Entrepreneurs – Is a Verbal Agreement a Binding Contract?

Many business deals have been finalised on a handshake alone. When two people trust each other and are eager to move forward with working together the formalities of paperwork and agreements can often be forgotten. But what happens when things go wrong? Can the handshake or verbal agreement be binding? This article looks at the consequences of verbal agreements. Here we go…

The general thinking amongst many entrepreneurs is that if there’s no agreement then the deal is unenforceable. This has lead to many disagreements and fallouts when the verbal agreement is not adhered to. Unscrupulous entrepreneurs may make false promises with the hope of going back on their promise by claiming a lack of a signed contract. The idea that lack of a signed agreement means there is no contract is wrong! In the eyes of the law, there is no requirement for a written agreement although a signed contract certainly helps if you want to prove what was agreed in the first place.

Here are the necessary elements for a contract:

There must be some kind of offer –

For example; I will sell my shoes for £40

There must be acceptance of the offer –

For example; OK, let’s do it. (The handshake)

There must be an intention to create a contract –

For example; You’re looking to buy shoes. I’m looking to sell shoes.

There must be ‘Consideration’ –

For example; Something in exchange – (usually money), but not always.

There must be clear terms –

For example; I will give you the shoes if you give me the money.

If you have all the above chances are you have a valid contract whether you have a written agreement or not.

We can say this with reasonable certainty because of past case law, in particular, the case Carlill v Carbolic Smoke Ball Company Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 Court of Appeal

In this case, which dates back to 1893 the Smoke Ball Company advertised in a newspaper that if any customer caught an illness after using their smoke ball in accordance with the instructions they would be rewarded with £100. A customer used the smoke ball and caught the flu shortly after.

In court, the company claimed that there was not a valid agreement in place since the offer was too vague, with no notice of acceptance. The court rejected the company’s assertion.

Although the above does highlight that there is not a necessity for a signed agreement to form a contract, it’s important to understand that some offers may not be offers at all, but are classed as ‘Invitations to treat” or a kind of pre-offer communication. Examples of this would be a shop display or someone who says, “I may sell to you”. So you do have to be careful as to the circumstances.

Other Considerations – Promissory Estoppel.

Promissory estoppel is a method in contract law that allows someone to claim damages if a party goes back on a promise even without a legal contract.

The requirements for Promissory estoppel are as follows:

The promisor made a significant promise that caused the other party to act on it.

The other party relied on the promise.

The other party suffered damages as a result of the promise.

Fulfilment of the promise is the only way the other party can be compensated.

The elements of the above were laid out in an English contract law case way back in 1947; Central London Property Trust Ltd vs. High Trees House Ltd (1947) KB 130

The elements above show that ‘Consideration’ i.e. something of value given in exchange is not required for Promissory Estoppel. This means it is feasible that a court could award damages even in the absence of payment and a legal contract.

Final Thoughts.

As an entrepreneur, you should be careful and be wary of any situation that involves making significant promises without a signed agreement. Lack of an agreement does not automatically mean you can back out of any details of the promises made, especially if the other party is likely to suffer loss as a result.

My name is Graham Jules, I am a Business Law Graduate (LLB Hons), founder of Pop Up World. and Pop Up World Token.

Some excerpts of this article are taken from the book Business Zero to Superhero

Please note this article is not legal advice always seek advice from a qualified legal professional in your jurisdiction.

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