Are Verbal Contracts Legal?

Business people often make handshake agreements. But are these agreements really legal? They may be legal, depending on the circumstances, but they may not be helpful if the agreement must be taken to court. Here's a story to illustrate:

A Business Barter Story - Is This Contract Legal?

Jim and Carter agree on a barter arrangement. Jim will maintain the landscaping around Carter's dental office and Carter will do Jim's dental work. They agree to an amount of work that each will do, roughly equal amounts on both sides. Jim makes an appointment with Carter and has his dental work done. He shows up one day to work on the landscaping, goes home after an hour, and never shows up again. Later Carter hears that Jim has declared bankruptcy.

Can Carter sue Jim? Sure. But the bigger question is whether he has a chance of getting his money because the agreement wasn't in writing.

The Difference Between "Legal" and "Enforceable"

The simple answer to the question, "Are verbal contracts legal?" is: "Yes, in many cases. But..." Most types of contracts don't have to be in writing, and it is not illegal to enter into a verbal business contract unless the nature of the contract itself is illegal (as in a contract for illegal drugs).

To be legally binding and enforceable by a court, a contract first must meet several specific requirements:

• There must be a clear offer and an acceptance, what's called a "meeting of the minds."
• Both parties must give something. There must be a consideration (something of value) given on both sides. For example, a payment by one person for work done by another person is an acceptable consideration.
• The contract must be for a legal purpose (a drug deal isn't a legal purpose),
• The contract must be between two parties who have the capacity to enter into the contract (a contract with a minor, someone who is intoxicated, or someone who is not mentally fit isn't a legal contract).

A verbal contract is difficult for a court to uphold because it turns into "he said/she said." A written contract is almost always preferable to an oral contract. Having the terms in writing eliminates some disputes over what was agreed on. Verbal contracts are more difficult to enforce in a court.

Some Contracts Must be in Writing

Each state has a statute of frauds that describes the types of contracts that must be in writing in order for them to be enforceable. The most common list of contracts that must be in writing includes:

• Contracts to answer to a creditor for the debt of another (as an executor for a will, for example)
• Contracts relating to marriage (prenuptial agreements, for example)
• Contracts for the sale of real estate or relating to an interest in real property
• Contracts not to be performed within one year.

Each state has different requirements for contracts and agreements that must be in writing. Florida law, for example, says that "contracts related to the sale of real estate or contracts that cannot be performed within one year must be in writing." 

The California Statue of Frauds has a longer list of contacts that are invalid if not in writing, including:

• Contracts not to be performed (both parties doing what they promised) within a year,
• Special promises to answer for debt, default, or miscarriage of another (with exceptions),
• Agreement for leasing for a longer period of one year, including real estate leases,
• Contracts for the sale of real property (land and buildings),
• An agreement that is not to be performed during the lifetime of the promiser
• Agreements for the purchase of real property with a mortgage,
• A contract to loan money or extend credit in an amount greater than $100,000.

Why Not Use a Free Contract Form?

If you have a quick and easy agreement you want to make with another business or individual, just to keep it legal you may decide to use one of those free contract forms that are floating around the internet. If you are thinking of using a free contract form, check out these reasons not to use free contract forms.