Basics of Oral Agreements
Contracts are divided into two main types: written contracts and verbal contracts. Some contracts in California must be in writing, for which failure to comply can result in the contract being unenforceable. An example of such a contract is a landlord-tenant lease. Most contracts, however, are either partly or wholly oral. A resulting question is whether verbal contracts are enforceable in California.
In California, oral contracts are enforceable unless the law specifically requires that a contract be in writing. Generally, an agreement will not be enforced simply because it is not in writing. There are a few exceptions to this rule: The Statute of Frauds is a California statute that specifies the types of contracts that must be in writing in order to be enforceable . In addition to material contracts such as those above for the sale of goods over $500 and those for the transfer of real property, there are some contracts that need not be in writing in California. For instance, an agreement that "by its terms is not to be performed within a year from the making" need not be in writing in order to be enforceable.
In the absence of a specific provision of law requiring otherwise, a verbal contract is binding if the parties to it have agreed upon all the essential elements of the contract: the parties, price, subject of the contract, time of performance, and other requirements of the contract. Generally, where all these factors have been agreed to by the parties, any differences that may remain do not negate the oral agreement.
Enforceability of Oral Contracts in California
Verbal contracts are legally binding in California, but under certain circumstances. Specific contracts fall under the statute of frauds. Oral agreements not covered under the statute of frauds are legally binding under California law.
Business Arrangements Covered by the Statute of Frauds
The statute of frauds requires a written agreement if it pertains to one of the following subjects:
Under California Civil Code Section 1624, contracts involving the sale of goods and services valued at more than $500 are also excluded from being enforceable unless in writing.
Other kinds of transactions that exclude a verbal contract may include contracts dealing with real estate – even if they relate to a lease or rental agreement. If a verbal contract for the sale of goods or services is for an amount beyond the mandated limit of the statute of frauds, it is not enforceable unless in writing.
What This Means
Verbal contracts are generally the same as written contracts, but there may be problems in California if the contract value is $500 or more. If this is the case, then a party may find it difficult to enforce the oral agreement unless the contract is in writing. There are very few exceptions to the statute of frauds.
It should also be noted that if a verbal contract is not legally binding, both parties cannot avoid their obligations. A breach of a verbal contract could still result in litigation like any other broken agreement.
When Oral Contracts are Enforceable
Even though California recognizes verbal contracts, these oral agreements are only legally binding when they include a set of conditions. First, an offer must be made, which the other party finds acceptable. Second, some form of consideration must exist. Consideration is the term for the price of a good or service exchanged as part of the terms of the contract. A verbal contract is also legally valid if the terms of agreement are mutual across both parties, meaning that both end up with an equal commitment to the same contract.
Limitations and Exceptions
There are some limitations and exceptions when it comes to verbal contracts in California. The primary limitation is that certain agreements are required by law to be in writing and signed. In California, these laws are called the Statute of Frauds. The Statute of Frauds denies enforceability to certain contracts unless that contract is in writing and signed by the party to be charged or their authorized agent. The Statute of Frauds only applies to executory contracts; meaning, it applies to contracts that have not yet been performed. Under California Civil Code section 1624, the following categories of agreements are subject to the Statute of Frauds: As you can see, both of these categories apply to different types of agreements. An example of an agreement that would fall under the first provision would be a new car purchase. The seller would be required to sign the sales contract and the buyer would be required to sign a number of documents; both of them would be required to keep copies of those documents. An example of a second provision requiring a written contract would be for a relationship between an employer and an independent contractor who is to perform work that is not completed within 1 year. Although many of the contracts are for well under $500.00, the 1 year provision would still require a signed contract, such as a handyman or a personal chef. There are two important exceptions to the statute of frauds that apply to verbal contracts: One example of an express agreement exception would be a franchise agreement. In this case, the franchise to be entered into is the same as the franchise previously entered into or is of essentially the same position in relation to the same franchisor. (California Civil Code section 1624(d)) An example of an implied agreement exception would include an agreement that is used to prevent fraud and by which the buyer of real property has paid part or all of the price and the seller may treat any payment already made as a credit on the balance.
Challenges in Upholding Oral Contracts
Despite having the potential to be legally binding, verbal contracts are much harder to prove, enforce, and defend than their written counterparts. If you have found yourself in the unfortunate position where an alleged contract is being challenged, or you are being accused of breach of contract in a California Court, it is important to seek out the advice and assistance of a California business litigation attorney who can help you understand what your options are and how to best proceed.
Challenges to Proving a Verbal Contract
A verbal contract can be hard to prove when it is not done in front of any witnesses, as words alone are difficult to remember after the fact. Even if there were witnesses present, they need to have enough recall of the conversations that they can testify to them with specificity in court. In most cases, a contract will be hard to prove unless there is some sort of documentation or materials that help back up the claim that a contract was verbally formed and breached. Examples of these items could include: Additionally, even if the items above can be produced, witnesses may be needed to assist in providing the context for this evidence. This is not only because people are generally poor recollectors , but also because witnesses can help provide insight into the relationship between the two parties. In other words, if the actions of the defendant show a pattern of behavior contrary to what the contract indicated, a witness may be called to help provide that context to the judge or jury. This is even more likely to be the case if the case becomes complex and there are mutual allegations of breach of contract or claims of fraud.
Challenges Faced In Defense of a Breach of Contract Action on a Verbal Contract
In assisting clients with challenging a breach of contract lawsuit involving a verbal contract, we have noticed some common issues that can lead to difficult circumstances. These issues include the following: Unfortunately, even with the above problems being present, it is still possible for a judge or jury to find sufficient cause for the breach of contract action and impose liability to pay monetary damages on one or both of the parties. Because of this possibility, it is important to recognize the common deficiencies in verbal contract arrangements and to seek out the help of an experienced attorney that can help you avoid or remedy these issues.
Avoiding Disputes with Oral Contracts
To reduce the risk of experiencing disputes, the best practice is to document all agreements in writing. However, that does not mean parties cannot agree to certain obligations verbally. If you choose to enter into a verbal agreement, it is important that you take comprehensive steps to document and memorialize these agreements as soon as possible in order to prevent misunderstandings throughout the business relationship.
For example, it is common for parties to use follow-up emails and text messages to summarize the agreed-upon terms. Emails and text messages are recommended, because they can be easily added to your files. Updating and printing your notes in a notebook or even writing them down on paper and making an email request for the other party to let you know if there are any mistakes can also be effective.
If all parties who participated in creating the verbal agreement are not present at the same time, it is crucial to take separate notes that express the same basic terms and requirements of the agreement, so you have documentation to determine what the parties in attendance at the meeting specifically agree upon if a disagreement arises later. If one party agrees to terms but the others do not respond, the party who initially makes the agreement should follow up with the parties who are not physically present to make sure that no misunderstandings are created.
In addition, it is important to make sure that the information you provide is clear. Vague summaries could create confusion in the future. Even if you do not have a formal written contract, when you memorialize the verbal agreement, it must be substantially complete.
Most importantly, don’t assume that you are free from liability if you and the other party were merely "joking" when creating the verbal agreement. If you can establish the existence of a verbal agreement, you could be legally bound even if you intend to perform under the agreement as a joke, or if you believe the other party was "joking" too.
Consulting an Attorney
Without a written contract, the risk of misunderstanding and dispute becomes more likely. If you find yourself in a verbal contract dispute, your first step should be to schedule a session with an attorney to discuss your case. With a professional advisor in your corner, you can gain a much clearer understanding of your rights and obligations and receive guidance on how to better protect yourself and maximize your interests. Furthermore , while many people falsely believe that contracts are only legally binding when executed in California, this is not the case. It is common for a written contract to fail to conform to the requirements of contracts law. A professional attorney will help you determine whether you have a legally binding verbal contract, written contract, or no enforceable contract at all.