An Introduction to Verbal Contracts
"Verbal Contracts" may also be known as spoken, oral, and other synonyms. This all generally means the same thing, and describes an agreement that is not in writing, but instead is expressed only verbally.
The law generally recognizes the presence of a verbal contract, however they are subject to certain rules and limitations, including the following.
Of course , any contract that does not fall under a specific exception to the statute of frauds usually constitutes a verbal agreement.
Therefore, a verbal agreement is almost always enforceable in Texas if it is not subject to the statute of frauds. However, just because verbal contracts are generally enforceable, does not mean that they are easily enforceable-quite the opposite. Rather, they are often difficult to prove.
The Legal Standing of Verbal Contracts in Texas
Texas courts generally recognize the enforceability of verbal contracts, though there are certain types of contracts that require a writing to be enforceable – such as real estate sales and transactions valued at $500.00 or more. The Texas Statute of Frauds disallows the enforcement of these types of contracts unless they are reduced to a signed writing by the party sought to be charged. There are also certain exceptions to the writing requirement for example, a promise made in consideration of marriage does not require a writing to be enforceable.
In many cases, parties may execute a written contract yet neglect to include some agreement reached by the parties prior to or after the execution of that document or do not follow the requirements for a written contract. When this occurs, the parties may dispute the enforceability or existence of an agreement. The courts will look to evidence of the parties’ intent to determine whether the alleged oral contract is enforceable.
Benefits and Pitfalls
The main advantage of a verbal agreement is the instant nature of the communication. Parties do not have to spend time and money preparing a written document. Because verbal agreements do not require the same formalities and time requirements as written ones, businesses and individuals can make contracts almost instantly.
Verbal agreements are also more flexible than written ones. The language of a written contract tends to be rigid, and the rules governing contract enforcement in Texas might require specific language to obtain the intended effect. In contrast, the language of a verbal agreement can be as intuitive and specific as parties want it to be.
While verbal contracts have their advantages, there are many risks involved in relying on them. Without a written document, it can be difficult to prove that the terms agreed to by the parties match the terms the parties claim to have agreed to. For example, let’s say Joe agrees to in writing to sell his restaurant to Ace Hardware for $300,000 with an additional $10,000 in escrow in the event that Joe doesn’t leave the area for an entire year after the sale. Ace Hardware sues Joe for breach of contract after Joe refuses to go through with the transaction. Joe, however, doesn’t think he owes Ace Hardware any money. Joe claims the deal was actually done verbally and that the written agreement is inaccurate. Furthermore, Joe claims he only agreed verbally to a $300,000 purchase price but that he never agreed to go into escrow. What does Ace Hardware do? Who is telling the truth? This is the problem with relying on verbal contracts: they are usually murky when it comes to the details.
Additionally, verbal agreements often have different rules than written contracts. For instance, for many types of contracts, a party must follow a certain procedure before they can sue the other party if the other party breaks the contract. This procedure is known as "notice." Written contracts often have a notice provision stating that a party must give the other party notice that they broke the contract, and that the party suing must wait a specific period of time before they can start a court case. A verbal agreement may not require a party to follow this procedure. Most importantly, however, when a party agrees verbally to sell or give a gift of a piece of real estate, depending on the circumstances, they may not be able to enforce the agreement. This issue is addressed in more detail elsewhere in this article.
Finally, some oral contracts do not hold up if the statute of frauds applies. The statute of frauds is a group of laws that requires some types of contracts to be in writing. A written contract will always prevail over a verbal contract if both parties intend for the written document to be the final agreement. While many outside of the legal context dismiss the concept of "intention," whether a party wrote something down explicitly or verbally communicated it is crucial to a contract dispute.
Common Myths
Several common myths surround verbal contracts, which can mislead people and potentially lead to costly mistakes. Let’s clarify a few of them: A verbal agreement is legally binding. While verbal contracts can form a legally binding agreement between parties, there are a number of exceptions that can make a verbal contract hard to enforce. For example: Verbal agreements are difficult to enforce. Texas courts do not allow oral testimony to prove the existence of a contract. As such, it is difficult to enforce verbal contracts in Texas. One of the best ways to avoid dealing with a verbal contract is to enter a written agreement from the start. Verbal contracts are the same as a handshake agreement. Unfortunately, "handshake agreements" have become synonymous with verbal agreements. However, handshake agreements are a type of verbal contract that have specific requirements for enforceability in Texas: Verbal Contracts have to be in writing to be enforced. While it is true that many verbal contracts can be enforced even if they are not in writing, certain types of contracts must be in writing to be enforceable in Texas.
Enforcement Problems
Verbal contracts can present a host of challenges when it comes to enforcement, especially if the agreement is worth more than $500.00. Under the Statute of Frauds, agreements for the sale of goods of $500.00 or more must be reduced in writing and signed by the party being sued under the agreement in order to be enforceable. Be prepared to argue this defense if you are defending a breach of contract case that is based upon an alleged verbal agreement of this amount.
And enforcement issues can be magnified when the contract is allegedly oral. Why, you may be wondering? Well, let’s look at it this way—what happens when verbal contract enforcement issues are magnified? First, let’s say that in defending a breach of contract lawsuit, you raise the Statute of Frauds defense that the contract was not in writing. The plaintiff believes that he or she has a "signed" writing that will satisfy the Statute of Frauds and defeat your defense. However, upon closer inspection of the alleged writing, you may find that the writing is not signed at all, but rather is an email or a series of emails that refers to the deal that the plaintiff says he or she closed on the phone.
But since there is no signature on the email or emails, you need to show that the alleged writing actually contains your client’s signature. If you and the other party have been communicating via email and/or text messages, the content of those messages may actually help you identify your client’s signature on the documents at issue.
And let’s say that you prevail on a motion for summary judgment on the plaintiff’s breach of contract case but not on the plaintiff’s claim for money damages based on unjust enrichment (which does not require a signed writing under the Statute of Frauds) . The plaintiff moves for reconsideration and submits a purported record contract that is signed by both parties that negates his unjust enrichment claim. In response, you submit a series of emails and text message conversations that occurred over the course of several months pointing to the fact that the purported contract could not have been executed.
Or let’s talk about credibility issues that may arise in a verbal contract case. When only two people know the terms of a verbal contract, courts are left with he said-she said disputes regarding the terms of the contract. Thus, evidence regarding the credibility of the parties is often central to these cases. For example, in Lake Airlines, Inc. v. Ives, a 2008 Amarillo Court of Appeals case, the court found that no enforceable contract existed and affirmed summary judgment on the plaintiff’s claims after finding that the opposing party had a history of lying. Similarly, in Sheshtyn v. Myers & Assocs., LLC, a 2014 Dallas Court of Appeals case, the court considered parties’ credibility as part of the summary judgment evidence on the contract claims and found that summary judgment was appropriate even though there were disputed facts in regards to the oral agreement.
As the above examples illustrate, many factors can complicate the enforcement of verbal contracts in Texas. With this in mind, even though oral contracts are valid in Texas, drafting a written and signed contract that includes all of the material terms of the deal is preferable. It just makes things a whole lot easier down the line.
Securing Verbal Agreements
When it comes to best practices in professional and personal dealings, there are several steps that individuals and businesses can take to better secure a verbal contract and further protect themselves in the event of a breach. First, if you intend to rely on a verbal agreement with another person or business, try to make your agreement as detailed as possible. The more information included in the verbal agreement, the less room for miscommunications on key factors such as price, job requirements or timeline. Second, document the verbal contract as soon as possible, so that both parties have a record of what the contract entails and its expectations. Third, provide for a witness to the verbal contract – whether it be a mutual friend or acquaintance, business partner, co-worker, etc. This person does not necessarily need to know what all aspects of the contract entail, but should be able to testify to the making of the verbal agreement if needed. Fourth, secure a stipulation in the verbal contract that requires disputes to go through arbitration rather than through litigation, which makes pursuing breach claims much more efficient and cost-effective. Finally, where appropriate, be sure to formally follow up with a written contract/revisions to the verbal contract – the latter of which is acceptable under Texas law to modify the terms of the agreement as long as the intent of the parties to modify the verbal contract is clear.
Reach Out for Legal Help
Our legal blog doesn’t dispense legal advice. It’s a general information source to teach business and land owners about our Texas real estate laws, and how these laws may apply to your specific situation. In commercial real estate transaction law (my specialty), verbal contracts are common. Understanding the nature of verbal contracts in Texas is very important for business owners and land buyers.
Our law firm, as well as every other reputable business transactions or real estate law firm in Houston Texas or elsewhere in the State of Texas gets calls from folks who say they need legal advice on a verbal contract. These are generally people who have a situation which have "gone south" and they need to know whether they can enforce the verbal agreement. As a practical matter, there are fewer verbal agreements today, than there were 10 or 20 years ago . Why? Because people want to have a written agreement to clearly define the respective rights and responsibilities of the parties, and so everyone knows what the contracting parties agreed they should do or not do. Having a written agreement reduces the potential for a misunderstanding.
At some point, you will want to consult with a business law attorney about enforcing or disputing a verbal agreement, or at least to determine your rights and responsibilities under the verbal agreement. Some of the more common circumstances where it make sense to seek legal counsel regarding a verbal contract include: For both parties to a verbal contract, it is advisable to keep a record of key details of a verbal agreement while the contract terms are fresh in the memory of the verbal contracting parties to it. This record can be helpful in an enforcement action or in a dispute to rebut another party’s contrary account of verbal contract terms.