Are Written or Verbal Contracts Legally Binding and When Should You Use Each?

Contracts are fundamental in establishing trust in a transaction or service exchange. They help define the terms of the agreement, clarify each party's obligations, and set protections for dangerous scenarios.

Everyone is familiar with written contracts but knows much less about the legality and mechanics of their verbal counterparts. Those who heard about verbal contracts often consider them a poor man's substitute for the real thing. However, both have their place in governing relationships.

What Is a Written Contract?

A written contract is a formal and binding agreement. The contract must be documented in a legally acceptable manner, digital or physical, and include clear evidence of approval from both parties. A contract does not always require signatures.

Additionally, not all written contracts are complex documents filled with legal jargon. Some contracts are simple email exchanges or written on a napkin at a lunch meeting. These contracts can be as simple or complex as the drafters want.

However, simple contracts tend to be easier to get out of if things go wrong. Lengthier contracts more clearly specify each party's roles and rights in a partnership. They also create guidelines for handling disputes and serve as evidence in court.

Written contracts are utilized in various transactions, such as business deals, employment agreements, rental leases, and credit payment plans.

What Is a Verbal Contract?

A verbal contract is an agreement created through oral communication, often called a spoken contract. These contracts do not have a written component, which makes them a riskier tool for parties lacking a close relationship.

Verbal agreements are best utilized in simple deals in which the parties aren't severely punished for their counterpart backing out. Some use cases for a verbal contract include holding items at a yard sale, hiring for minor yard work, or lending a small amount of money to a trusted family member.

Are Verbal Agreements Legally Binding?

Depending on the jurisdiction, a verbal contract has the same legally binding power as a written one. According to the statute of frauds, the validity of a verbal contract may also change based on its content.

This legal principle does not allow verbal contracts in high-stakes exchanges that could lead to excessive or malicious injury to one party. For example, most states do not recognize verbal contracts in real estate contracts or prenuptial agreements.

During a contest, verbal contracts can be supported by evidence such as emails, receipts, or other communications. The goal is to prove that one or both parties acted according to the verbal contract's alleged terms.

Key Legal Principles Governing Verbal Agreements

Verbal contracts must exhibit the elements of a valid contract to be recognized in court. The contesting party must prove the agreement included the following aspects:

• Mutual Consent: Both parties agreed to the terms of the contract with clear signs of acceptance. This can be proven by showing that both sides took actions in line with the contract, such as depositing money or buying necessary materials for a job.
• Consideration: There must be a clear value exchange between the parties, such as money, property, services, or any other promise.
• Capacity and Awareness: Both parties must fully understand the obligations and consequences outlined in the agreement. They must also be of sound mind when entering into the contract without signs of duress or misrepresentation of the terms.
• Legality: The agreement and exchanged value must comply with all legal statutes. For example, a contract for exchanging illegal goods will not be upheld in court.

Pros and Cons of Written vs. Verbal Contracts

Contract Type	Pros	Cons
Written Contracts	Clear source of evidence for disputes Easier to enforce in court Prevents misunderstandings with precise language Outlines specific terms and obligations	Can be time-consuming to draft May require legal professionals Less flexibility once signed
Verbal Contracts	Quick and easy to agree More flexible and informal No paperwork required	More difficult to prove in court Higher chance of misunderstanding the terms Unavailable for certain types of agreements Risk of forgotten terms during fulfillment

Can a Verbal Agreement Override a Written Contract?

Yes, a verbal agreement can modify or override an existing written contract. However, parties will want to officially alter the written contract to avoid future disputes and misunderstandings.

If a problem does arise, the contesting party must prove that the modifications met the legal standards of a contract, including acceptance, consideration, and awareness. It would also greatly help if the party could prove that both sides acted in accordance with the modification.

Most business contracts include a "No Oral Modification" clause to avoid accidental contract modifications. While this clause isn't an ironclad measure, it does make verbal modifications significantly harder to argue in court.

Legal Considerations When Choosing a Contract Type

Selecting the right contract type depends mainly on the seriousness of the exchange. Some people may believe a verbal contract is sufficient when dealing with a trusted contact. The countless number of nightmare divorce stories prove this point wrong.

When to Use a Verbal Contract

Verbal contracts are suitable for informal or low-risk exchanges. Arrangements like hiring a neighborhood teen to mow the lawn or buying baseball cards at a garage sale are perfect opportunities to enter into a verbal contract.

Most people don't even consider these situations as a contract. They are just going through their daily lives, and the interaction doesn't cause abnormal stress or incur a serious risk for either side. These are safe environments.

Additionally, verbal contracts are helpful for contracts requiring flexibility or leniency. It is much easier to back out of a verbal contract without the other side pursuing legal action.

Things do not change when dealing with a close friend or family member. In these cases, an unclear verbal contract can lead to arguments that destroy the relationship and lead to contentious court cases.

When to Use a Written Contract

Exchanges that, if broken, could lead to financial, emotional, or physical injury should be backed by a written contract. In short, if you care about the result of an exchange, you should get the terms in writing.

For example, renters rely on lease agreements to ensure safe and reliable housing. This written contract describes the rental duration, living conditions, amenities, unit price, and consequences for violating the agreement.

This contract protects both the renter and the landlord from unfair treatment. Without this agreement, renters could be thrown out for any reason, and landlords may have their property altered or damaged.

Exchanges containing the following aspects should always include a written contract:

• High-Value Assets: Financial deals involving significant funds, real estate, or business transactions require written contracts. This provides greater clarity and enforceability in court.
• Long-Term Commitments: Employment contracts, lease agreements, or repayment plans should be governed by written contracts. People plan their lives around these assurances and face significant risk if those fall through.
• Complex Terms: Many contracts outline changing obligations depending on the outcome of certain events. This complexity is best explained through writing, allowing the parties time to agree on every point.

How to Prove a Verbal Agreement in Court?

While challenging, proving a verbal agreement is far from impossible. Contract disputes are civil proceedings requiring a standard of proof called "the preponderance of evidence." This term means that the court must believe one argument is more likely to be correct.

So, even without an official contract, any proof is useful if it shows that the other party acted as though the agreement existed. The goal of evidence is to make the contract's existence more plausible rather than explicitly prove it.

For example, a contractor might verbally agree to use a specific type of glass on the windows and doors. However, they cannot obtain enough material and only follow through on half of the windows.

The homeowner can show that the contractor's use of special glass in some areas points to the existence of the verbal agreement. The party arguing for the verbal agreement must likely stack several examples to make their case.

Other Evidence Required for Proving a Verbal Agreement

Many types of evidence can support a verbal agreement. The content in digital correspondences can strongly suggest a contract. Emails and text messages can show the parties confirming details, and money transfers can indicate a completed exchange.

Parties may also rely on witness testimony. Potential witnesses can testify that they saw the deal's formation or recount conversations with the defendant that show recognition of the terms.

If available, audio or video recordings of conversations are highly effective. However, each state has different laws about recording without the other party's knowledge, which will affect the admissibility of evidence.

Challenges of Enforcing Verbal Agreements

Verbal agreements are useful for small and informal contracts but notoriously difficult to enforce in court. This is because there is no documented record of how each party understood the terms or if the agreement existed at all.

Additionally, it's not enough to prove the agreement exists. The complainant must also show that both parties interpreted the terms in the same way. A contractor may believe they fulfilled the verbal agreement's terms, even if it wasn't what the other party imagined. This built-in ambiguity means the complainant must produce evidence of a shared understanding for every point in the agreement.

Deciding between written or verbal contracts is about weighing the value of convenience against protection. Verbal contracts are flexible and convenient but also vague and difficult to enforce. They are ill-suited for complex agreements where one party has a lot to lose.

On the other hand, written contracts are harder to draft but provide increased clarity and access to judicial recourse. Both parties understand their obligations and face significant pressure to adhere to the contract's terms.

Both contract types have their place, but understanding where to use them can save people from financial and emotional distress.