Exploring the Nature of Oral Contracts
Verbal contracts are agreements that the contracting parties enter into orally as opposed to in writing. While most legal contracts include a written component, not all contracts have to, and verbal contracts are perfectly valid in almost all circumstances.
Verbal contracts usually include an offer or proposal where one person asks another to do something, such as provide services, and then the second person accepts. They can exist in both verbal and non-verbal communication, such as a physical gesture like a handshake rather than an oral acceptance . Other ways of accepting a verbal contract can exist, such as an affirmative response or simply going along with what the other person says or without total objecting to it, by staying silent. The main thing to bear in mind is that verbal contracts do not have to be spoken as long as the parties involved do communicate the contents of the contract to the other party. Also, verbal contracts need to be taken seriously and fulfilled as they are legally binding in New York.
Legal Principles Governing Oral Contracts in New York
In New York, a contract is legally binding when it meets certain criteria — including an offer and acceptance, consideration, a legal purpose and capacity. The terms of the contract can be oral or written. While New York law generally allows for oral agreements that meet these criteria, a written agreement is preferable in order to reduce the risk of challenges to the contract’s enforceability.
A written agreement is required for a number of classes of contracts under New York law, but NY CLS Gen Oblig § 5-701 states that only those agreements that are "immoral, against public policy, a promise to answer for a debt, default or miscarriage of another" are not binding unless they are in writing.
Unlike other contracts that can be expressly stated or implied through performance, "an implied-in-fact," according to the New York State Bar Association, "arises from the circumstances surrounding the subject matter of the contract," and "is inferred from the conduct of the parties."
Validating Oral Contracts: A Guide to Their Enforceability
For a verbal contract to be enforceable in New York, the agreement must be one made with mutual consent. This means that both parties had to intend to be bound by the agreement. The verbal contract must be supported by consideration, meaning, there must be an exchange for the performance of the action contemplated in the oral agreement. It is also required that the terms of the verbal contract be sufficiently clear and definite so that the court can give an appropriate remedy for breach.
Generally, where the terms of the verbal agreement are clear and complete, the agreement is enforceable. When the terms are lacking in some way, the court may make decisions as to the missing terms. If the missing terms cannot be determined by the court, the verbal agreement will not be enforced. Some examples of terms that are considered sufficiently clear are contracts where there is a meeting of the minds as to the subject matter and amount being paid, with a price, time for performance and the nature of the services to be rendered. Verbal contracts are generally enforceable unless the Statute of Frauds requires that a contract be in writing.
Common Exceptions to the Enforceability of Oral Contracts
Despite the common belief that verbal contracts are not enforceable, an agreement only needs to meet a few requirements to be legally binding under New York law. There are important exceptions to this general rule, however. For example, some types of transactions are specifically addressed under the Statute of Frauds, which effectively creates a set of services and products whose contracts cannot be enforced unless they are in writing. While the Statute of Frauds or other state laws may require a written contract for a specific type of transaction, this does not mean that all transactions of this type must be in writing.
Suppose that two people have a verbal agreement for employment for a term of one year, for example. If a disagreement arose regarding the details of the agreement, either party could prove the terms of the contract through their own testimony. Yet similar agreements spanning a period longer than a year would be required to be in writing to be enforceable, under New York’s Statute of Frauds, a set of number of presumptions regarding the enforceability of certain kinds of contracts. Contracts to sell goods exceeding $500, contracts to lease or sell realizable property exceeding $1,000, and contracts within a year of the contract date are all covered under this law, among other types of contracts. If any of these prior conditions were not met, going to court to enforce the contract would be a waste of time.
Presenting an Oral Contract in a Court of Law
In a New York court of law, the burden of proof rests on the plaintiff. The plaintiff must produce enough compelling evidence to convince the judge or jury, by the preponderance of the evidence, that the essential elements of the contract exist. High standards of proof are not required in civil cases. Though verbal contracts are legally binding in New York , they may be even more difficult to prove than written contracts. Witnesses who can testify to the terms of the contract, what was discussed, and what was agreed upon in a timely manner are helpful for verbal contract cases. Additionally, communications such as emails, text messages, and other instant messaging services (like WhatsApp) may serve as successful evidence of the terms of the contract as well as an agreement to the terms of the contract.
Tips to Ensure the Effectiveness of Oral Contracts
While verbal contracts are legally binding in New York, they can lead to disputes that may be difficult to resolve without any sort of written documentation. However, there are some steps you can take to minimize the chances that a verbal contract will result in a dispute or that you will be put in a difficult position if such a dispute arises. First, be intentional about your verbal contracts. While ambiguity is the enemy of any type of contract, it can be especially detrimental when you execute an agreement verbally. For example, if you own a company and want to hire a new employee, make sure you explicitly outline the terms of the employment before an offer is made. There are several different ways you can do this. You can sit down with the prospective employee and verbally discuss the terms of the employment, making sure you both agree on such issues as salary, time commitment, job duties, and expected start date. If you feel more comfortable with a written documentation, you can also go through a written offer together, making hand notes for any changes so that you both consent to the changes. From the very beginning of your relationship, you should ensure you are on the same page with each other. Secondly, even with all of this careful outlining of expectations, it’s still a good idea to put it in writing as soon as possible. You can have a quick text conversation with your new employee that details all of the aspects of your new relationship. You would want to outline their salary, benefits, responsibilities, and anything else you think is important. You’ll want to close with something along the lines of, "I look forward to working with you—we can get started as soon as you’re ready." When you both consent to start a new working relationship, it’s assumed that you both have agreed to the terms. If it’s not a convenient time to have a back-and-forth conversation with the person, just send a simple email with the details. Again, it’s still best to keep in mind that you can always refer back to the email in the future if a disagreement arises. In short, if you want to have a verbal agreement with a New York resident, you must prove that all elements of a contract exist between you. As with any legal transaction it is best to consult with an attorney to ensure that all of your legal bases are covered and your interests protected.
Real-Life Scenarios: Oral Contracts in Action
Several cases have attempted to explain the line between "disagreements" and "contracts" in New York. The cases above provide a foundation for how New York courts may view verbal contracts:
Case Study 1
In Long v. Eastern Air Lines, Inc., 35 N.Y.2d 184 (1974), a stewardess applied for a job with Eastern Airlines. It was alleged that an Executive Vice President of the airline called the stewardess and told her she would be flying with "a defined group in a defined area at a defined salary." The stewardess argued that this constituted a contract and the failure to follow these terms by the airline amounted to an illegal termination. The state’s highest court disagreed, holding that the subject matter of the alleged agreement left too many questions unanswered. In fact, the court noted that the agreement was lacking as to 1) the number of flight segments, 2) the nature and amount of wages, and 3) the duration of employment. Thus, the court found, there was no contract.
Case Study 2
In Strong v. Crooning M. Assoc. 97 A.D.2d 603 (N.Y. App. Div. 1983), a plaintiff v. defendant lawyer said he represented a defendant (a recording artist) in an action commenced against him. Plaintiff undertook to defend the recording artist pro bono in exchange for part of any future royalties from her recordings. The plaintiff did not have a written retainer agreement with his "client," nor did he have the client’s consent to accept a contingent fee. Plaintiff’s client sought to terminate her agreement with the plaintiff (the "lawyer") because she claimed he was not fulfilling his obligations. Shortly thereafter, the recording artist sued the plaintiff and the law firm for breach of a fiduciary duty. The court took an interesting approach and decided that plaintiff had no contract with the artist and the artist’s decision to terminate her agreement with the plaintiff relieved the plaintiff of all liability to its prior client. Furthermore, the court found that any record royalties received by the plaintiff after his representation of the recording artist ceased belonged to the artist.
Case Study 3
In Generale Bank v. First Interstate Bank, 97 N.Y.2d 236 (2002), a banking error case, the parties signed a written agency agreement. A representative of the bank’s client then made a telephone call instructing the bank to transfer $1.5 million. The parties’ agency agreement automatically authorized such a transfer. However, the agency agreement prohibited transfers that were not made in accordance with the agreement’s requirements. In this case, the telephone call did not comply with the contract’s requirements and therefore was not authorized. The court found that the parties intended to impose written requirements on the agent, and the apparent acquiescence by the bank does not establish an acceptance or amendment.
Summation of Findings: Best Practices
In conclusion, verbal contracts are indeed legally binding in New York under most circumstances. While they are enforceable, it is best to avoid relying on them and to protect yourself by putting any important agreements in writing whenever possible. An exception exists if the verbal contract is one that is supposed to be in writing, or a contract for the purchase of real estate in which the statute of frauds would apply .
Business owners and managers should also understand relevant laws and requirements that govern procurements with others. While some verbal contracts may be binding, in many circumstances obtaining an agreement in writing is the right approach to protect against unrecoverable amounts that ultimately could be incurred due to misunderstanding of complicated business deals.