Verbal Contracts - Enforceable?

Introduction:

To the surprise of many of the citizens of California, oral or verbal contracts can be fully enforceable in this State in many circumstances. The California Civil Code specifically prohibits certain contracts from being oral-they must be in writing. But, with those exceptions noted below, a verbal contract can be enforced in this State.

Before proceeding further with this Article, the reader should review our article on Contracts on this Web Site to get the basic law for what constitutes the requirements for a contract and should also review our article on Fraud.

The problem with any oral contract is that the terms must be proven by oral testimony rather than with a clear written document and people often have different recollections about what was agreed-or lie. It is axiomatic that it takes twice as long and costs three times as much to prove the terms of an oral contract rather than a written contract. A written contract is ALWAYS preferable to an oral one.

But that does not mean that oral contracts are not enforceable in many cases-merely harder to prove.

In certain instances oral contracts are explicitly prohibited and without a writing the courts will not enforce them. Those are discussed below.

The issue of an oral contract’s enforceability should not be confused with the PAROL EVIDENCE RULE which is a rule of evidence indicating when oral testimony can be used to prove or disprove a writing.

Another difference to keep in mind is “express contracts” which are verbally agreed upon contracts, and “implied contracts” which are those inferred by the conduct of the parties. Civil Code Section 1619 states,

 

1619.  A contract is either express or implied.

 

1620.  An express contract is one, the terms of which are stated in words.

 

1621.  An implied contract is one, the existence and terms of which are manifested by conduct.

 

What is “conduct?” It can be any action or inaction which proves to a judge or jury that an understanding had been reached. An example would be if I paint your house after you have provided to me the paint, tools and access and told your wife that you were intending to pay me the going rate. (An oral contract would be you told me you were going to pay me the going rate and I verbally agreed.)

 

Basic Law of Oral Contracts

California law normally allows oral contracts. At Civil Code Section 1622 (hereafter “CC”) we read:

 

1622.  All contracts may be oral, except such as are specially required by statute to be in writing.

 

Further, if a party tricks another into not having a written contract, a verbal contract may be enforced even when normally required to be in writing.

 

1623.  Where a contract, which is required by law to be in writing, is prevented from being put into writing by the fraud of a party thereto, any other party who is by such fraud led to believe that it is in writing, and acts upon such belief to his prejudice, may enforce it against the fraudulent party.

 

And those contracts that must be in writing are specifically listed at CC 1624:

 

1624.  (a) The following contracts are invalid, unless they, or some note or memorandum thereof, are in writing and subscribed by the party to be charged or by the party's agent:

   (1) An agreement that by its terms is not to be performed within a year from the making thereof.

   (2) A special promise to answer for the debt, default, or miscarriage of another, except in the cases provided for in Section 2794.

   (3) An agreement for the leasing for a longer period than one year, or for the sale of real property, or of an interest therein; such an agreement, if made by an agent of the party sought to be charged, is invalid, unless the authority of the agent is in writing, subscribed by the party sought to be charged.

   (4) An agreement authorizing or employing an agent, broker, or any other person to purchase or sell real estate, or to lease real estate for a longer period than one year, or to procure, introduce, or find a purchaser or seller of real estate or a lessee or lessor of real estate where the lease is for a longer period than one year, for compensation or a commission.

   (5) An agreement that by its terms is not to be performed during the lifetime of the promisor.

   (6) An agreement by a purchaser of real property to pay an indebtedness secured by a mortgage or deed of trust upon the property purchased, unless assumption of the indebtedness by the purchaser is specifically provided for in the conveyance of the property.

   (7) A contract, promise, undertaking, or commitment to loan money or to grant or extend credit, in an amount greater than one hundred thousand dollars ($100,000), not primarily for personal, family, or household purposes, made by a person engaged in the business of lending or arranging for the lending of money or extending credit.

 

For purposes of this section, a contract, promise, undertaking or commitment to loan money secured solely by residential property consisting of one to four dwelling units shall be deemed to be for personal, family, or household purposes.

The above basic law has many exceptions often obtained by special interests or by unique requirements of the markets. For instance, various oral contracts are allowed for sale of commodities and precious metals orally, currency options, etc. See subsection b of the above Section which provides,

 

b) Notwithstanding paragraph (1) of subdivision (a):

   (1) An agreement or contract that is valid in other respects and is otherwise enforceable is not invalid for lack of a note, memorandum, or other writing and is enforceable by way of action or defense, provided that the agreement or contract is a qualified financial contract as defined in paragraph (2) and (A) there is, as provided in paragraph (3), sufficient evidence to indicate that a contract has been made or (B) the parties thereto by means of a prior or subsequent written contract, have agreed to be bound by the terms of the qualified financial contract from the time they reached agreement (by telephone, by exchange of electronic messages, or otherwise) on those terms.

   (2) For purposes of this subdivision, a "qualified financial contract" means an agreement as to which each party thereto is other than a natural person and that is any of the following:

   (A) For the purchase and sale of foreign exchange, foreign currency, bullion, coin or precious metals on a forward, spot, next-day value or other basis.

   (B) A contract (other than a contract for the purchase of a commodity for future delivery on, or subject to the rules of, a contract market or board of trade) for the purchase, sale, or transfer of any commodity or any similar good, article, service, right, or interest that is presently or in the future becomes the subject of a dealing in the forward contract trade, or any product or byproduct thereof, with a maturity date more than two days after the date the contract is entered into.

   (C) For the purchase and sale of currency, or interbank deposits denominated in United States dollars.

   (D) For a currency option, currency swap, or cross-currency rate swap.

   (E) For a commodity swap or a commodity option (other than an option contract traded on, or subject to the rules of a contract market or board of trade).

   (F) For a rate swap, basis swap, forward rate transaction, or an interest rate option.

   (G) For a security-index swap or option, or a security or securities price swap or option.

   (H) An agreement that involves any other similar transaction relating to a price or index (including, without limitation, any transaction or agreement involving any combination of the foregoing, any cap, floor, collar, or similar transaction with respect to a rate, commodity price, commodity index, security or securities price, security index, other price index, or loan price).

   (I) An option with respect to any of the foregoing.

 

Experienced legal advice would be required to determine if the exception above would apply to the various types of transactions described. Note that the above subsection would not apply to the average consumer.

Also note that the law is in flux as to the enforceability of the types of contracts created by electronic means. Given the power of the internet and the amount of agreements made in this form of communication, and the fact that the centuries old definition of a “writing” has not taken into account electronic commitments, the following law has been passed to attempt to address the issues:

 

CC 1624

 

   (3) There is sufficient evidence that a contract has been made in any of the following circumstances:

   (A) There is evidence of an electronic communication (including, without limitation, the recording of a telephone call or the tangible written text produced by computer retrieval), admissible in evidence under the laws of this state, sufficient to indicate that in the communication a contract was made between the parties.

And note that actions of the Parties subsequent to the oral contract can enforce a contract often required to be in writing. At CC 1624 (B) we read that such a contract is enforceable if

… A confirmation in writing sufficient to indicate that a contract has been made between the parties and sufficient against the sender is received by the party against whom enforcement is sought no later than the fifth business day after the contract is made (or any other period of time that the parties may agree in writing) and the sender does not receive, on or before the third business day after receipt (or the other period of time that the parties may agree in writing), written objection to a material term of the confirmation.  For purposes of this subparagraph, a confirmation or an objection thereto is received at the time there has been an actual receipt by an individual responsible for the transaction or, if earlier, at the time there has been constructive receipt, which is the time actual receipt by that individual would have occurred if the receiving party, as an organization, had exercised reasonable diligence. For the purposes of this subparagraph, a "business day" is a day on which both parties are open and transacting business of the kind involved in that qualified financial contract that is the subject of confirmation.

And if a Party admits that a contract was made, the requirement of writing can be eliminated. At CC 1624 is found:

   (C) The party against whom enforcement is sought admits in its pleading, testimony, or otherwise in court that a contract was made.

And, last, a writing that is not the contract, but is signed by the party denying it which admits that a contract has been made, may create a binding contract even if the underlying contract was verbal:

   CC 1624 (D) There is a note, memorandum, or other writing sufficient to indicate that a contract has been made, signed by the party against whom enforcement is sought or by its authorized agent or broker.

 

The law has have also relaxed the amount of information required for electronic communications to constitute a written contract. At CC 1624 the statute provided

For purposes of this paragraph, evidence of an electronic communication indicating the making in that communication of a contract, or a confirmation, admission, note, memorandum, or writing is not insufficient because it omits or incorrectly states one or more material terms agreed upon, as long as the evidence provides a reasonable basis for concluding that a contract was made.

Going further, the law now allows for electronic signatures on documents creating a written binding contract, similar to the Federal Law on the same topic and allows computer information to be formed into a written contract:

 

CC 1624   (4) For purposes of this subdivision, the tangible written text produced by telex, telefacsimile, computer retrieval, or other process by which electronic signals are transmitted by telephone or otherwise shall constitute a writing, and any symbol executed or adopted by a party with the present intention to authenticate a writing shall constitute a signing.

 

Conclusion:

The above citations are only a small segment of the copious law and statutes, relating to the enforceability of verbal contracts in California. Suffice to state that anyone feeling that a binding verbal agreement may exist should seek competent legal counsel to determine if that is the case and not assume that only a writing can bind the parties even in those areas normally required to be in writing.

Courts dislike fraud and are inclined to enforce contracts if they feel that one of the parties somehow “fooled” the other side into relying on a promise. As seen in our article on Contracts, such concepts as waiver and promissory estoppel can be invoked to create a binding agreement even if the formalities are not adhered to.

Which is not to say that one should opt for oral contracts. A writing is always better and the cost and turmoil of attempting to enforce a verbal agreement are quickly evident. Such useful clauses as providing for arbitration and mediation or attorneys fees to the prevailing party can be inserted in a written contract and cannot be enforced in an oral contract.

And certain types of contracts involving real estate or guaranties are extremely difficult if not impossible to enforce absent a writing, even with all the exceptions noted above.

Get it in writing if you can. If you no longer can, do not give up until you have consulted with experienced counsel.