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Verbal Agreements: Are They Enforceable?

What do you usually do when you get into a verbal agreement with someone? You shake hands. Interestingly, the handshake was believed to have begun as a peaceful gesture to show that neither carried any weapons. Today, handshakes are used for greeting, congratulating, showing gratitude, or to form an agreement. However, in our litigious society, does the handshake—particularly a person’s word—still mean anything? Are verbal agreements still enforceable?

Yes it is. Verbal agreements are actually as binding as written contracts. It needs to have four crucial elements: an offer, acceptance, consideration, and intention to form a legal relationship. If all these are present, then the oral contract exists.

But there’s a catch, of course. First, if either party was at a material disadvantage (i.e. one of them wasn’t fully aware of what he or she was doing and/or was under any undue stress when deciding on the agreement), then revoking the verbal agreement may be justified.

Secondly, like written contracts, you’ll have to prove your verbal agreement in court. To do that, you’ll need to:

  • Provide some witnesses to your verbal agreement. It would be especially helpful if your witness isn't associated with you. But if the witness stands to benefit from the agreement, naturally, the person's statement would be dubious so you'll have to provide another witness or evidence that would reinforce the statement.
  • Show evidence of action to corroborate your verbal agreement. For instance, a cheque you wrote to serve as payment would be undeniable proof that you intended to form an agreement. There is a snag though: for this approach to work, you need to show that the other party also started doing their part of the bargain.
  • Present substantiating proof like e-mails, memos, receipts, faxes--anything that can prove the existence of your oral contract. Even a thank you e-mail can be used to show some form of agreement.
  • Demonstrate your integrity and character to show the court that you're telling the truth in your assertions. Do not lie under any circumstances. Always keep control of your anger and other emotions, especially against the other party.

A couple of oil companies learned about enforceable contracts first-hand when a U.S. court upheld a verbal contract between Pennzoil and Getty Oil. The two agreed to merge, but before any documents were signed, Texaco offered Getty Oil a better price. Because of this, Getty Oil backed out of its deal with Pennzoil and went with Texaco.

When Pennzoil won the lawsuit, it was initially awarded $11.1 billion. An appellate court reduced the amount to $2 billion, but penalties eventually brought the sum back up to $10.3 billion. Unfortunately, all parties concerned didn’t have to go through all of this if everyone kept their word or if there was a signed agreement in the first place.

Take note, however, that while verbal agreements are legally binding (as long as you can prove them), there are still certain exceptions when they are unenforceable. Here are a couple of examples:

  • Consumer credit must always be documented and the consumer must always be given a copy. These are established by law to prevent fraud and protect consumers.
  • For marine insurance to be legally binding, it has to be documented as well.