of frauds that would allow a verbal contract to be enforceable include a verbal contract for a good or service worth less than $500, a verbal contract for a good or service worth $500-$5,000, or a verbal contract that is an installment contract.
Characteristics of a Valid Verbal Contract
For a contract to be enforceable, it must contain certain critical components. In Texas, four basic elements compose the requirements for a verbal contract’s enforceability.
Offer: An offer can be made verbally or in writing, requiring one party to propose terms to a second party. The offer creates the opportunity for a contract to form.
Acceptance: Acceptance is the expression by one party of an agreement to the terms offered by the other party. The acceptance has to mirror the content of the offer, and it must be clearly communicated through words, actions, or silence. Silence may not always be viewed as unconditional acceptance. There are various circumstances in which the law departments view silence as acceptance.
Consideration: This is the exchange of something that has value between the parties to a contract: money, services, land, property, etc. The most critical requirement of consideration is that both parties must exchange something of value through the transaction. Consideration does not have to be equal on both sides. The parties are free to mutually decide the value of the consideration they contribute to the contract.
Mutual Consent: In order for a contract to exist, the parties must mutually consent to its terms. The parties must have the same material understanding of the terms of the contract and must have the capacity to consent to those terms. Consent of the parties involves the relationship between the parties. It can be given through written or spoken word, or it may be implied through conduct.
Competency: A verbal contract is only enforceable if the parties are competent to enter into a contract. A person is normally regarded as being competent if he or she understands the consequences and obligations involved in entering into a transaction. Individuals who are minors or who suffer from mental impairment are typically not legally competent, so cannot enter into enforceable contracts. Additionally, if a party is intoxicated at the time the contract is formed, that person is presumed to lack the capacity to enter into a contract.
Limitations and Exceptions for Oral Contracts
Certain limitations exist for verbal contracts. Sometimes the Statute of Frauds prohibits oral contracts regardless of whether all elements for a unique verbal contract are satisfied. The Texas Statute of Frauds generally requires the following types of contracts to be in writing to be enforceable:
Contracts relating to or that cannot be performed within one year from the date of the contract’s making;
Real estate contracts except for leases lasting one year or less or provided for with a short-term lease provision;
Contracts for the sale of goods costing $500 or more;
Contracts for the sale of real property or certain types of business interests or partnerships;
Contracts for the sale of an estate or interest in real estate. Contracts exceeding one year may be real estate contracts unless the same statute of frauds exception for one-year property leases applies;
Contracts of suretyship or guarantee. A surety is one who promises to answer to a creditor for the debt of someone who has agreed to pay it; guarantees are a promise of performance to induce a third party to enter into a contract; and
A sales contract between a telephone company and telephone subscriber. Examples include damages for slamming (selling a customer’s phone service to a different company without permission) and cramming (adding services to a customer’s account and charging them for those services).
In the event that a contract falls within the foregoing categories, such as a partnership agreement, real property contract, agreement to buy and sell a business, agreement to pay another’s debt, contract relating to goods, services, or an existing account, or a suretyship agreement, a creditor may still seek damages and enforcement through the doctrines of promissory estoppel or quantum meruit.
Proving the Existence of a Verbal Contract
If you are pursuing a case that involves an alleged verbal agreement, you may be wondering about what exactly constitutes adequate evidence of the existence of such a contract. There are several types of evidence that could support your case:
Witnesses
While not every witness will necessarily be willing to testify in court, if you have several people with firsthand knowledge of the verbal agreement you are pursuing, you may have a better case for proving its existence. This is especially true if the witnesses were present when the contract was discussed and formed. Witnesses could include friends, family members, employees, co-workers, vendors, customers or even business partners.
Written communication
Communication about the agreement through email or text message, and notes about the agreement are all ways you could prove the contract existed. This could include anything from a note from the other party saying it would be a good idea to sign a contract to a conversation via text about what work you would do in exchange for money. The more specific about the agreement, and the closer the conversation came to a legally binding contract, the stronger your case will be.
Work performed
If you performed any work as part of this contract , you may have grounds to prove it existed. For example, if you performed some work, but the work has not yet been paid for, you might be able to bring your case to court to pursue payment for those services. The fact that the work was performed in exchange for something is evidence of the existence of the agreement. However, it is important to note that if you continued to work under the agreement, even though it was never formalized with a written contract, you might be considered to have essentially entered into a new contract.
Payments made
Depending on the nature of your agreement, you may be able to follow a paper trail to show the existence of your verbal contract. In the preceding example, you could follow payments from the other party in an attempt to show the work you performed related to your contract. However, simply sending invoices is not always enough evidence to show proof of the contract.
The onus to prove the existence of a verbal contract falls squarely on the shoulders of the plaintiff, and if you hope to be able to use the contract to your advantage, you will need compelling evidence to discuss with your attorney that might support your case.
Examples of Verbal Contracts
Juan Larsen v. Amit Kapur, d.b.a. Panera Bread Co., 169 F.3d 763 (5th Cir. 1999) In Larsen, the plaintiff sought damages from the defendant for economic damages under a verbal agreement to purchase a Panera franchise. The Franchise Agreement contained a non-verbal contract clause that barred an oral modification. The court of appeals held that even though the Franchise Agreement contained an explicit oral modification prohibition, there was still ample evidence that [364] the parties had entered into a verbal modification anyway, and that the verbal modification was binding. The court first noted that Panera’s Vice President agreed in his deposition that the parties had agreed to the verbal modification. Further, Panera’s Performance Pay Program Fact Sheet acknowledged that the parties had agreed to a verbal modification. Finally, Panera’s Human Resource Manager admitted that she had sent the plaintiff a copy of the Performance Pay Program Fact Sheet acknowledging the verbal modification.
In re KM-LLC, G – 11-1682 (Tex. Dist. Ct. Harris County 2011) This bankruptcy adverse party held that an alleged verbal agreement created a legally enforceable contract in favor of the plaintiff. The plaintiff alleged that the debtor breached a verbal contract to sell the plaintiff a retail strip center at the time that the debtor first transferred two interested properties to the defendant. The defendant alleged that the plaintiff’s action was barred by the Statute of Frauds. The court began its analysis by noting the four ways in which an otherwise unenforceable contract can become binding. The court found that the requirement that a contract be in writing is not designed to keep alternative forms of express agreements from recognition. The court also noted that the doctrine of partial performance provides a very narrow exception to this statutory requirement. When one party’s performance under an otherwise unenforceable contract creates serious injustice, the doctrine of partial performance is applied more liberally where enforcement is sought against the party who lacks the written agreement. In other words, the Statute of Frauds is not an absolute bar to contract enforcement.
Weidman v. County of Orange, 984 F.2d 1460 (9th Cir. 1993) In Weidman, the court held that the Statute of Frauds had no application because the so-called "contract" was not really a contract at all because the parties had purported only to agree about future action which in itself was without value. In this case, the defendants argued that the plaintiffs had executed a waiver which exempted the defendants from liability. The court noted that the employees who collected the waivers were presented them after they had eaten and drunk. The waivers were ambiguous in meaning, and the employees did not know if they were supposed to give up their rights or their rights not to be harmed. The employees were never told that their rights were being waived. If they understood the English language, they would understand that signing the waivers was not in anyone’s interest except that of the waste manager. The court noted that no exchange was ever made between the parties. Thus, the court held that the waiver was an illusory promise, and therefore did not satisfy the Statute of Frauds.
Tips and Practices to Protect Your Interests
If you or your business is considering entering into a verbal or oral contract, there are steps you can take to protect yourself from the potential consequences of entering into an enforceable yet unwritten agreement. First, clearly establish in writing that all promises and agreements are contained in the written contract, and that the contract may not be amended, changed, or modified by an oral agreement. Second, this will prevent future cases like the cases listed above, however in practice it is important to discuss the terms of any agreements with the other party to avoid potential liability down the road. Third, put all agreements in writing so as to have a permanent record you can refer to if problems arise. If it’s already too late and you’re already involved in a dispute involving a verbal contract, here are additional steps you can take to increase your chances of protecting your rights: Another benefit to having all business dealings in writing is that if there is ever a dispute, your case could be given precedence over any oral contract. If you or your business is entering into an oral contract and you want to make sure it stays "oral" (as opposed to becoming "written"), the best thing to do is to consult with an attorney who can help identify specific ways to avoid the oral contract from being enforced in Texas.
Conclusion and Key Takeaways
Fundamentally, a verbal contract can be legally binding in Texas, but as the case law shows, it’s just not practical. Oral contracts are typically fraught with potential misunderstandings and varying recollections that may or may not have occurred. Without proof of the specific terms of the agreement, it’s almost impossible to prove anything definitively in an oral contract dispute. Furthermore, when relying on verbal contracts , you will likely be ending up in the court system more often than not. It almost always turns out that both parties wish they had a written contract to prove their side of the story. Therefore, in the end, a written contract will save time, money, and effort, even if the written contract is not the initial agreement between the parties. Just simply follow the general rule of thumb given above, that unless the statute of frauds applies, you are better protected with a written agreement.
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