Is a Verbal Contract Legally Binding?
Would a rose by any other name, smell just as sweet?[1]
How about a contract? When is a contract a contract, and when is it not? When you buy a candy bar from a street kiosk vendor is that “just a purchase” or is there a contract of some kind involved? Is there a difference? How about when you order $1M electrical generator for your power plant on the basis of a phone call, only filling out the paperwork later - maybe?
There can be some very important implications to if and when a contract is made. You could spend the better part of an advanced course on contracts on these complex concepts (which I did, thank you Professor Chiang![2]), but I will try to make them seem (relatively) simple here. Let’s see if I succeed!
Disclaimer 1: The following information does NOT constitute legal advice, no attorney client relationship is created between us. Each situation is different and specific legal issues usually require additional research and investigation, so do not rely on this article to address a particular legal issue; use this as a starting point to gain a general understanding.
Disclaimer 2: This article, although educational in purpose and substance, nevertheless, might be deemed attorney advertising, and prior results do not guarantee future success.
1. What’s A Contract?
What is a contract? Is it a 100 page or even 10 page document spelling everything out? What about the ‘contract’ from Willa Wonka?[3] Would it be enforceable? How about this? Let's say I’m feeling lazy, and say to you, if you pick up my groceries from the store, I’ll let you keep the change from this $100 bill. If you agree, is that a contract? What if I later say give me the change, would you have the right to keep it?[4]
Well, there are some good starting points on how to define a contract. One court has said a contract is an agreement in which a party undertakes to do or not do a particular thing.[5] Another court defined a contract as a set of promises the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.[6] In plain English, a promise with bite! If you promise to do it and renege, the other person can sue.
A slightly more technical way to think about contracts is to view them as possessing three or five factors. Every time you earnestly agree to buy something someone is selling for value, and there is something of value changing hands, it’s a contract. In other words, there must be five factors in every contract: an (i) offer (ii) acceptance of the offer (iii) consideration (iv) mutual assent (v) and an intent to be bound.[7] Many abbreviate this to only three factors of (i) Offer (ii) Acceptance and (iii) Consideration (quietly assuming the other two factors).
An “Offer” is an offer to buy or sell something. An “Acceptance” is agreeing to the other person’s Offer. “Consideration,” is fancy talk for something of value to the person receiving it or a detriment to the person losing it (usually, but not always, it means “money”; it’s a loss the person handing it over and a benefit to the person receiving it). [8] Every contract really has two sets of these things going on simultaneously - hence the “mutual assent.”
And the “intent to be bound?” That usually means you were serious about your offer and not joking around, i.e. when you say you’ll give someone a million dollars if do your algebra homework, and they scream “deal!” you probably weren’t really serious, and there wasn’t an actual contract. Imagine if the law always took everything literally!
2. The Chocolate Contract
Ok, don’t panic. Here’s an example to make this crystal clear. A candy store vendor, proudly displaying their tempting choco-treats, listing prices (say $1), is making the “Offer” to sell (choco-treats for a $1). You, with your insatiable sweet tooth, if you communicate your intention to buy it (“hi, may I please have the Snickers?” [9]) are making an “Acceptance” of the vendor’s Offer to sell. The $1 bill itself is “Consideration.”
Previously, I said there are really two sets of these Offers, Acceptances, and Considerations going on simultaneously. Did you see the other set? While you were Accepting the vendor’s Offer to sell a candy bar, you also “Offered” to buy the vendor’s candy bar, which the vendor, in their turn, Accepted (your Offer to buy). And the vendor’s Consideration? The vendor lost the value of the candy bar to their detriment, and you gained a tasty snack!
3. Oral Contracts & Implied Contracts
Finally, it’s important to realize that “oral” (i.e. just spoken, not written) contracts are really binding and enforceable (again, as long as you serious about them).[10] When you bought the candy bar, did you sign anything? No. But you still had a contract to buy the candy bar. Here’s another really interesting part. The moment you made a serious offer to buy the candy bar for money and the vendor said “ok,” technically, you had a binding contract.
If you changed your mind, especially after the vendor nodded in agreement or handed you the candy bar, technically the candy store operator could sue you for what’s called “breach of contract,” that is, breaking your promise to buy the candy bar. Note, there are some very important and complicated exceptions (usually purchases of goods of $500 or more, or service contracts that take more than a year to complete) to this rule about oral contracts covered by something called the Statute of Frauds[11] (meaning, sometimes you really do need a written contract), but we’ll cover that a bit more below.
Likewise, “implied” contracts (those contracts indicated by your actions, not your words) also are binding.[12] Suppose you never said a word to the vendor, but just grabbed the candy bar and handed over a dollar. Are you stealing? No. Do you still have a contract without signing or saying anything? Yes! Your grabbing the candy bar was an Offer to buy, your $1 the Consideration, and the vendor taking your dollar the Acceptance of your Offer to buy.
Or, if you prefer, the vendor’s Offer to sell the candy bar by having it there, the vendor’s Acceptance of your money, and the candy bar the vendor’s Consideration. Of course, if you just grab the candy bar and run off it with it, without paying, now that’s probably just theft, unless you have some kind of understanding with the vendor … so, maybe don’t do that!
4. Telephone Call Contracts
Now, let’s try something a bit more complicated and commercial. Suppose you are the vice president of ACME Elec Co. One of your generators blew out and on an emergency basis you call a factory and ask them to ship you a new generator right away and you will pay them on receipt. However, a day later, you find a cheaper generator in a foreign factory. You call to cancel your original order. Can you?
That’s a very complicated question. Let’s go back to our candy bar example. Just as your words to the candy vendor, “can I have the Snickers?” was an Offer to buy the candy bar, so too, was your telephone call to the factory, an Offer to buy a generator. When the factory agreed to ship the generator for a million dollars on receipt, the factory Accepted your Offer. What about the Consideration? The $1 million. You didn’t pay it yet - does that get you off the hook?
In the candy bar example you paid almost simultaneously with your Offer - does it matter? Consideration is vital to making a contract - you can’t have a contract without Consideration.[13] However, in order to be binding, Consideration does not have to change hands immediately, it can be paid in the future.
Another way to think of it is your present (i.e. in real time) promise to pay something of value in the future makes it a binding contract.[14] So, usually the answer would be no, you can’t take back your generator order and you’re stuck, because you had an oral agreement on the phone and the other party Accepted your Offer to buy the generator.
5-A. Statute of Frauds
However, before, I alluded to something called the Statute of Frauds which usually requires a *signed* *writing* for purchases of $500 or more. And, when I say “signed” I mean if Person A wants to recover or enforce the contract against Person B, Person B needed to sign it.
In other words, the factory is going to want you, VP of Acme, to sign the agreement so they can sue you if you don’t pay or try to back out. But, you, too, as VP of Acme are going to want some kind of signed confirmation from the factory, so you can sue them if they don’t deliver.
Whichever party does *not* sign, theoretically could, try to escape the contract; even if the other party signs. For example, you, as VP of ACME orally ordered the generator, someone at the factory said “ok,” and sent you a form to sign, which you signed. The factory (for whatever reason) wants to back out.
Theoretically, the factory could back out because they didn’t sign the agreement (even if it’s their standard form; they needed to sign it!). Similarly, you, as Acme VP could back out of it if you didn’t sign anything, even though you ordered the generator. Note: There are many exceptions, so don't try this at home without sound legal advice first! (see below for some).
5-B. SOF Merchant Exception
However, there is an exception to this Statute of Frauds requirement. When Merchants deal with other Merchants, an *oral* contract *can be* binding on both of them, even if only one Merchant signs the agreement (as long as the other one doesn’t object within ten days).[15]
What’s a Merchant? A Merchant is someone who deals in those kinds of goods in the contract (i.e. electrical generators), holds themselves out as an expert in them, or has an expert on hand in the subject.[16] So, the factory is definitely a Merchant for generators. The electrical company may or may not be a Merchant for electrical generators. That would be a very interesting question of fact for the court to explore.
Let’s assume the court finds that Acme is a Merchant. If the factory sent a written confirmation of the order to Acme, within a reasonable time of the original order request, and ACME took more than 10 days to object to that written confirmation, again ACME might have trouble backing out of the contract (even though ACME never signed it). Since we said that Acme cancelled the order the next day, ACME probably could get out of it, though, if ACME did not sign anything confirming the order.
5-C. SOF Exception: Partial Performance
What if the factory already shipped the generator or started making it? That probably falls under “partial performance”[17] and might be an exception to the exception. In other words, the factory already incurred cost to build, order or ship the generator, and should not be penalized because you suddenly changed your mind.
If you find this very complicated, don’t feel bad. That’s the reason people hire lawyers! This happens to be an area of full of pitfalls and traps. A good guideline to follow is if you make an oral contract, and you feel you must cancel, do it as soon as possible and don’t sign anything beforehand; also do so with tact and diplomacy - some people overlook this obvious piece of advice, but I find a little honey can sweeten almost any deal, even if it's an exit from one.
Remember, merely not signing anything does not automatically make a contract less real or enforceable.
Conclusion
What all this means is that you don’t need a parchment, with two sets of signatures, and an embossed wax seal from the King or local magistrate to make every transaction an official contract. Basically, any serious agreement, between two or more parties, exchanging something of value, is technically a contract, whether written or spoken or implied.
This includes the original example of buying a candy bar. There is no theoretical difference between a “simple purchase” and a hundred page contract covering a $1M piece of equipment, at least in terms of the basics, although sometimes additional specific rules could apply.
I hope this article exposed you to some of these core concepts as well as gave you some food for thought about the types of issues that you should think about when buying and selling things and wheeling and dealing!
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Hyperlinks Active! Try them below!
[1] “What’s in a name? That which we call a rose by any other name would smell as sweet.” Romeo & Juliet, Act II Scene II, William Shakespeare.
[2] Professor Chiang had a true gift for simplifying very complicated legal doctrines into the types of examples you will see in this article; I hope I can do some credit to his teachings (don’t be too rough on me Professor if you read this blog!).
[4] There was a time, not long ago, when people did not deliver everything to your doorstep, and you might ask someone to retrieve something for you. As frightening as that concept might be if you’re younger than 35, in my early days, doctors made house calls - they actually visited you in your home! See, it wasn’t all bad…
[5] J.B. Preston Co. v. Funhouser, 261 N.Y. 140 (1933). (no hyperlink, sorry!).
[8] This can be also give the giving away of a right to do something or even not to do something. Becker v. Colonial Life Ins. Co., 153 A.D. 382, 385 (2nd Dept. 1912) (also no hyperlink!) (the technical sense of “Consideration” is “some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other.”
[9] Note: Snickers did not pay me for the mention or endorsement, although I wish they did. I just like Snickers (no nuts, please if you ever want me to give one).
[11] In New York, you can find *two* such laws: NY General Obligations Law, §5-701, and the Uniform Commercial Code, §2-201.
[15] UCC, §2-201(2).
[17] UCC, §2-201(3).
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