It is common in business to agree to something during a conversation. You might meet in person and shake hands on it, or you might agree by telephone.
Whenever you do so, you’ll want to know whether you have created legal relations, and whether you both are tied to your word if a dispute arises.
What is an oral agreement?
An oral agreement is one made verbally, through spoken communication, rather than being written down.
While oral agreements can be legally binding, enforcing them through a court can be difficult.
Do you have a contract?
A contract is an agreement that is legally binding.
In UK law, all contracts must have four elements present. These are:
Offer
An offer is an expression of willingness by one party to enter into a legally binding agreement with another party on certain terms that the first party proposes.
Acceptance
Acceptance is unconditional agreement to the terms of the offer made by the offeror by the party to whom the offer was made. The contract is not subject to further negotiations.
Consideration
Consideration means something of value given by each party to the agreement.
It might be to pay money, transfer ownership of a physical object such as land, allow use of an intangible object such as software, perform a service or even not to do something. The value might be given in the future or have already been given in the past.
Consideration must be sufficient, which means it has some value to the other, but need not be of equal value for each party.
Mutual intent to create legal relations
Mutual intent to be bound means that all the parties involved understand and agree that non-performance of the contract by either of them can be enforced by law.
Do the parties have capacity?
This is related to intention to be bound.
To create a contract, the parties must have legal capacity.
They must be of sound mind and of sufficient age (so as to understand the terms of the agreement reached), and within a business context, have authority from their business (such as being a company director). If a junior employee signs a contract to deliver services, it may not be a valid contract.
Proving a verbal contract in court
To enforce a contract in law, you must prove before a judge first that it existed – that the four requirements of a contract were present and that the parties had legal capacity, and then the exact terms that were agreed.
If the terms are written down and the document signed and dated, there is strong evidence of a contract.
It is more difficult to provide evidence of the existence and terms of an oral contract because being verbal, it tends not to be recorded.
How a verbal agreement might be proved
But there may be ways in which an orally agreed contract can be proved.
There may be a recording of the parties making an agreement.
There may be written messages such as emails or text messages referring to the verbal contract and give details of what was agreed. These will have a date and time that they were sent so that they can be shown to be written after the contract was made.
There may be evidence of performance of the contract. Bank statements may show payments made by one to the other. There may be delivery receipts or evidence created by a third party such as a subcontractor. It strengthens your case if it is the breaching party who has taken the action.
Lastly, you may be able to ask an independent witness to the contract being made to provide a written statement (known as a statutory declaration) to verify the terms.
A judge will take a common sense approach in deciding whether
What should you do if you have a verbal contract?
If you have already made a verbal contract and you are now worried about whether you have legal recourse, then there are two things you can do.
The first is to go back to the other party and ask them to record the agreement in writing to avoid ambiguity. Approach them tactfully. Since the contract is already made, they are under no obligation to do so.
The second is to gather evidence of the pre-existing contract. You might even email the other party and ask them to confirm back to you the key terms.
Before you finalise the contract
If you haven’t yet finished business negotiations, you can ensure that evidence of the terms exists and that you don’t accidentally enter into a verbal contract.
Write ‘subject to contract’ on all written communications. These three words explicitly state that whatever is in the message or document should not be construed as legally binding on either of you.
Use a heads of terms document, which is a high level summary of the most important terms to both of you.
Include a dispute resolution process in the agreement. Usually, this is to engage in a process of mediation or arbitration before going to court.
Lastly, when you are ready to sign, check all the contract terms are incorporated into a written agreement.
Oral agreements that are never legally binding
UK law requires certain types of agreement to be in written form in order to be legally binding.
Transfers of real property (land or buildings) or of company shares must be made by deed, not contract. Deeds must be written.
Certain residential tenancy agreements, such as assured shorthold tenancy agreements and standard occupation contracts, and employment contracts and settlement agreements must be written.