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As a business owner, you will likely enter into many business negotiations. In doing so, you may sometimes enter into an oral agreement instead of a written contract. You can legally enforce oral agreements in the UK. However, their enforceability depends on certain conditions. Indeed, identifying an enforceable contract is an essential aspect of doing business. This is particularly true due to the frequency of handshake deals and conversational deals in the business world. This article will explain some key features of oral agreements and how to identify whether you can enforce them in court.
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What is an Oral Agreement?
An oral agreement is one made through spoken words. In contrast, a written agreement is recorded in writing. Intuitively, you may think a legally binding contract must be in written form. It is true that most businesses document their agreements in writing to ensure the exact contractual terms are clear. A written contract will also serve as clear evidence of the agreement if a dispute arises in court. However, contracts do not always need to be in writing to be valid. Indeed, an oral agreement can be enforceable if you meet the five key elements of creating a legally binding contract.
How to Create a Valid Oral Agreement
An oral agreement will amount to a legally binding contract if it meets the five requirements of contract formation. The requirements are that there must be:
- A valid offer (not an invitation to treat): an offer is a promise from one party to another as to the terms of the agreement.
- Valid acceptance: acceptance is a reciprocal communication that agrees to the terms made within the offer.
- An intention to create legal relations: in a business contract or a commercial setting, it is assumed that the parties intend to create legal relations.
- Consideration: the parties must exchange something of value.
- Capacity: the parties must have the mental capacity to create an agreement.
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Potential Issues with Oral Agreements
Meeting the technical legal requirements is only one aspect of creating a verbal contract. The more pressing problems often occur after you enter into the contract. This is because, by their nature, there are limited to no records of oral contracts.
Common issues that may arise include:
- a lack of clarity on what was agreed;
- the absence of written terms leaves room for confusion; or
- if there is a breach of contract, you may lack the necessary documents to support your claim.
Proving a Verbal Agreement in Court
Some common ways of proving a verbal agreement in court include presenting as much evidence relevant to the agreement as possible. For example, written evidence may include:
- emails;
- text messages;
- notes made at the time of the agreement; and
- letters.
Further, there might have been witnesses who were present when you entered the oral agreement. It would be valuable to ask them to provide a written statement to verify you have a valid contract. Other pieces of evidence might include circumstantial evidence like invoices, bank statements or any other documents that indicate the fulfilment of the agreement.
What Should I Do If I Have a Verbal Contract?
If you have created a verbal contract with another party and are worried about its enforceability, it may be a good idea to reduce the agreement to writing in a formal contract.
Similarly, you can avoid some ambiguity if you are yet to finalise the contract by the following:
- getting your solicitor to create a heads of terms document – this will outline the key contract terms to avoid ambiguity;
- marking all of your written communications as ‘subject to contract’ to make it clear that you are operating within a valid contract; and
- draft a formal document that includes a dispute resolution process – this can help you avoid problems in the future. You may benefit from including an arbitration clause in your contract.
Finally, it is also worth remembering that an oral agreement will not be sufficient to make certain contracts legally enforceable. Certain types of agreements will need to be made in writing. For example, a contract for real property (also known as land) or for shares requires a formal deed document, which you must make in writing.
Key Takeaways
As a business entering into frequent contracts, ensuring your agreements are legally enforceable is critical. A legally binding agreement requires an offer, acceptance, intent for legal relations, and consideration to be legally valid. If you have entered into an oral contract, it is often a good idea to set out the key terms of your agreement in a written document, so that you have a document to rely on if you ever have to go to court.
For assistance in turning your oral agreements into legally binding written contracts, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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