When does a Verbal Agreement become a Valid Contract?
The idea of entering into verbal agreements conjures up an image of the good old days when a person’s word equated with their honour and was therefore unbreakable. Nowadays, very little real business gets done without some form of written agreement, even if it is just a few words hastily scribbled down on a scrap of paper. Verbal agreements are viewed as a remnant of a past age and few people even believe that they are enforceable in the real world!
However, Samuel Goldwyn’s famous quip that ‘a verbal contract isn’t worth the paper it’s written on’ is not reflective of the true nature of contract law. A verbal contract is a valid contract, barring some exceptions such as agreements involving property or guarantees.
The differences between a verbal contract and a written contract are normally highlighted by the ease in which a claimant will be able to prove what the terms of the contract are or were.
What makes a Contract?
To form a contract, the following four elements are required;
- an offer;
- consideration; and
- the intention to create a legally binding agreement
An offer is a pledge by one party to another, promising to enter into a contract on set terms. It has to be specific, complete and capable of being accepted. Acceptance of the offer must be made unequivocally for a contract to be made (ie there are no further negotiations).
Consideration (either an item or service of value exchanged between the parties) must be present for a contract to occur, as does intention to create legal relations. The courts apply an objective test in determining whether such intention exists. In commercial contracts, there is a rebuttable presumption that the parties intend to bind themselves.
It is not necessary for any of these points to be written down. In some situations, a verbal agreement is not even required: The court may infer a contract based on the conduct of the parties.
The problem with words
The classic problem with verbal contracts is it can be frightfully difficult to prove the terms of the agreement, should a dispute arise.
Judges, despite their formidable intellect, do not have magical powers which allow them to deduce which party before them is telling the truth. It is up to the parties to the agreement to provide the Court with proof a contract was intended, and indeed made.
Get some evidence
If you believe you have a verbal contract with a person or company, then you must provide your solicitor with as much evidence relating to the transaction as you can muster. Emails and texts that refer to the agreement reached, bank statements showing payment being made – these can assist your solicitor in building a case on solid foundations. If you have a witness to the agreement taking place, then ensure you receive a written statement from them.
If you and the other party to the contract are unable to settle and you wind up in court, a judge is likely to take an objective approach and consider the credibility of each party’s claims.
In commercial situations, the court will, if necessary, enforce terms that are standard in the sector or give business efficacy to the terms agreed.
Save the hassle and write it down
The best way to avoid ambiguity is to:
- Have your solicitor create a Head of Terms (HOT) document. This will set out the essentials of the agreement and will be marked Subject to Contract. By setting out the broad principles of the agreement before negotiations proceed, both parties should be spared any surprises when the final contract is presented.
- Mark all communications during the negotiating period as ‘Subject to Contract’ to avoid inadvertently entering into a binding verbal agreement on one or more terms.
- Draft a formal contract that includes a disputes resolution procedure. This can save a great deal of time and money if a disagreement arises.
Although verbal agreements are binding under English law, the cost, stress and energy you need to expend to prove the terms of a verbal contract is likely to be more trouble than it is worth. Investing time and money in a properly drafted contract gives you the surety that your agreement is robust and enforceable.
Although you can draft an agreement yourself, it is better for you to consult a professional who has experience in drafting similar agreements and can give you a heads up on what to look out for and what to avoid. There are several factors that we often forget when drawing up an agreement and it is important that all pertinent details are recorded so that there is little or no ambiguity in the agreement, especially in the event of a dispute.
Saracens Solicitors is a multi-service law firm based in London’s West End. Our commercial litigation team can advise both businesses and individuals on UK contract law. To find out more, please phone our London office on 020 3588 3500 to make an appointment with one of our Solicitors.