Is a verbal agreement legally binding?

The legal position

The law does not generally prescribe any form for a contract. A contract may be made orally, in writing, by conduct, or by a combination of these.

The principal exceptions are statutory:

• Land. No action may be brought upon a contract for the sale or other disposition of land, or of any interest in land, unless the agreement, or some memorandum or note of it, is in writing. It must be signed by the party to be charged (the person against whom enforcement is sought) or by a person lawfully authorised by that party (Conveyancing and Law of Property Act, s 4(1)). The equitable doctrine of part performance, which the Act preserves, may in limited circumstances permit the enforcement of an oral agreement. The usual instance is where the purchaser has been let into possession.
• Guarantees. A promise to answer for the debt or default of another person must be in writing, or evidenced in writing, and signed by the guarantor (Statute of Frauds 1677, s 4).
• Goods of the value of $100 or upwards. Such a contract may be enforced by action if the buyer has accepted and actually received part of the goods, has given something "in earnest" (a token payment or article to bind the bargain), or has made a part payment. Writing is necessary only where none of those conditions has been satisfied. The contract is then enforceable only if there is a note or memorandum of it in writing, signed by the party to be charged or that party's agent (Sale of Goods Act, s 6(1)).

Where these requirements apply, a contract that does not satisfy them is not void, but it cannot be enforced by action unless and until they are satisfied.

Where the terms of an oral contract are disputed, what was agreed is a question of fact that must be proved by precise evidence.

Practical implications

An oral agreement for services, such as a contractor's quotation accepted by telephone, is binding. An oral contract for the supply of goods is equally binding. Where the goods are of the value of $100 or upwards, the contract becomes enforceable once part of the goods has been accepted and received, or something has been given in earnest or in part payment. A signed note of the contract is required only where none of those has occurred.

A party to a binding oral contract has no greater liberty to withdraw from it than a party to a written one. Refusal to perform is a breach in either case. An offer may, however, be withdrawn at any time before it is accepted, provided that the withdrawal is communicated to the person to whom the offer was made.

The court will determine the terms of an oral agreement by reference to all of the surrounding evidence. That includes correspondence and messages exchanged before and after the agreement, payments made, work begun, and the testimony of those who were present.

Where a written contract was later signed, an oral assurance given to induce the signature may, in some circumstances, prevail over the printed terms. Such an assurance must be strictly proved. Many written contracts also contain an "entire agreement" clause, which provides that the document records the whole of the parties' agreement.

Recommended steps

The terms of an oral agreement should be confirmed in writing on the same day. The confirmation should state the parties, what is to be supplied or done, the price, and the time for performance. An uncontradicted written confirmation is persuasive evidence of the terms agreed.

Payments should be made by bank transfer or cheque, bearing a reference that identifies the transaction, rather than in cash. All receipts should be retained.

Contracts concerning land, and guarantees, should always be reduced to writing and signed. Without that, the agreement may exist but be incapable of enforcement. A sale of goods of the value of $100 or upwards should likewise be recorded in a signed note unless part of the goods has already been accepted and received, or something has been given in earnest or in part payment; in any of those cases, writing is not required for enforcement. See Must a contract be in writing, signed or witnessed?

Where a dispute arises, a record should be made without delay of what was said, when it was said, and who was present.