Oral Agreements Explained
A verbal agreement is also commonly called an oral contract. Verbal agreements are governed by the same basic legal principles that apply to all contracts in Texas, which state that most contracts become enforceable after they have been entered into if they contain an offer, acceptance, consideration, legal capacity, and legal purpose.
Verbal or oral contracts are usually formed in three ways:
Because of their oral nature, verbal agreements can often be open to multiple interpretations, especially in the areas of:
Disputes over verbal contracts can lead to disagreements among the parties about what the contract actually was meant to say. These disputes can be particularly intense when looking at complex issues like the rules of conduct regarding real estate, financial or medical transactions or particular practices demanded in a trade industry .
While they might seem informal and easier to come to than a written contract, verbal agreements can be just as binding as written contracts when entered into between parties. Verbal agreements are common, particularly in situations when: The purpose of a verbal agreement is largely the same as that of a written contract, which is to make an enforceable business arrangement between involved parties. Even if a contract is verbal, if the agreement has been entered into by both parties, it could be enforceable by a court. For this reason, we do not advise people to enter into oral contracts unless the terms of these contracts are very clearly understood by both sides.
Texas Law for Oral Agreements
Verbal agreements are just as legally binding as those in writing. However, certain performance is required of both parties in order to give the verbal agreement legal standing. This makes both parties accountable for performance and can lead to legal action for breaches of verbal agreements. Verbal agreements that are legally binding are not oral agreements, they are verbal contracts. The Texas Two-Year Rule can invalidate verbal contracts for actions that occurred after the two year period has expired.
The law in Texas does not require a written contract for an agreement to be binding or enforceable. The Texas Supreme Court found that simply having an agreement is enough to enforce it. Whether a verbal agreement exists between parties is a question of fact and a court will look at the extrinsic evidence surrounding the creation of the agreement to see if it was intended to be binding. The actions of the parties and the words spoken will be evaluated to determine if there was a meeting of the minds to form a binding agreement.
In Texas, verbal agreements are just as legally binding as written agreements. However, in Texas, the Statute of Frauds states that agreements regarding interests in real property or sales of real property worth more than $500 must be written to be enforceable. Contract performance or partial performance of a contract in real property can make the contract enforceable. In regards to real property transactions, there can be an exchange of money or other property that constitutes part performance of the contract. If the agreement is for the sale of goods valued at over $500, the Statute of Frauds requires the contract to be signed by the person being charged with the breach, or if the contract can’t be completed in a year. If the agreement cannot be completed within one year, then it must be in writing. It must be in writing due to the Statute of Frauds if it is an agreement for a loan that exceeds more than $50,000.
Oral Agreement Exceptions
While verbal agreements can generally be enforceable in Texas, several exceptions carve out instances when they simply will not hold up in a court of law. An analysis of these exceptions is very factually intensive, so keep in mind that this list is non-final and subject to the specific details of the parties’ interactions.
Statute of Frauds
The Statute of Frauds is an older remnant of Anglo-Saxon law that developed to prevent fraud-based actions concerning the sale of property and other assets. These laws mandate that, when attempting to enforce an agreement regarding the sale or transfer of certain assets worth at least $500, the agreement must be in writing. In Texas, these assets include real estate, personal property over $500, and the sale of goods in excess of $500. A number of other agreements also need to be written. For example, in a past Texas case, a verbal agreement was overturned because the deal involved the promise by one party to pay the debts of another party.
Promissory Estoppel
You may see "promissory estoppel" commonly referenced as "estoppel," which you may find flowing within a contract and often used when the enforcing party is trying to prevent a party from going back on a verbal agreement. In essence, this exception protects any party who has relied on a verbal agreement to their detriment. For example, if a party spends thousands of dollars completing work for the other party based on a verbal agreement that the other party will compensate them for their work, the first-party may be able to enforce the term, as the spent funds were justified.
Undue Influence
At the crux of a verbal agreement that is not enforceable, you sometimes will find a situation where a party tricked or gained an unfair advantage over the other party to execute the verbal agreement in the first place. If one of the parties used fraud, duress, coercion, or any other form of undue influence to sway the other’s agreement into existence, then the verbal agreement may not be enforceable. For reference, undue influence is often found when strong relationships exist, like between parent and child, or husband and wife.
Proving an Oral Agreement
To prove that an oral agreement exists, and what its terms are, Texas law permits the following types of evidence: testimony from the parties, testimony of witnesses who are familiar with similar transactions, written evidence of the agreement to perform an act that is not required to be in writing, and any other evidence that establishes the agreement. Typically, a court looking at whether an oral contract was actually made will also have to determine whether the oral agreement is supported by legally sufficient consideration and whether the oral contract is vague and uncertain.
Pros and Cons of Oral Agreements
When used appropriately and with the right parties involved, a verbal agreement can have many benefits. It can be quick and easy to implement, with no cumbersome paperwork to deal with. It has fewer formalities than a written contract, which some people may consider to be unnecessary. Additionally, for people who personally know one another, more casual language and a lack of formalities may seem completely appropriate. However, there are a number of pitfalls associated with verbal agreements. There is no protection of the terms of the contract and it will often lack important details, such as a list of each party’s responsibilities under the agreement or deadlines for the completion of certain tasks. If one party doesn’t carry out its end of the deal , it can be difficult to hold them legally responsible for failing to do so without a written contract. There is also a lot of gray area in verbal contracts that can be easily manipulated by either party. For example, what does "reasonable price" mean? Is a price reasonable if the other party says that it is? Even if you enter into an agreement in good faith, you still run the risk of it being misrepresented by the other party. Verbal contracts should also be approached with caution when dealing with people you don’t know well. Good faith may have no bearing on the situation if you are deceived from the start.
How to Make Oral Agreements
Unfortunately, with all the interactions and communications that occur on a day-to-day basis, verbal agreements are inevitable. In several situations, it can be effective to enter into a verbal agreement. At the same time, however, entering into such an agreement is certainly risky. In these situations, it is important to protect yourself and do what you can do to ensure that the agreement you are entering into is clear and enforceable.
- Choose to enter into a written or oral agreement. When considering a legal agreement of any kind, it is often best to have it in writing. However, if for whatever reason it is not feasible to enter into a written contract, you could consider entering into an agreement over the phone, or some other way. Note that it is illegal to enter into a verbal agreement that is contrary to the law, such as something that is illegal in and of itself, or an agreement related to an illegal purpose. In most circumstances, an oral agreement is valid unless the Texas statute of frauds deems it invalid. Statutory frauds make certain agreements unenforceable unless they are written and signed by the party to be charged. This includes contracts dealing with real property, a debt of $50 or more (promissory notes, bonds, etc.), an agreement that cannot be performed within one year from the date of the making, and for the sale of personal property.
- Seek an oral agreement confirmation. If you enter into a verbal agreement, at a minimum, you should follow up in writing to confirm the details of the agreement to avoid any dispute about the terms. You can email, fax or mail a summary of what the parties agreed upon. This document can be used as evidence that may verify the terms of the agreement.
- Perform your end of the deal. It goes without saying, but it’s always important to honor you commitments to the other party as stated in the verbal agreement.
- Seek to have the agreement put in writing. While it may not be feasible at the time, try to enter into a written contract that details the terms of your agreement. A written contract should be clear and detailed, and ideally should state the contract price, performance obligations, and remedies. A written contract is not always the best choice, however. For example, a written contract may allow for the opposing party to present reasons that you did not initially agree to, such as a pre-existing damage or condition. Further, imposing a written contract might turn a less bind verbal agreement into a legally holdable contract. Therefore, without potentially problematic contract terms, a simple written summary of your agreement might be the best option.
Oral Agreement Alternatives
Alternative methods of forming an agreement are not limited to just verbal or oral agreements. Written contracts are generally preferred because they reduce the risk of misunderstanding, even if it is not legally required in certain circumstances. In some instances, specific requirements may be imposed as to the form in which an agreement must be reached. For example, a written contract or agreement may be contractually required for a particular transaction to have effect. Such contracts may also be easier to enforce in Texas, because they show both parties’ intentions clearly and unambiguously. Orally or verbal agreements require that the terms of the agreement be implied from facts surrounding the agreement. Generally , if an agreement is never committed to writing, it is almost impossible for a court to determine the terms of the agreement or the party’s intentions.
If the contract must be in writing, and is not, it does not affect the validity of the contract. However, if the contract is an agreement by will, it must be in writing to be enforceable. Although this would take very little planning, you may want to write your will as soon as possible to avoid any questions or other issues that may arise.
It’s important to note that where the law requires that an agreement be in writing, it is not sufficient for one of the parties to have a written copy. Rather, the agreement must be formally signed by the party charged with enforcing the agreement.