Oral Contract Requirements and Validity

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 What is an Oral Contract?

An oral contract is a legally binding verbal agreement between two or more parties.

Similar to a written contract, an oral contract involves the parties agreeing to undertake or abstain from certain obligations. However, unlike written contracts, oral contracts rely solely on spoken words, making it difficult to provide concrete evidence of their existence other than through the testimony of the involved parties or witnesses.

Courts generally prefer written contracts as they provide clear evidence of the agreement and the intentions of the parties involved. Having a written contract can be especially helpful in resolving disputes that may arise in the future.

What are the Requirements to Form an Oral Contract?

Several requirements must be met to form a legally binding oral contract:

  1. The contract’s terms must be valid and legally enforceable.
  2. The contract must include essential elements such as offer, acceptance, consideration, and a “meeting of the minds” (mutuality).
  3. The oral agreement must not violate any laws or regulations that prohibit oral contracts, such as those falling under the Statute of Frauds, which requires certain contracts to be in writing.

Although not strictly required, the following factors can help prove the existence of an oral contract:

  1. Having witnesses present during the formation of the oral contract to provide proof and future testimony.
  2. Creating or preserving physical evidence associated with the oral contract, such as emails, letters, receipts, and other documents.
  3. Ensuring that the oral contract produces a tangible result when its terms are executed, such as an agreement to buy or sell a service or product.

What are Other Important Elements of an Oral Contract?

All parties involved in an oral contract must possess the competency and legal capacity to enter into a valid agreement. A court may not enforce an oral contract if one or both parties lack competency or legal capacity.

Examples of situations where parties may be deemed incompetent or lacking legal capacity include:

  1. If one or both parties were under the influence of alcohol or other incapacitating substances.
  2. If one or both parties were below the legal age to form a contract (usually 18 years of age, but this may vary by state).
  3. If one or both parties are mentally incompetent.
  4. If one or both parties are under duress or experiencing undue influence, which could impair their ability to make a voluntary and informed decision.
  5. If one or both parties are facing a significant language barrier, preventing them from fully understanding the terms and implications of the contract.
  6. If one or both parties have a severe cognitive impairment or a medical condition that affects their ability to comprehend and make informed decisions.
  7. If one or both parties are involved in fraudulent activities or misrepresentations, which could impact their ability to enter into a valid contract in good faith.
  8. If one or both parties are declared bankrupt, which might affect their legal capacity to enter into contracts involving financial obligations.
  9. If one or both parties are subject to legal restrictions, such as a court order or probation, that may limit their ability to enter into certain types of contracts.
  10. If the contract involves an illegal purpose or activity, which renders the agreement void and unenforceable, affecting the parties’ capacity to enter into a valid contract.

What is the Statute of Frauds?

Another issue that often arises with oral contracts is the Statute of Frauds, which requires certain types of agreements to be in writing.

If an oral contract involves a subject matter that must be in writing according to the statute, it will not be legally binding. The subject matters covered by the Statute of Frauds will be discussed further below.

Can Verbal Contracts Be Legally Binding?

Verbal contracts can be legally binding if they meet the same requirements as written contracts, including:

  • Offer and acceptance.
  • Legal subject matter.
  • Complete and clear terms.
  • Voluntary consent from both parties.

However, if the terms are complex and difficult to understand, the parties are uncertain about the existence of a contract, or the contract involves a matter that falls under the Statute of Frauds and must be in writing, the oral contract will likely not be binding.

When are Oral Contracts Unenforceable?

An oral contract may be unenforceable if its subject matter falls under the Statute of Frauds, which requires certain contracts to be in writing and signed.

Examples of contracts that must be in writing include:

  • Consideration of marriage, including prenuptial and postnuptial agreements.
  • Sale of goods above a certain value (usually $500, but this may vary by state).
  • Transfer or sale of land ownership.
  • Contracts that cannot be fulfilled within a year.
  • Promises to pay another’s debt (“surety contracts“).
  • Executor agreements to satisfy the debts of a decedent.

What is a Breach of a Verbal Contract?

A breach of contract occurs when one party fails to fulfill their obligations under the agreement. In the case of an oral contract, the non-breaching party must demonstrate not only the existence of the contract but also that the other party breached its terms.

Proving the existence of an oral contract can be challenging, often requiring evidence of performance by one or both parties to show clear reliance on the agreement.

For example, if Party A verbally agrees to sell Party B a textbook for $400, and Party B accepts the agreement and sends $400 to Party A, but Party A does not deliver the textbook and keeps the money, Party A has breached the oral contract. Party B may then sue Party A for breach of contract to recover the cost of the undelivered textbook.

Breaches of oral contracts are treated similarly to breaches of written contracts, with the primary difference being the difficulty in proving the existence of the oral contract.

What Should I Do If I Want to Sue for Damages for a Breach of the Oral Contract?

Suing for damages in the case of a breached oral contract can be challenging due to the difficulty in proving its existence. However, if the non-breaching party has clear proof, such as reliance on the agreement, witnesses who were present when the agreement was made, or documents that demonstrate the agreement’s existence, they may consider pursuing legal action.

If the non-breaching party believes their oral contract is valid and legally enforceable, they should consider suing the breaching party. If unsure, they should consult a contract attorney for assistance.

Suing for a breach of an oral contract may have various consequences, including arbitration or mediation, payment of legal costs, remedying the situation without legal counsel, and potential loss of business contacts, customers, or personal relationships.

Ultimately, suing for a breach of an oral contract is only worthwhile if there is sufficient evidence to support the claim, clear reliance on the agreement, and if the oral contract is enforceable. Regardless, the non-breaching party should consult a lawyer to explore all options for recovery.

Do I Need a Lawyer If Someone Breaches an Oral Contract?

If you believe another party has breached the terms of an oral contract, first try to communicate with them and resolve the issue. If they refuse to discuss the matter or a resolution cannot be reached, consult a local contract attorney for guidance.

A lawyer can explain your legal options, help you prepare your case, gather evidence, file necessary legal documents, and answer any questions you may have. They can also represent you in court if necessary.

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