Sometimes contracts are created verbally, without the parties involved recording them in writing. Such contracts are referred to as oral contracts. Enright (2018) defines oral contracts as verbal agreements that may be legally binding. Similar to written agreements, the involved parties enter into an oral contract to do or not to do a particular obligation. Notably, there are two key differences between oral and written contracts. The first one is that an oral contract is a verbal agreement. The second one is that there is no further evidence to prove that an oral contract was formed apart from the parties that formed it or witness who heard its creation. Due to their undocumented nature, oral contracts often creates uncertainty regarding what exactly did the parties involved agree to and the intentions set when entering into the agreement.
Read also The Statute of Frauds – Oral Contracts
Enforceability of Oral Contracts
Enforceability is dependent on how well the agreement meets the necessary requirements that must be met to form an oral contract. Three basic requirements must be met to render an oral contract legally binding. Firstly, the contract’s terms must be valid and legally enforceable. Secondly, the contract must contain the necessary components found in all contracts: offer, acceptance, consideration, and mutuality. Thirdly, the agreement must not violate existing laws or regulations established to prohibit oral agreements, such as the contracts that fall under the Statute of Frauds (Enright, 2018). If an oral contract meets these requirements, then it is enforceable in the United States in many circumstances.
Also, as with all other contracts, the parties involved must be competent and legally qualified to form a valid contract. A Court cannot enforce an oral contract if one or both parties are not competent or lacks the legal capacity to create the contract. Examples of when a court may consider the parties to lack competence or capacity include; (1) if one or both parties formed the contract while under the influence of alcohol or any other impairing substance, (2) of one or both parties were below the legal age at the time they formed the contract, and (3) if one or both parties are mentally incompetent (Snyder & Burge, 2017). Therefore, an oral contract might meet all the above-described requirements, but if one or both parties are incompetent or not legally qualified to form a contract, then it becomes unenforceable.
Besides the above highlighted basic requirements, there is another set of factors that can be useful in case either party has to prove a verbal contract exists. Firstly, during the creation of a verbal contract, it is good to have a witness present. Secondly, the parties can create or preserve any physical evidence associated with the agreement, such as letters, receipts, emails, et cetera. Lastly, it is worth noting that oral contracts operate best when there is a tangible end result that can prove its terms were carried out. For instance, an oral contract to sell or buy a given product or service (Snyder & Burge, 2017). Consideration of these aspects can prove significantly useful for proof and future testimonial purposes in case of a breach.
Another issue that affects the enforceability of oral contracts is the Statute of Frauds, which was established to prevent fraud. The statute dictates that certain types of contracts must be in writing to be enforceable. These contracts involve agreements dealing with land, marriage, paying off debt, property transfer, contracts lasting more than one year, real estate leases, contracts lasting longer than the participants’ lifespan, real estate sales, and property transfer (Monateri, 2017). If an oral contract fits into one of these categories, a court will not enforce the agreement.
Bottom line, an oral contract is enforceable if it meets all the necessary requirements of a contract, including an offer and acceptance, entails a legal subject matter, has complete and clear terms, and there is voluntary consent by both parties (who must be competent and have the legal capacity to create contracts) (Monateri, 2017). However, whereas oral contracts are enforceable, if the terms of the agreement are complex and hard to understand, or one or both parties does not understand whether the contract exists, or the subject matter of the agreement falls under the Statute of Frauds, then it is not legally binding (Snyder & Burge, 2017). Moreover, when a verbal contract breach occurs, it is difficult for the parties to prove that the agreement existed. Often, cases involving breach of oral contracts require proof of performance to show that there was evident reliance on the agreement (Monateri, 2017). For this reason, courts prefer that parties who wish to enter into a contract formalize their agreement in writing.
Often, people misunderstand the scope of oral contract by regarding implied contracts as verbal agreements. However, an implied contract differs from a verbal agreement. An implied contract refers to a legally binding obligation derived from one or more parties’ conduct, actions, or circumstances in an agreement. The contract is assumed to exist, although there is no written or verbal confirmation (Monateri, 2017). For instance, in healthcare settings, it is implied that a practitioner will act in the best interests of a patient. It is also implied that the patient will pay the proper fees for the services they receive. Although there is no written or verbal agreement to these terms, it is implied that both act accordingly.
There exist two types of implied contracts, namely: (1) implied in fact and (2) implied in law (quasi-contract). With implied in fact contract, the contracting parties act in a manner that indicates that they intend to be in an agreement with each other. The health provider-patient interaction provided above is an example of an implied by fact contract. On the other hand, are those agreements that the court is requires to uphold justice by calling for the formation of an implied contract (Monateri, 2017). For instance, if an individual benefits from another person without having legal entitlement, the law will require that the enriched party make restitution to the injured party even if there is no existence of a written or oral contract.
To sum up, oral contracts are enforceable in the US as long as they meet all the requirements for a legally binding agreement. However, their enforceability poses a considerable challenge since it is hard to prove their existence as they are no written proof. Additionally, if a verbal contract subject matter falls in the categories listed in the Statute of Fraud, it is unenforceable. Given the challenge of proof associated with oral contracts, it is advisable to opt for written agreements.