Briefing Note - Legal Binding Agreements and Verbal Contracts

In order to form a contract, the parties must agree on what either party will do under the terms of the contract; they must have the intention to form contractual relations; and there must be consideration. It is immaterial whether the contract is verbal, in writing, or partially verbal and partially written, although common sense says that recording the agreement in writing creates a document that may be referred to for its terms in the event of a dispute between the parties. Obviously, this is particularly important when disputes arise in respect of the agreement, whether the dispute arises in respect to the work to be performed or sums to be paid under the agreement. Both verbal contracts and written contracts are equally legally binding contracts, subject to the existence of the usual requirements for formation of a contract.

Certainty and Completeness of Agreement

Agreement is reached between contracting parties when an offer is made by one party which is clearly and unequivocally accepted by the other party. The offer must be sufficiently certain so as the parties know what is to be performed, and the agreement must be complete. An agreement is incomplete when an essential term has not been agreed or there are further matters to be agreed. Agreements in principle are usually considered not to be complete, as are contracts expressly stated to be ‘subject to contract’. In deciding whether a contract is complete, a court will consider a contract to be formed when, from the viewpoint of an officious bystander, the parties have agreed in the same terms on the same subject matter.

Verbal Contracts

There is no legal impediment to the parties entering into a contract based on their conduct and verbal statements or representations. When parties agree the terms of the contract by verbal statements, the binding terms of the contract are more difficult to ascertain. Usually a court will look to the history of the statements made by the parties and the performance of the parties to obtain assistance in determining what was actually agreed by the parties. Where one person however has not performed their part of the bargain, and court is left to more uncertain means in reaching a decision. Draft contract documents, emails, letters and order forms may lend assistance to deciding the terms of a verbal agreement, and courts have used similar agreements with third parties to apply a standard of reasonableness in determining the terms of the contract in the absence of writing.

In the event that a party refuses to sign  a contract, it is essential to write to the person and confirm the terms of the contract as they are understood, to provide a evidence at a later date as to the terms of the agreement reached. In the absence of any other evidence these communications are may be key in assisting the resolution of disputes relating to the terms of the contract. It may be useful to know that where an verbal agreement has been reached, which is later confirmed in writing but the written document does not properly record the terms, that it may be rectified using the doctrine of rectification.

Exceptions

There are exceptions to the general rule that contracts may be verbal, for instance in respect to employment contracts, tenacy agreements and contracts for consumer credit. In some instances where writing is required, a note or memorandum will be required. In the absence of such evidence of the contract, the agreement may be void, unenforceable, or unenforceable by only one party, or on the order of a court.