What are Oral Contracts?
Oral contracts are verbal agreements between one party and another. However, in the legal field, oral contracts are understood and handled in the same way as a written contract. Until the deal is finalized between the parties, there is room for mishaps and misunderstandings. On a daily basis, oral contracts are formed without either party actually considering that they may or may not be held legally binding. An example of a non-legal, and oftentimes unwritten contract, is a lunch date. If one party agrees to meet the other at the corner taco restaurant at 1:00 p.m., that agreement stands. If one party should forget, or misinterpret the time, the other party cannot assume that the decision was invalidated. Everyday decisions like this one can be considered an oral contract. The most common forms of oral contracts are those that you share with someone you know , such as a family member, co-worker, or even a sibling. In certain situations, an oral contract can be binding in California. The Test for Enforcement states that if two parties come to an agreement, and if both parties have performed certain steps to complete the deal, the contract is enforceable. In legal situations involving real estate, certain contracts must be in writing. This is known as the Statute of Fraud, which states that the following contracts must always be in writing: The construction contractor can often get into disputes with many subcontractors. Oftentimes, the issue can be resolved quickly among parties if there is an oral contract involved. Although oral contracts are not as cut and dry as those in writing, if the parties have performed their individual roles in the deal, then it is often a strong enough binding agreement.
Status of Oral Contracts in California
Oral contracts in California have legal standing, despite the debate that surrounds them. For every court case and lawyer that insists on the validity of oral contracts, there is an opinion piece or individual who says they can’t be enforced. This is where having a comprehensive understanding of the law set forth by the California civil code comes in.
Section 1622 of the California Civil Code
Under this section of the civil code, "[a]n agreement made in California that is not required by law to be in writing is enforceable." It further states that, "no particular form is required unless required by provision of law." The fact that provisions may require a contract to be in writing is critical to keep in mind. When there is a law that requires a contract to be in writing in order to be enforced, such as under the statute of frauds, an oral contract is not effective.
Statute of Frauds
The statute of frauds is what makes it such that some contracts must be in writing to be legally binding. Under the California Civil Code, the statute of frauds applies to written contracts for: Those that fall under the statute of frauds must be in writing to be legally binding.
When Are Oral Contracts Enforceable?
This doesn’t mean that all oral contracts in California can’t be enforced, however. For example, they can be enforced when relating to real estate, orally and impliedly, or if performed over time. In contrast, for typical sales that are over $500, a contract must be in writing. Oral contracts are also enforceable when it does not seem possible for them to be fulfilled within a year. Because an oral contract cannot be completed in this short time frame, it’s not required to be in writing to be enforceable.
When It’s Not Enforceable
Currently, the law prohibits recovery on various types of contracts unless the contract is in writing. Therefore, even though there is an oral contract that a general contractor believes promises to pay a construction employee and to compensate the employee in some manner, the employee may not be able to enforce the contract and recover the damages he/she is seeking if the contract falls within the Statute of Frauds. This section discusses these and other situations where an oral contract may be unenforceable under the law.
In California, the following types of contracts are subject to the Statute of Frauds and thus must be in writing to be enforceable: The Statute of Frauds provides that some categories of contracts can never be enforced against a party who did not sign the contract unless that party signed a written contract. In other words, the Statute of Frauds requires that certain contracts be in writing for the contract to be enforceable as a matter of law. This rule is intended to prevent fraud and perjury in the enforcement of contracts by requiring and encouraging the use of definitive written evidence of agreements.
In addition to the Statute of Frauds, an oral contract may not be enforceable for the following reasons: The contract is one that cannot be performed within one year. The contract is an employment contract for an indefinite period of time. The contract is for the sale of real estate, or an interest in real estate. The contract is for the sale of goods, over $500.
How to Prove an Oral Contract
Proving the existence of an oral contract in a court of law is no easy feat. As previously mentioned, any modification to the contract must also be done orally or in writing, material terms must be established through the parties’ actions and work on the project, and you won’t find a signed contract as evidence in a court of law. When proving the existence of a contract, California courts allow oral evidence to show the parties’ intention to enter into an agreement. An oral contract can be enforced if the following is present: This indicates that the parties, whether verbally or through their actions, formed the intention to create a contract. With a unilateral contract, the proving of an oral contract can be based on performance, such as by showing that one party performed all or a substantial portion of the terms of the agreement. This suggests acceptance of the offer and an intention to enter into the contract. When there is strong evidence of the parties’ intention to form a contract, California courts will enforce an oral contract even if it was never fully completed . Courts use evidence of the parties’ subsequent actions to help prove that a contract exists. This can include requests for work, hiring employees, securing permits and licenses, and other activities that clearly indicate what type of agreement the parties have made. What’s more – under the doctrine of part performance, an oral contract isn’t required to meet the statute of frauds. If the performance of an oral contract is inconsistent with any other indication of the parties’ agreement, oral evidence of the parties’ intentions will be permitted. A contract may not need to be written, but it should nonetheless be documented to avoid disputes and potential misunderstanding. For construction agreements, parties should include a detailed description of the work, specifications and material requirements, a set schedule of work, the names of the officers or managers with signing authority, and the payment terms. In the event a breach of contract arises, an experienced California construction attorney can help prove an oral contract so you can move forward.
Common Oral Contract Issues
While oral contracts are generally valid and enforceable in California, they come with certain risks and issues. First and foremost is the difficulty of proving an oral contract exists. Enforcing an oral contract in litigation can sometimes be even more difficult. For example, if Joe hires Sheila to build him a fence, Sheila does not have an enforceable contract despite verbal promises from both parties, unless Sheila has already started building the fence. If Sheila never starts working on the fence, Joe will most likely not be able to enforce the contract against Sheila in court.
Parties to an oral contract can also have trouble proving the terms of the contract. In the fence example, Joe and Sheila might have different recollections about where the fence is to be built and what kind of fence it is to be. Because there is no written record, proving who is right is difficult. Disputes over other contract terms are also common, such as the time for performance, the price, the quality of work, etc.
Lastly, an oral contract can give rise to liability for fraud. Although oral contracts are generally enforceable, disputes may arise if either party tries to enforce an agreement to commit a crime. For example, Joe may hire Sheila to build a fence around his property, but tells her that he does not actually own the property and he wants her to post like the fence instead and build a large stage in the yard. Rather than refusing the job, Sheila attempts to build the fence but accidentally posts the wrong property and the landowner calls the police. Sheila can be found civilly and criminally liable for trespassing and trespass to land.
Oral Contract Safety Tips
A better approach to using oral contracts is to keep records of them and make clear, in writing or by conduct, what the agreement encompassed. For example, you could start each engagement verbally and follow up with a written confirmation of the key terms discussed. After the initial meeting, prepare a written (or at least clear and concise) summary of what work is required and/or what a customer has ordered. Then get the other person to actually respond in writing acknowledging receipt of the summary and approving it. If someone asks you to go ahead with a project or to perform services , send an email confirming that you are proceeding with the work requested. Otherwise, you may be faced with litigation over what work you performed or what was actually ordered and requested.
A written contract is always preferable to an oral one. If the conditions leading to a claim are not resolved before you start performing, it might significantly impede your ability to recover, prove damages, or conclusively establish any sort of contract terms or project details that are disputed.
Oral contracts may sometimes be unavoidable, but we highly recommend you do not rely on them in California to avoid a dispute arising out of an ambiguous agreement.