Is a Verbal Contract Enforceable?
The basic rule is that a verbal contract is just as enforceable as a written one, depending upon a few provios (which I will get to in a moment.) To create a contract, verbal or written, you need three things:
1. An offer: An offer has to be clear and unambiguous to create the basis of an enforceable contract. “I would like to buy 100 widgets from you and will pay $1 a unit.” That is an offer. But, “I need about 100 widgets” is not.
2. An acceptance of that offer: “Great, I can definitely get you those 100 widgets at $1 a unit and can deliver them in a week.” Acceptance. “I’ll see what I can do.” Not an acceptance.
3. Consideration – a bargained for exchange, “this for that”: This is the toughest of the three to understand, and it was for us in law school too. Essentially, the idea is that to create a contract, both sides have to agree to give up something. I agree give up $100 and you agree to give up 100 widgets.
But this is not consideration: I say, “Don’t worry about the price, I have extra widgets and will give them to you.” Only one side is making a promise in that case, and the other side is giving up nothing. So, no consideration = no contract.
Onward. If you have an offer, acceptance, and consideration, then you have a valid contract, even if it is not in writing, right?
There is something called The Statute of Frauds which states that certain contracts MUST be in writing to be enforceable. The traditional rule is that these sorts of contracts have to be in writing:
- Contracts that cannot be performed in under a year (e.g., a two-year employment agreement)
- Contracts for the sales of goods over $500 (in the case above, the deal is for $100, so it need not be in writing)
- Contracts for the sale of land.
There will be other provisions in your locale, so again, best to see an attorney.
OK, now we get to the witching hour. Is the contract above enforceable? Yes, but Jim may never see a penny.
Here’s why: There was an offer, acceptance, and consideration. The deal did not have to be in writing. They had a deal, right?
Well, no, according to the customer. There was no “meeting of the minds” here. There is no “agreement” (obviously, because they don’t agree on what the price was supposed to be.) And in any case, how would Jim prove that the customer agreed to $1 a widget? That would be tough. If Jim made some cotemporaneous notes, that would help. If he sent a follow-up email with the deal outlined, that would help a lot. If he had a witness, that would be great.
Another thing that could help his cause is the “conduct of the parties.” If Jim always orders widgets for $1, it would be very unlikely that he would make a special order for less than that amount. A judge might like that argument.
And then again, he or she might not. I always used to tell my clients, “Your odds, once you go to court, are 50-50. Yes, you may have the facts and law on your side, but you never know what a judge will decide. It is a crapshoot to put your fate in the hands of a judge if you can avoid it.”
And there are two ways to avoid it, two lessons to be learned:
First, as the old legal saying goes, “verbal contracts aren’t worth the paper they are written on.” Always get your deals in writing. Always, always.
Second, lawsuits are usually expensive, cumbersome, depressing vehicles for resolving disputes.
Beware the lawsuit, and beware the verbal contract.
Steve Strauss is a senior small business columnist at USA TODAY and author of 15 books, including The Small Business Bible.