Are verbal contracts binding?
In a word, yes. The old saying that ‘a verbal contract is not worth the paper it is written on’ is not quite true. There are certain contracts which require special formalities, such as those concerning immovable, or real, property and consumer credit agreements and such like. Other than those exceptions, a verbal contract can be used wherever a written contract can.
In Jersey law there are four essential elements for the formation of a valid contract. These are:
1. Capacity (a person must have legal capacity);
2. Consent (a person must freely give their valid and informed consent);
3. Objet (the subject matter of the contract);
4. Cause (the reason for the obligation to be performed).
If those four elements of a contract are present then a verbal contract is just as legally binding as a written contract.
What are the problems?
Verbal contracts are great as long as no problems arise (and in most cases, problems do not arise). The difficulties come when the parties fall out.
The principal problem with a verbal contract is evidencing what was agreed. People can have very different recollections of what was actually agreed. The risk of misunderstandings is significant – who was supposed to do what? When? And for what price? Where there is a significant disagreement as to what was agreed, it is difficult for a Court to determine what the terms agreed were, or even if there was a contract at all. A Court may refuse to enforce an agreement if it cannot be satisfied that there even was a contract.
If goods or services have been supplied in a business context then there must have been a contract of some kind. Often there is supporting paperwork, such as a quote or a list of specifications, that provide evidence as to the terms agreed. This may well be helpful should any dispute arise.
Other problems arise out of the absence of clauses usually incorporated into written contracts. These often deal with matters such as exclusion of liability, or exoneration from liability, or govern the rights of the parties to terminate. Importantly, they can also limit the damages which might be recovered for breach. All can be extremely important and all will be extremely difficult to evidence (even if they were agreed) in a verbal contract.
Putting everything into writing is not a panacea. Neither it is necessary to instruct a lawyer in relation to every contract you wish to enter (although the more important, or valuable, the contract is, the more important it is to seek advice). Putting down the agreement in writing is, however, a sensible thing to do. It reduces the risk of a misunderstanding. It increases the prospects of both establishing that there was a conract and enforcing its terms. It can make for a more trouble-free business life. And if there is a dispute, it can make it simpler, quicker and cheaper to resolve it.