Everyone seems to agree. You’re all smiling and nodding. You stand up and shake hands. But is the deal done?
Not necessarily.
In some cases, a verbal agreement can be considered legally binding, but it can be hard to prove.
We share the differences between verbal and written contracts and why negotiators should never consider a deal done before a contract is signed on the dotted line by all parties.
Are All Negotiations Subject To Contract in the U.S.A.?
Not necessarily. In some cases, a verbal or written agreement may be considered binding. This is where clarity in correspondence can help avoid litigation.
If negotiating parties do not intend for agreed terms to be binding, they may want to include the phrase “subject to contract” in any correspondence relating to the negotiation, including emails.
Unfortunately, “subject to contract” may not apply in a verbal agreement.
The Maker Group specializes in teaching negotiators how to excel in contract negotiations and reach a mutually beneficial agreement without leaving money on the table. Complex contract negotiation requires skilled planning and execution.
Don’t let your negotiators walk away from a deal with nothing more than a handshake. Let The Maker Group help with our bespoke negotiation training and consulting solutions.
Is a Handshake or Verbal Agreement Considered Binding?
As a rule, the law does not require an agreement to be in writing to be enforceable. A handshake or verbal deal may be just as enforceable as a signed contract.
Handshakes or verbal agreements follow the same contract principles that apply to a written contract, though this varies from state to state and some exceptions apply.
When Are Verbal Contracts Not Legally Binding?
If a verbal contract is missing one or more elements of a valid contract, a court is likely to rule the agreement to be unenforceable. Many states have adopted a statute of fraud requiring certain contracts to be in writing in order to be binding.
The rules vary from state to state, but usually, a written contract is necessary for:
- The sale or transfer of an interest in land or real estate
- Terms of a contract that outlast the projected lifetime of one of the parties
- Selling goods greater than $500
- A promise to pay someone’s debt
- Contract terms that will likely take longer than one year to carry out
To determine if a verbal or handshake deal can be enforced, you should consult a lawyer who is familiar with the laws in the state the deal was made.
In complex negotiations, it’s always advisable to secure a written and signed contract that outlines the exact terms of the agreement. Not only is a written contract easily enforced, but it may help prevent unscrupulous parties from later claiming that the terms were not agreed upon.
What Happens if You Break a Verbal Agreement?
It is possible to sue the other party for breaching a verbal contract, but it can be difficult to prove a breach of terms without anything in writing. Breaching a contract is not considered a criminal offense, but the other party may seek legal remedies and damages.
The bottom line on verbal agreements?
In negotiations — even when you think you have a deal — everything is subject to change until it’s in writing and signed.
While most negotiators don’t want the reputational implications of someone who constantly makes changes to an otherwise agreed-upon deal, getting the agreement in writing is always the wisest action to take.
Verbal vs. Written Contracts
Verbal contracts can be difficult to prove unless the agreement was recorded or witnessed by a non-biased third party. Not only can the involved parties have different recollections of the terms as time goes on, but proving the terms in court is nearly impossible, leaving the outcome of the agreement to the ruling of a judge.
Written agreements are far easier to enforce as they clearly lay out the terms and conditions as approved by all parties — it’s literally in black and white. U.S. contract law has a provision called the “Four Corners Rule”, which governs written agreements. The doctrine outlines why written agreements are better than verbal agreements.
The “Four Corners” refers to the four edges of a piece of paper or document containing the legal parts of the agreement. Any evidence that exists outside those corners cannot be used in a court of law.
This rule protects all parties from any misunderstandings that could occur during negotiations and makes any signed agreement legally binding as long as it meets all of the elements of a valid contract.
The 6 Elements of a Legally Binding Contract
#1: Offer and Acceptance
A legally binding contract must include an offering party and an accepting party. For example, if a contractor creates a bid to renovate a home, the homeowner must accept the terms of the contract and both parties must sign for the contract to be binding.
Offers are always conditional on acceptance. By making an offer, you show your willingness to enter into a contract and by signing an offer, you show your willingness to accept the terms of the offer.
#2: Lawful Consideration
Consideration is the value offered and accepted by all parties entering into the contract.
Consideration is not always money. It can include anything of value, such as:
- Services
- Objects
- Property
- Promises to do something
- Promises to not do something
Both parties must provide consideration within contract law. For example, if you create a purchase and sale agreement to sell your home to a buyer for $250,000, your consideration is the home and the buyers is the money.
#3: Mutuality or Intention
Mutuality is known as the meeting of the minds. It states that all parties entering into a contract must be bound to perform the obligations agreed upon within the contract. If not, the law will rule that none of the parties are bound to the contract.
If a contract lacks mutuality, it’s void.
This becomes especially important when one party isn’t afforded the option to cancel the contract, but the other is. To avoid having a contract invalidated by the courts for lack of mutuality, you must limit all parties’ abilities to cancel the contract.
#4: Legality
Legality is pretty straightforward. Contracts are forbidden from including anything that is against the laws of the state, such as assault, robbery, murder, or drug trafficking.
If the terms are consistent with the law, the contract is binding. If not, the contract is non-legally binding.
For example, you cannot form a contract that exchanges consideration for a crime, like paying a friend to rob a bank.
#5: Capacity
Capacity takes into consideration factors that might prevent a person from legally being able to sign a contract, such as:
- Age — minors cannot legally enter into a contract.
- Mental capacity — any individuals who are not sound of mind may not be legally required to fulfill their obligations of a contract.
- Influence — any individuals under the influence of drugs or alcohol may not be legally required to fulfill their obligations of a contract.
- Coercion — any individuals who are forced to sign a contract using force or threats are not legally required to fulfill their obligations of a contract.
Simply put, not everyone can enter into a contract. All parties must have full capacity to understand the contract and fulfill the terms of the agreement.
#6: Certainty
Finally, certainty means that both parties fully understand what they are agreeing to. This can occur in several ways, including:
- The use of industry-standard terms
- Express written contractual obligations
- Clear identifications of the parties involved
If a contract is breached, it should be easy to identify the liable party and accurately enforce the claim of legality.
When Is a Contract Considered Non-Legally Binding?
A non-binding contract means that the parties involved in the agreement are not legally obligated to its terms. If a contract is void or voidable, it may be considered non-binding.
Void Contracts
When a court rules that a contract is void, it means the contract has no effect or force. Neither party is bound by it, nor can they rely on it.
Usually, a contract is void because it does not have all of the elements of a binding contract. Courts may find a contract void if the terms:
- Go against public policy or are illegal
- Are too vague or impossible to fulfill
- Restrict an individual’s rights
- Lack consideration
Voidable Contracts
A valid contract that any party may choose to void or enforce is considered a voidable contract. Courts may find a contract voidable if:
- Mistakes in the contract affect the ability of one or both parties to fulfill obligations
- Any party was under undue influence
- Either party breaches the terms of the contract
- Either party commits fraud
- Either party was coerced or threatened into signing the contract
- Either party was incapacitated while signing the contract
- Either party misrepresented facts or omitted information
Get to the Ts and Cs of Contract Negotiation Quicker With the Help of The Maker Group
The Maker Group is composed of highly successful negotiators with decades of experience in contract negotiations with some of the biggest companies in the world.
We understand that in the world of negotiation, nothing is agreed upon until everything is agreed upon, and nothing is final until you get a signature on the dotted line.
That’s why our approach to training is deeply rooted in experiential learning. People learn by doing, so we won’t inundate your negotiators with hours of lectures and textbook theory. Instead, we show them how to effectively execute any negotiation to the end.
Our training is built from the ground up with your specific pain points in mind. We strategize as a team to create a dynamic, individualized experience that gives negotiators the knowledge and skills needed to negotiate legally-binding contracts that satisfy all parties involved.
When it comes to getting to the Ts and Cs of contract negotiation, you want The Maker Group on your side.
Contact us today to schedule your complimentary training consultation.
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