Legal: Oral Contracts in Texas

One of the most popular questions I have received over the years involves whether oral contracts are enforceable.  The answer, as you can imagine, is “maybe”.  I would never advise anyone to enter into an agreement simply on a handshake and a promise, but people do it all the time and then frequently have to retain an attorney to clean up the mess when things go south, as they often do.  Written contracts provide terms for the parties to abide by, and while they are often broken and still result in their fair share of litigation, there are often far fewer issues to try and figure out when compared to an oral agreement.  In an oral agreement, each party will have their own versions of what the terms were, how they were to be carried out, and what was supposed to happen if things did not go as planned. One of the largest problems with oral contracts is errors in people’s memories often attributed to the fast pace that many of us live our lives.

Consent

To determine if an oral agreement is binding on the parties, there are two initial threshold questions.  First, was there mutual consent (or a meeting of minds) whereby both parties to the agreement intended for there to be a contract?   This gets to the parties’ intent when the agreement was made; was one person just playing along without intending to make a deal?  Was a person just joking when they agreed? 

To prove intent, and the parties’ consent to the agreement, you must delve into how the person acted towards the supposed contract.  Did the parties act like there was a contract?  Are there emails or other communications that show the parties were interacting with one another as if there was an agreement in place?  Did the parties start acting under the contract – i.e., doing the things the contract required?  Each of these items requires someone (often a jury or judge) to determine intent, which is no easy thing. 

Consideration

The second threshold is met when the parties exchange consideration.  If you offer to sell your car to the neighbor for $400.00, but the neighbor never pays the $400.00, there has been no exchange of value.  Therefore, the neighbor cannot enforce the sale because they have not paid the consideration.  For an oral contract to be valid (or any contract for that matter), the parties need to exchange some value.  While this may be cash, it could be items of personal property, intellectual property or even time. 

Legal

Another step in determining if an oral contract can be enforced is if the basis of the contract is legal.  If the substance and/or the actions required of a party in a contract are illegal, then the contract cannot generally be upheld.  For example, if you agree to pay $500.00 to a friend to steal a car, and he steals the car, the friend cannot sue you for the $500.00 if you refuse to pay because the contract was based upon an illegal act.  While this example is obvious, the issue can get complicated especially when the contract involves the laws of multiple states or countries where certain things may be perfectly legal in one place, but illegal in another. 

Must be in Writing

There are certain types of contracts that must be in writing because if they were not, they would be subject to a lot of fraud.  In Texas, real estate contracts must be in writing and oral real estate contracts are unenforceable.  Likewise, the sale of items for an amount of more than $500.00 must be in writing.  Other examples are oil and gas leases, and lease agreements generally must also be in a written contract.  Finally, if an agreement cannot be completed in one year, then the parties must reduce it to writing.  If the agreement could be completed in a year, it may be enforceable, but if it is impossible to perform in one year it is unenforceable. 

Get it in Writing

Many of my clients love the flexibility of an oral contract due to the fact that an agreement can be reached very quickly (without multiple drafts of verbiage in contracts that all parties have to agree upon). However, an oral contract is very difficult to prove in court and I tell folks all the time to get your agreements in writing and always read what you sign before signing.  If these two acts are taken, many disputes involving agreements can be easily avoided.  However, the reality is that many still make agreements on a handshake alone, which comes down to one person’s word versus another should a disagreement arise. While a handshake agreement may be enforceable, it is always a huge risk and I can assure you that almost every time it would have been a lot cheaper (and much less stressful) to put an agreement together in writing in the beginning. Life rarely goes as planned, and a written contract will assist you in determining the appropriate steps when and if the terms of the contract do not go as planned.