Are Verbal Agreements Enforceable?

Most of us are familiar with the implications of a written contract. However, some people may be surprised to learn that, in Australia, enforceable agreements don’t have to be in writing.

In order for a written or a verbal agreement to be enforceable, it must meet the five essential requirements necessary to form a legally binding contract. Below, we have summarised these five essential elements to help you consider whether or not your verbal agreements are binding.

Element 1: Offer and acceptance

The first essential elements of a binding written or a verbal agreement is an “offer and acceptance”. This element is relatively simple. It demonstrates a readiness of the offeror to be bound to the offer on acceptance by the offeree.

Element 2: “Consideration”

The second necessary element for written or a verbal agreement is “consideration”. Consideration is essentially the motive behind the deal, or what the other party receives in exchange for the verbal contractual agreement. This is often money or services; however, it can range to almost anything. In some cases, “love and affection” have been found to be adequate consideration for a binding agreement.

It is important to note that what the offeror and offeree get out of the agreement doesn’t have to be equal in value for consideration to be sufficient. An offeror can offer their gold watch in exchange for an umbrella, so long as there is some form of consideration. The reason behind this is that it is the role of the judge to determine whether or not there is a legally binding agreement rather than whether one amount, item, thing or action is valuable or not.

Element 3: Intention to enter legal relations

The third element of a binding written or a verbal agreement is an intention to create legal relations. There is a general presumption that agreements made in a commercial context are intended to be legally binding. On the other hand, verbal agreements made in social or domestic context are presumed to be non-binding in nature.

Element 4: Certainty

In addition to the previous four elements, for written or a verbal agreement to be considered binding, they must be shown to be sufficiently certain and adequately complete so that each party’s rights and obligations under the agreement can be discerned and enforced. When it comes to verbal agreements, there are three common certainty issues that often arise:

1. The parties failed to reach a clear agreement on all the essential terms, rendering the agreement uncertain.
2. The terms of the agreement are sometimes found to be too ambiguous for a court to be able to attribute meaning to the agreement.
3. The agreement can be uncertain because the terms allow one party discretion as to whether they perform their part of the bargain.

Element 5: Capacity

In order for a contract to be enforceable, all parties must have capacity to enter into the agreement. The following categories indicate cases where individuals do not have capacity to enter legally binding agreements:

1. Mental disorder: An individual who suffers from a mental disorder that prevents them from understanding the nature of an agreement cannot enter legally binding agreements. In this instance, the party seeking to withdraw from the contract must prove the disability.
2. Intoxication: if an individual is unable to understand the nature of an agreement due to their intoxication, then they are unable to enter into legally binding relations. Again, in this instance, the party seeking to withdraw from the contract must prove the intoxication.
3. Minors: The general consensus is that anyone under the age of 18 cannot enter legally binding agreements. However, it is important to be aware that there are some exceptions to this rule, such as in cases where someone under the age of 18 enters into a beneficial contract of employment.

The issue of proof

If the five elements discussed above can be demonstrated, then it is likely that the agreement is legally enforceable.

As discussed, the five elements apply equally to written and non-written agreements. So, if the same contractual principles apply equally to verbal and written agreements, why are written agreements so much easier to enforce? In the end, it often comes down to proof. Agreements that are in writing and signed by the parties provide strong evidence of the existence and terms of the contract. These written agreements can easily be examined by the parties and their legal representatives to ascertain whether or not a legally enforceable agreement exists.

On the other hand, verbal representations can easily be misinterpreted, misconstrued or forgotten. If a verbal agreement is disputed and taken to court, the party alleging the verbal agreement must prove to the court that a legally binding agreement exists. Whilst all of the elements to form a legally binding agreement may be present, the alleging party may have difficulty demonstrating this to the court.

So how would someone go about proving the elements of a verbal agreement? The alleging party will have to firstly give oral evidence of the agreement. In doing this, they would need to establish the essential elements listed above. However, it is unlikely that this evidence alone would be enough to prove that a verbal contract existed. The alleging party would also need to produce supporting evidence to the court such as emails, text messages, notes of conversations, phone logs and witness testimony (if available).

For this reason, we always recommend that important agreements are drafted in writing by skilled legal professionals. This is the best way to ensure that an agreement is sufficiently binding on all the parties and can be relied upon down the track if a disagreement ever arises.

Want to know more about business contracts and agreements? Please don’t hesitate to contact our experienced commercial lawyers at Butlers Business Lawyers on (02) 4929 7002 or fill out an enquiry form.