Introduction

In today’s fast-paced world, the reliance on quick, oral agreements is often a necessity in both personal and professional settings. While the simplicity and speed of verbal agreements can be appealing, it’s crucial to understand their legal implications.

This article explores the legal framework surrounding verbal contracts, a form of agreement that, despite lacking written documentation, holds significant legal weight. From informal conversations to structured business dealings, verbal contracts permeate various aspects of law, including employment, construction, real estate, and commercial law. Understanding the essentials of a verbal agreement, its enforceability, and practical steps to ensure its validity are key to navigating this often-misunderstood legal territory.

What are Verbal Agreements?

Verbal contracts, also recognised as oral contracts, are legally enforceable agreements established through spoken communication between two or more parties. Typically formed in casual environments, they lack formal written records. Such agreements can be established through face-to-face conversations, telephone calls, or video conferencing.

Although verbal contracts do not necessitate written documentation, it’s crucial to have a clear comprehension of the agreement’s terms. It is important for all parties involved to concur on the fundamental aspects of the contract, which include the specifics of the goods or services being exchanged, the timeframe for their delivery, and the stipulations regarding payment.

Essentials of a Verbal Contract

The fundamentals of a verbal agreement align with those of a written contract, requiring the involved parties to concur on key terms. These essential terms encompass the following elements:

• Offer and Acceptance: This involves one party extending an offer and the other accepting it. The acceptance can be communicated directly through verbal means or indirectly through conduct that implies consent.
• Consideration: All parties must receive something of value, which could be in various forms like money, goods, or services.
• Intention to Create Legal Relations: It’s crucial that the parties involved have the intention to enter a binding agreement, acknowledging its legal enforceability.
• Certainty of Terms of the Agreement: The agreement must have clearly defined and definitive terms, including specifics like price, quantity, and delivery date.
• Competency to Contract: Parties must be competent to enter into a contract. This means they should not be under the influence of substances (like alcohol), facing bankruptcy, suffering from a mental disorder, or be a minor, as these factors can invalidate their ability to legally consent to a contract.

Are Verbal Agreements Legally Binding and Enforceable?

Verbal contracts are indeed enforceable in Australia, though their enforcement in court can be difficult due to the lack of tangible evidence. The legal system treats these oral agreements on par with written contracts. In cases where a party breaches the agreement, the aggrieved party has the right to seek legal recourse and demand damages.

To successfully enforce a verbal contract, it’s necessary to prove that an agreement was indeed made and that the key terms of this agreement were clear and understood by all parties. This proof can be provided through various means, including witness testimonies, electronic communications, or audio recordings. Nonetheless, proving the specifics of the agreement can be challenging without written documentation.

It’s also crucial to recognise that certain types of contracts are legally required to be in writing. These include contracts for the sale of land or land interests, contracts that cannot be completed within a year, and contracts for the sale of goods valued over $5,000. In these instances, a verbal agreement would not be legally sufficient.

Difficulties in Enforcement of Verbal Contracts – Douglas v Mikhael

The recent judgement in Douglas v Mikhael [2023] NSWSC 979 highlights the challenges in enforcing verbal contracts. In this case, the plaintiff alleged two verbal contracts for business profits, but failed to prove their existence, as he solely relied on conversations that supposedly took place in 1999 and 2015. The court emphasised that the burden of proof lies with the person claiming a verbal contract, and the contract must be proven to the court’s satisfaction. Justice Richmond, in his judgment, elucidated several key legal principles pertaining to verbal contracts, which are instrumental in their enforcement and interpretation:

• Burden of Proof: The individual asserting the existence of a verbal contract carries the burden of proving its existence. This means it is their responsibility to present sufficient evidence to support the claim that the verbal contract was indeed formed.
• Proof of Conversation: It is essential to demonstrate the occurrence of the relevant conversation to the court’s reasonable satisfaction. The court must be convinced, or feel an ‘actual persuasion’, that such a conversation took place.
• Binding Nature and Intent: The court must be convinced that any agreement reached had the capacity to form a binding contract and that there was a mutual intention by the parties for it to be legally binding. This assesses both the substance of the agreement and the intent behind it.
• History of the Relationship: The court considers the history of the relationship between the parties involved. This historical context can shed light on the nature of the agreement and the intentions of the parties.
• Conduct of the Parties: The behaviour of the parties both before and after the formation of the alleged verbal contract is relevant. This includes actions and communications that occurred during the time of the contract’s formation and any subsequent conduct that might indicate the terms or existence of the agreement.

This case underscores the difficulty of proving verbal agreements, especially in the absence of a written record or credible witnesses. For commercial entities, relying on verbal or handshake contracts, especially in significant financial transactions, can be risky. Disputes often arise from conflicting accounts, and courts are reluctant to recognise a legally binding agreement without clear proof. The best practice is to draft legally binding agreements in a formal written contract to avoid ambiguity and disputes, ensuring a secure and reliable record of the agreement’s terms, which is crucial in high-stakes commercial dealings. 

Practical Checklist to Ensure Your Verbal Agreements are Binding Contracts

To ensure that your verbal agreements are both valid and enforceable, consider adhering to the following practical checklist. Each step is accompanied by a brief explanation for better understanding:

• Confirm Agreement Details Verbally and Make a Record: After reaching a verbal agreement, verbally reiterate the key points and jot them down. This helps in maintaining a clear record of what was agreed upon, aiding in future reference and clarification.
• Have Witnesses Present During the Agreement: Witnesses can provide independent confirmation of the agreement’s existence and its terms, adding credibility and support in case of disputes.
• Retain Communication About the Agreement: Even if the contract isn’t in writing, keeping a record of related communications (like emails or texts) can provide evidence of the agreement’s terms and the intent of the parties.
• Record Conversations About the Contract: With the consent of all involved parties, recording discussions pertaining to the contract can provide a direct and unambiguous account of what was agreed upon.
• Document Post-Contract Conduct: Keep records of actions taken after the agreement, such as delivery of goods or payments. This conduct can demonstrate the parties’ understanding and acceptance of the agreement terms.
• Maintain Consistency with Any Related Written Agreements: If there are written documents related to the verbal agreement, ensure that both are consistent with each other to avoid conflicts or ambiguities.
• Comply with the Statute of Frauds: Certain agreements, like those involving real estate, must be in writing to be enforceable. Understanding and adhering to these legal requirements is crucial.
• Ensure Essentials of Verbal Agreements are Met: As previously discussed, essentials like offer and acceptance, consideration, and intention to create legal relations must be clear and agreed upon by all parties to form a valid contract.

By following these steps, you can help secure the validity and enforceability of verbal agreements, making them more reliable and less prone to legal challenges.

Key Takeaways – Contact Us for Expert Legal Advice!

Verbal agreements, while convenient, pose challenges in their enforcement due to the absence of written documentation, as highlighted in the case of Douglas v Mikhael [2023] NSWSC 979. It’s crucial to be aware of the legal implications of such contracts. The absence of written proof makes it imperative for parties involved in verbal agreements to be conscious of the legal nuances and obligations that come with such arrangements. Following a practical checklist can aid in ensuring that these agreements are not only valid but also enforceable, thereby safeguarding the interests of all involved parties.

PBL Law Group specialises in navigating the complexities of verbal agreements. We offer expert guidance and legal services to ensure the validity and enforceability of these contracts, protecting your rights and interests. For expert assistance with verbal contracts, contact our law firm today!