Only contracts to do criminal acts are illegal, and making a run-of-the-mill verbal contract won't send an individual to jail in any state. But just because a contract is legal doesn't mean it is enforceable. Texas, along with most states, won't prosecute the maker of an oral contract, but in many cases it won't enforce the contract, either.
Some contracts must be in writing to be enforceable under the Statute of Frauds, while other contracts are simply too difficult to prove as binding contracts when oral.
Legal Does Not Mean Enforceable
Let's say that individual A contracts with individual B to buy a car for $1,000, but they don't put their agreement in writing. This is perfectly legal in Texas – legal here means that neither A nor B will be arrested and prosecuted for making a verbal contract. And, if buyer A brings the money, and seller B signs over ownership of the car, all is good and everyone is happy.
But if, when buyer A brings the money, seller B denies having made any such agreement, the contract's legality doesn't help much. The buyer can take the matter to court to force the seller's hand, but how will they prove that the contract even existed? And even if there were witnesses, the seller could say it was all a joke or that they agreed to sell an old, broken down Volkswagen for $1,000, but not the Tesla the buyer wants, or that the cost was $100,000, not $1,000.
That explains the primary problem with verbal contracts in Texas or anywhere. When the details of an agreement are not in writing signed by the parties, a court is reluctant to enforce the deal if the parties' recollections about those details differ. One can imagine instances where enforcement might be possible – think verbal agreement that was put on video – but these are not the norm.
Statute of Frauds in Texas
The Statute of Frauds is a legal doctrine that requires certain types of contracts to be in writing in order to be enforceable. The most common types of contracts covered by the Statute of Frauds include sales of real estate, agreements involving goods worth over $500, and contracts lasting one year or more.
The Statute of Frauds was initially part of the common law of this country, but has been formalized by code in most states. In Texas, it is found in the Business and Commerce Code at Title 3, Chapter 26.
The Statute of Frauds is said to have been invented to prevent fraud, with both evidentiary and cautionary functions. The evidentiary function is to ensure that there is written evidence of a legal, binding agreement. The cautionary function is to instill each party with caution when entering into a contract, making them more serious and deliberate in their agreements.
Enforcing Texas Statute of Frauds
Texas is among the many states that have enacted a law setting out a version of the Statute of Frauds. The Texas statute lists those types of contracts that are enforceable only when written.
Note that the statute does not make oral contracts on these matters illegal. It simply states that any promise or agreement described in the law cannot be enforced in court unless the agreement is in writing and signed by the person charged with the promise or agreement, or signed by their lawful agent.
Contracts covered in the Texas Statute of Frauds include:
- Promise by executor or administrator to answer out of his own estate for any debt or damage due from his testator or intestate.
- Promise by one person to answer for the debt, default or miscarriage of another.
- Agreement made on consideration of marriage or cohabitation.
- Contract for sale of real estate.
- Lease of real estate for a term longer than one year.
- Agreement not to be performed within one year from date of making the agreement.
- Agreement to pay a commission for sale or purchase of oil or gas mining lease or royalty, or minerals/mineral interests.
- Medical care agreement made by physician or health care provider.
- Loans from certain financial institutions.
Texas Verbal Contract Law
In Texas, a verbal contract is legal as long as it is not for an illegal purpose. For example, a verbal contract to provide illegal drugs is illegal, but the same contract would also be illegal if in writing. However, many verbal contracts are not enforceable.
Texas law provides that verbal contracts can be enforced as valid contracts if all of the following elements are established:
- One party made an offer.
- This offer was accepted by the other party.
- Parties were in agreement ("meeting of the minds") about the terms of the contract.
- Each party will receive some consideration.
Breaching an Oral Agreement
A breach of an oral contract is established with these elements:
- Valid existing contract between the parties.
- One party performs their obligation under the contract.
- Oher party fails to perform their obligation.
- Performing party is injured by the other party's failure to perform.
Note that in Texas, a breach of an oral contract has the same four-year statute of limitations as a written contract. That means that anyone entering into a contract can sue for up to four years after the breach of contract took place.
Use of Verbal Contracts in Texas
While lawmakers and judges might prefer that all business owners draw up written agreements, the fact is that many business agreements are verbal, "signed" by a handshake. And, as an interim agreement, verbal agreements can work well; they permit work to start quickly while the more subtle details are still being worked out.
Nevertheless, verbal contracts are problematic since the existence of the contract and its terms are difficult to prove in court. The cases of verbal contracts that are capable of being proved in court are usually those where there is corroboration by one or more witnesses.
Teo Spengler earned a J.D. from U.C. Berkeley's Boalt Hall. As an Assistant Attorney General in Juneau, she practiced before the Alaska Supreme Court and the U.S. Supreme Court before opening a plaintiff's personal injury practice in San Francisco. She holds both an M.A. and an M.F.A in creative writing and enjoys writing legal blogs and articles. Her work has appeared in numerous online publications including USA Today, Legal Zoom, eHow Business, Livestrong, SF Gate, Go Banking Rates, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, TurboTax.com, and numerous attorney websites. Spengler splits her time between the French Basque Country and Northern California.