Verbal Contract: Definition & Law

Instructor: Kenneth Poortvliet
A verbal agreement may be an enforceable contract if certain requirements are met. In this lesson we will look at how a verbal contract stacks up to a written one, and when they have the full force of the law.

Floyd is casually talking to his neighbor Arnie while raking some leaves. With frustration, he says to Arnie, 'I'll give you my new boat if you cut down that tree that keeps shedding its leaves all over my lawn.' Arnie laughs and says, 'It's a deal!' A week later Arnie cuts his tree down, then drives his truck over to Floyd's, hooks the new boat, and puts it in his own driveway. Needless to say, Floyd's not happy, and he confronts Arnie who refuses to give him back the boat. If they went to court, who'd win?

An agreement is when two or more people all come to a similar understanding, whereas a contract is defined as 'a legally enforceable agreement between two parties.' With only a few exceptions, there is no requirement that an agreement be written before it will be enforced as a contract. However, the court will look to see if all of the elements of a contract are present before determining a contract exists.

Elements of a Contract

Elements Definition
Offer The offering party presents to the other party the that they will give something or do something (or refrain from doing something), in exchange for something (or refraining from something) from the other party.
Acceptance The offer was agreed upon, as is, and clearly and unambiguously accepted by the other party. The acceptance must exactly match the offer; if any terms are added, deleted or changed, this becomes a rejection and a counter-offer.
Consideration The heart and subject of a contract. Consideration exists if both sides will receive a benefit and an obligation. Anything short of both sides receiving a benefit and incurring an obligation, then there is no consideration and no contract.
Competency Both parties must be over 18 and of sound mind.
Legality The subject of the contract must be legal before a court will recognize and enforce it.

Verbal v. Written

If the elements of a contract are written and signed by all the parties, then it's enforceable. If they are discussed and verbally agreed upon, that that's a contract as well. So what's the difference? The most obvious is with a written contract, the terms are spelled out and recorded in the document making it easier to determine the terms.

The signatures on a contract show that all parties have agreed.
signing document business

For example: While Jed was shooting at some food for his family, he discovered oil on his property. Now he wants to move the family to Beverly Hills, so he asks Ted to manage his oil pumps. He writes up a written agreement that obligates him to pay Ted, and in consideration for the pay, Ted will operate and manage the oil business. Both parties sign the document.

This is an enforceable contract as the terms are written and both parties have signed indicating that the offer made by Jed and was accepted by Ted. There was an offer, acceptance (indicated by the signatures), consideration (both parties get and give), competency (both are adults and of sound mind) and legality (oil is legal).

On the other hand, let's say there was nothing written, but they verbally agreed to the same terms. Since they are both competent adults and oil is legal, its a contract. So what's the problem? The answer is nothing, until Jed just stops paying Ted. Then if Ted took him to court, he'd have to prove to the court that a contract existed. If Jed said they never agreed on anything, is Ted out of luck?

Non-Written Evidence of a Contract

A verbal contract is also called a parol contract. The word parol means given or expressed verbally, and historically, the courts have recognized parol contracts as valid if the terms can be determined. This can be done by the actions of the parties. If both behaved like a contract existed, then that conduct can be used to indicate the current terms. In Jed's case, the court can look at the history of Ted managing the oil business and Jed paying him. So the court can determine that, from the time Jed stopped paying until the time Ted stopped managing, Jed would have to pay Ted the same rate he always paid him.

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