What is an Oral Contract?

An oral contract is a type of business contract that is outlined and agreed to via spoken communication, but not written down. Although it can be difficult to prove the terms of an oral contract in the event of a breach, this type of contract is legally binding. Oral contracts are often mistakenly referred to as verbal contracts, but a verbal contract is really any contract since all contracts are created using language.

Understanding Oral Contracts

Oral contracts are generally considered as valid as written contracts, although this depends on the jurisdiction and, often, the type of contract. In some jurisdictions, some types of contracts must be written to be considered legally binding. For example, a contract involving the conveyance of real estate must be written to be legally binding.

In some cases, an oral contract can be considered binding, but only if it’s evidenced by a written contract. This means that once the oral contract has been agreed upon the parties must write down the contract terms. Other evidence that can be used to bolster the enforceability of an oral contract includes the testimony of witnesses to the creation of the contract. When one or both parties act on the contract, this too can be construed as evidence that a contract existed. Furthermore, letters, memos, bills, receipts, emails and faxes can all be used as evidence to support the enforceability of an oral contract.

A famous example of the enforceability of an oral contract occurred in the 1990s when actress Kim Basinger backed out of her promise to star in Jennifer Lynch's film Boxing Helena. A jury awarded the producers $8 million in damages. Basinger appealed the decision and later settled for a lower amount, but not before having to file bankruptcy.

When Oral Contracts Fall Apart

Oral contracts are best used for simple agreements. For example, an oral contract to trade a used lawn mower for a used clothes dryer need not require much detail. The simpler the contract, the lower the chances that the parties involved will need to go to court. But more complex contracts, such as those for employment, typically should involve written contracts. Complex oral contracts are more likely to fall apart when held up to the scrutiny of a court, usually because the parties can’t reach an accord over the finer points of the agreement.