What Is an Oral Contract?
An oral contract is a type of business contract that is outlined and agreed to via spoken communication, but not written down. Although it can be difficult to prove the terms of an oral contract in the event of a breach, this type of contract is legally binding.
Key Takeaways
- An oral contract is a type of contract that is agreed to via spoken communication, but not written down and signed.
- Oral contracts are legally binding but can be difficult to prove in a court of law.
- The enforceability of oral contracts depends on the jurisdiction as well as the type of deal.
- It is recommended that oral contracts only be used for simple deals whereas written contracts should be used for more complex deals that include a lot of information.
Understanding Oral Contracts
Oral contracts are generally considered as valid as written contracts, although this depends on the jurisdiction and, often, the type of contract. In some jurisdictions, some types of contracts must be written to be considered legally binding. For example, a contract involving the conveyance of real estate must be written to be legally binding.
In some cases, an oral contract can be considered binding, but only if it’s evidenced by a written contract. This means that once the oral contract has been agreed upon the parties must write down the contract terms. Other evidence that can be used to bolster the enforceability of an oral contract includes the testimony of witnesses to the creation of the contract.
When one or both parties act on the contract, this too can be construed as evidence that a contract existed. Furthermore, letters, memos, bills, receipts, emails, and faxes can all be used as evidence to support the enforceability of an oral contract.
A famous example of the enforceability of an oral contract occurred in the 1990s when actress Kim Basinger backed out of her promise to star in Jennifer Lynch's film Boxing Helena. A jury awarded the producers $8 million in damages. Basinger appealed the decision and later settled for a lower amount, but not before having to file bankruptcy.
When Oral Contracts Fall Apart
Oral contracts are best used for simple agreements. For example, an oral contract to trade a used lawn mower for a used clothes dryer need not require much detail. The simpler the contract, the lower the chances that the parties involved will need to go to court.
But more complex contracts, such as those for employment, typically should involve written contracts. Complex oral contracts are more likely to fall apart when held up to the scrutiny of a court, usually because the parties can’t reach an accord over the finer points of the agreement.
Is an Oral Contract Enforceable?
Generally, yes, an oral contract is enforceable even though it may be difficult to prove. The enforceability of oral contracts also comes down to the jurisdiction in which a contract may be contested and the type of agreement the contract relates to.
What Makes a Valid Oral Contract?
A valid oral contract consists of an offer, usually a price or a promise for some action to be taken, and an acceptance; an agreement accepting the offer in exchange for payment or service. There need not be more information involved in an oral contract than just the offer and the acceptance of that offer.
What Are the Disadvantages of Oral Contracts?
The primary disadvantages of oral contracts are that they are difficult to enforce, may lead to confusion and error, or the outcome may be inconsistent with what was agreed upon. Because oral contracts are made through spoken word, they can be difficult to enforce in a court of law if one party backs out or does not complete their end of the deal in an acceptable fashion. The disadvantage of all oral contracts is the increased level of risk in the contract.
The Bottom Line
Although oral contracts are legally binding, they can be difficult to prove in front of a judge. It is recommended that all contracts be written down and signed by all parties to remove any confusion that could possibly arise later.
