Are Oral Contracts Enforceable?

In Pennsylvania oral contracts are indeed enforceable under certain circumstances. However, relying on them can lead to many legal complications and misunderstandings. This article will highlight the nuances of oral agreements and provide you with three compelling reasons why you should think twice before relying on them.

Understanding Oral Contracts

An oral contract is an agreement made verbally, without any written documentation. Here are come common examples:

Business loans

A business is short on cash so one of the owners lends the business money, expecting to be repaid in the future but without a written agreement with the business an other owners verifying it as a loan and specifying repayment terms.

Customer agreements

You are a contractor and agree to add a new deck to someone’s home.  You discuss what the owner wants, agree on a price but do not put any of the specifics in writing.

Real estate agreements

You agree with a partner to buy a home, renovate and then flip it. Your agreement regarding who will contribute what for renovations, how you’ll sell the property and split the profits are all verbal.

While verbal agreements can be legally binding, enforcement can become complicated, especially when disagreements arise.

Essential Elements of an Enforceable Oral Contract

1. Offer and Acceptance

Like any contract, an enforceable verbal agreement must have a clear offer and acceptance. One party must propose the terms of the agreement, and the other must accept those terms. This can happen through spoken words, actions, or a combination of both.

2. Mutual Consent

Both parties must mutually agree to the terms of the contract. This requires a meeting of the minds, meaning all parties understand and agree on the basic substance and terms of the contract. If any party claims a misunderstanding, it can lead to disputes that challenge the contract's validity.

3. Consideration

Consideration is an essential element in contract law. It refers to something of value that is exchanged between the parties. In a verbal contract, this could be money, services, or goods. Each party must offer something of value; otherwise, the agreement may not be enforceable.

4. Capacity

For a verbal agreement to be enforceable, the parties must have the legal capacity to enter into a contract. This means they are of legal age (18 years or older in Pennsylvania) and possess the mental competency necessary to understand the agreement.

5. Possibility of Performance

The agreement's terms must be possible to perform. If the fulfillment of the contract is impossible from the outset, it will not hold up in court.

Situations Where Oral Contracts Are Not Enforceable

It’s crucial to note that there are certain scenarios where an oral contract may not be enforceable, even if it meets the above criteria:

Statute of Frauds

Pennsylvania's Statute of Frauds requires that certain contracts must be in writing to be enforceable. This includes agreements involving the sale of real estate, leases longer than one year, and contracts for the sale of goods priced at $500 or more. If an agreement falls within these categories, it must be documented in writing, or it risks being unenforceable.

Complex Agreements

While simple agreements can often be proven verbally, complex contracts that involve detailed terms may be more effective and safer if documented. Courts may find it challenging to enforce verbal agreements that lack clarity or specificity.

Home Improvement Contracts

Agreements to provide improvements to residential properties must be in writing according the Home Improvement Consumer Protection Act. If the contract is not in writing and does not contain the terms required by the Act, it is not enforceable.

Illegal Contracts

The terms of the agreement must be legal and not against public policy. There are some agreements, even if they meet all the requirements of enforceability, are not enforceable.  An oral contract for an illegal purpose, such as drug sales or other unlawful activities, will not be enforceable.

Three Reasons Not to Rely on Oral Contracts

1. Difficulty in Proving Terms and Conditions

One of the most significant downsides of oral contracts is the challenge of proving their terms if a dispute arises. Unlike written agreements, which can clearly outline the specifics of the deal, oral contracts often leave room for misinterpretation. This ambiguity can lead to differing recollections of what was agreed upon. In court, the burden of proof is on the party claiming the existence of the oral contract, which can be a significant hurdle when there’s no tangible evidence to back up their claims.

2. Being Sued Out of State

It is not unusual for businesses and their customers to be in different states.  One benefit of written contracts is that the parties can dictate where and how disputes are resolved.  Business owners should require disputes to be resolved on their home turf.  If you have only verbal agreements with customers, you risk being sued by your customer in their state, which could be very inconvenient and expensive for you. 

3. Potential for Misunderstanding and Disputes

Even when both parties remember the terms of an oral contract, nuances can be easily misunderstood. The lack of written documentation leads to ambiguity regarding vital details, such as timelines, deliverables, and responsibilities. This ambiguity can damage relationships and lead to protracted and costly disputes. By contrast, a written contract clarifies expectations and provides a reference point for both parties, reducing the likelihood of misunderstandings.

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While oral contracts can be enforceable under the right circumstances in Pennsylvania, it’s always a bad idea to rely on them. The difficulties in proving terms, the need to navigate statutory requirements, and the potential for misunderstandings make oral agreements a precarious choice.

To safeguard your interests, it’s always advisable to put significant agreements in writing. A well-crafted written contract not only protects your rights but also serves as a clear reference point, significantly minimizing the risk of future disputes. If you have questions about a specific agreement or need legal insight into contract law, don’t hesitate to consult our business attorneys at Fiffik Law Group.