Laws on Verbal Agreements

In most cases, there are only three things required to form a legally binding contract: one party makes an offer, the other party accepts the offer, and there is mutual "consideration," meaning that both parties agree to exchange something of value. These three things don't have to be written down for a contract to be formed. For instance, if John says to Jane, "I will buy your bicycle for $20," and Jane responds, "OK. I will sell you my bicycle for $20," John and Jane have made a legally enforceable contract, even if they never write down the agreement. John made an offer, Jane accepted the offer, and both sides agreed to give up something of value. Each state has its own specific laws about contracts, and the rules applicable to your situation may vary based on where you are entering into an agreement.

Read More: What Are the Four Elements That Make a Contract Legally Binding and Enforceable?

Under a legal concept called "the statute of frauds," certain types of agreements have to be written down before they become enforceable. These are generally contracts that will take a long time to perform or involve a large exchange of goods or property. There are four broad categories of agreements that have to be put into writing before they are enforceable under the statute of frauds: land sales, loans or other debts, contracts that cannot be completed within a year, and sales of goods governed by the Uniform Commercial Code. The UCC covers sales of items worth more than $500 when the sale is made by a "merchant," which is defined as anyone who regularly sells a certain type of goods.

There is a reason that most contracts are eventually put into writing, especially when there is something significant at stake. Both sides want proof of what the other side has promised to do. If the parties disagree about what their obligations are under the contract, they may want to ask a judge or a jury to enforce it. Without a written document setting forth the terms of the contract, neither side has proof that his recollection of the parties' agreement is right.

Certain types of verbal agreements are not enforceable even if the parties agree on the terms of the exchange. For instance, a judge will not enforce a contract entered into by a person under the age of 18, because minors can't legally enter into contracts. Likewise, a contract based on misrepresentation, concealment of material information, or fraud by one of the parties is unenforceable. Finally, courts will not enforce contracts that are illegal or violate public policy. For instance, a contract for the sale of illegal drugs cannot be enforced in court.