Is a Verbal Contract Legally Binding in Business? [Solved]

Note: This article contains legal advice. We recommend you consult a lawyer before making legal decisions in your business.

There are a lot of advantages to being a freelancer. Flexible hours, being your own boss, and choosing what skills to focus on and what projects to take on are a few of them.

Dealing with legal stuff? That is not one of the advantages.

Particularly for creative-minded freelancers, the technicalities of running a business can be frustrating. Collecting payment, managing cash flow, scaling, filing taxes, negotiations, and written and verbal contracts, are a necessary part of working for yourself (we all need to get paid!), but, depending on your personality, not the most glamorous or fun parts of the job.

Contracts are particularly important for single contractors or small business owners. A contract protects you when clients try to change the terms of your agreement or refuse to pay altogether. Legal battles are expensive, but having a contract to enforce gives you strong leverage to work through a deal that has gone bad.

There are dozens of different types of contracts, including things like fixed-price contracts work-for-hire agreements, licensing agreements, implied contracts, retainers, contract-to-hire agreements and so many more. In this article, we will explore the more informal use of verbal contracts, when and how freelancers can benefit from their use, and the legalities of having only a verbal contract.

Next time you work with a client and the subject of a verbal contract comes up, you will be well-armed with information to protect both yourself and your business relationship.

What is a verbal contract?

A contract is simply an agreement between multiple parties, where something of value is exchanged. They are one of the most fundamental concepts in business, and used constantly.

Even before you became a freelancer, you worked with contracts all the time. Car loans, rental agreements, your cell phone plan, your utilities like water, power and internet, your email account and even everyday purchases are various contracts.

Some contracts are formally written down, signed and maybe even notarized. Others are implied––when you hand over your money at the first drive through window, you are entering into a contract, where you expect to be handed your diet soda at the second window. Or maybe that last one is just me?

A verbal contract–sometimes called an oral contract–is exactly like a written contract except for the obvious difference: it was never written down. It’s a formal agreement to exchange something of value. More on verbal contracts in our glossary.

For a verbal contract to be, in fact, a contract, there are three elements that must be present.

1. An offer

Either you or your client would suggest the terms of the agreement. Usually, this would be the amount of money the client is willing to pay in exchange for set services. For example–your client offers to pay you a set hourly rate, a monthly retainer, or a flat project fee. The agreement has to be clearly understood by both parties.

2. Acceptance

You have to both verbally agree to the deal. Unlike a written signature, there is no one right way to do this. However you say yes, you and your client have now struck a bargain.

Believe it or not, the handshake is optional. A verbal contract can happen over the phone, on a Zoom call, in person, or even through a voicemail.

3. Consideration

This last one is the trickiest part to understand. Consideration is a legal term that means that both parties have skin in the game. If you gift your services to a non-profit charity, they aren’t giving anything up in the deal, so it’s not a contract.

Or if a client offers to give you a discount on their products or services in a friendly conversation without asking for anything in exchange, that isn’t a contract either. Both sides have to be offering something of value.

The real difference between a verbal contract vs. written contract

We’ve already covered that a written contract and a verbal contract are essentially the same thing, aside from one of them being spoken and one being written down.

But the real difference between the two is enforceability.

A written contract is a physical (or possibly digital) artifact that can be seen, verified, authenticated, and presented as evidence in a court case. It carries a signature and a date, both of which give a lot of weight to any claims you have against a client, or vice versa.

A verbal contract, on the other hand, is much harder to pin down.

It’s a literal he said/she said kind of moment.

You can claim to have entered into a verbal contract, but unless you can somehow prove that it happened, this claim will not hold up in court.

You should also be aware that in some cases, a verbal contract just won’t fly. Real estate exchanges require a written signature, as do wills in most states. For business agreements, however, a verbal contract is usually seen as a legal agreement.

The final difference between a verbal contract and a written one is that a verbal contract has a shorter statute of limitations. Depending on the state where you do business, you may have as short a time as a year to enforce an oral agreement.

Is a verbal contract legally enforceable?

You may have heard the phrase, “A verbal contract is only as good as the paper it’s written on.” This makes for a quippy TV show line, but it’s not actually true. Verbal contracts are, in most cases, just as legally binding as their written counterparts.

The problem is, they are more difficult to prove.

When it comes down to it, a verbal contract is really built on trust. And sadly, trust in business can be a dangerous thing.

There are still ways to protect yourself with a verbal contract, of course. It all comes down to evidence. If you’re planning to use a verbal contract, here are some ways to gather the necessary proof:

1. Recording everything

Remember when I said you could get a verbal agreement through a voicemail? This is actually a great idea, because then you have solid proof that the agreement happened. Even better, a verbal contract conducted over a Zoom call that is recorded will give you pretty solid evidence, should you need it later.

2. Witnesses

A verbal contract most often happens when everyone is in a rush to get things done and there is no time to write a full contract. If you find yourself in a tight spot without time to draw up and sign a written document, calling in witnesses is the next best thing.

Both parties should have witnesses present–these individuals can then be asked if issues should arise.

3. Written documentation after the fact

It’s a great idea to formalize a verbal contract at some later date. Even a quick email works, just to say, “Hey, per our conversation on (date), I am planning to perform these specific duties, and you promised to pay me this specific amount.

I just wanted to verify that we both remember the same terms. Will you shoot me back a yes/no on this when you get a chance?”

If it seems awkward to bring up things like recording the conversation, remember, a court battle is not the only reason to ensure your contract is documented.

Human memories are notoriously terrible. Recording the contract or formalizing it with a written document later on just helps ensure that everyone is on the same page, and you can refer back to it if you’ve forgotten yourself what you agreed to.

What to do if someone breaches a verbal contract

If you have taken the necessary steps to document your verbal contract, a client is going to have a pretty hard time taking advantage of you.

However, sometimes things just happen.

The first thing to do is have an honest conversation with your client. Assume the best. Maybe your check got lost in the mail. Maybe they are having cash flow issues. Maybe they just forgot. Maybe they remember the terms of your agreement differently (and they aren’t you glad you have that recording?), or maybe they really are trying to take advantage of you.

The point is, don’t jump to conclusions or go into the conversation with your emotions revved up. Remind the client about what you agreed to, and ask why they haven’t held up their end of the deal.

If this doesn’t work, you can use the evidence you have gathered to enforce your contract. Start by simply going above your client’s head to the next-level manager at the company.

If this doesn’t work (or if your client IS the head of the company), you can hire a lawyer. Just know that it will cost you a decent amount of money (probably $1000+), so make sure it’s worth it.

Should you use a verbal contract?

As with most business decisions, this one is on you.

Personally, I rarely use a verbal contract. Having a written agreement is just safest for both you AND the client. Typically my clients bring up the use of a contract before I even have a chance to.

That said, I have taken on clients once or twice based on a verbal contract. I’ll give you two examples. Once was for a friend I had known for decades, and once was in a situation where the deadline was within two hours of the proposed work.

In the first situation, we did eventually sign a written agreement, because no matter how good your friendship is, it’s just better to have a formal agreement. In the second situation, I charged a pretty hefty rush charge, which was agreed to up front, and the potential benefit outweighed the risk for me. Fortunately, I got paid in both of these instances without any trouble.

There are probably times when a verbal contract makes sense. As long as you know what you’re getting into, you can make an informed decision about entering into a verbal contract.

Still, recording the conversation won’t hurt.

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