How do verbal promises become legally binding?

Dynamic Business revisits a highly interesting topic on how verbal promises become legally binding, what that looks like and when it becomes “official.” In 2013, Lachlan McKnight gave us his expertise on the matter, helping small business owners understand where that line is. 

Lachlan is the CEO of LegalVision. He co-founded LegalVision in 2012 with the goal of providing high quality, cost effective legal services at scale to both SMEs and large corporates.

His invaluable advice below provides 3 steps to remember and learn when it comes to a verbal promise becoming a legal contract in the workplace.

By: Lachlan McKnight

I once heard an employer tell an employee she didn’t have to fulfill a promise because it was “only a verbal contract”.

An agreement does not need to be in writing to be legally binding as enforceable contracts can either be in written or verbal form.

So be warned! In some circumstances you might be bound by what you say. Here are the three main ingredients for a verbal agreement to become contractually binding.

Step 1 – There needs to be offer and acceptance

The ‘offer and acceptance’ principle really is as simple as it sounds, if someone makes an offer and you accept – then you’ve fulfilled the first step for a verbal agreement becoming legally binding.

For example:

Martin (the boss) verbally offers Sam (his employee) a promotion – ‘offer’.

Sam accepts the offer – ‘acceptance’.

This is just step one – if that is all that happened then neither party would be bound at this point in time.  This is not because the agreement is verbal, but because nothing of value has been exchanged or promised.

Step 2 – “The Consideration Principle”

If every offer/acceptance agreement was legally binding this would create absolute chaos in society because everybody would be totally bound to every little promise they make.

Luckily the law will only consider an agreement to be enforceable if the person receiving the promise provides something of value in exchange for it. This is known as ‘consideration’ (as strange as it may sound to call it that).

So in Martin and Sam’s case, nothing of value was exchanged – so Martin would probably be legally free to renege on his promise.

But in that case, if Sam had already started performing the work associated with the promotion and Martin was aware of this, then it is more likely that a court would recognise the verbal agreement as binding.

So please be aware that the ‘something of value’ does not need to be money.

Step three – Intention: Did both parties show an intention to be bound by the agreement?

Both parties must have shown they intended to create a legally binding agreement for courts to recognise it as such.

Courts will look at the surrounding circumstances to determine whether you intended to be legally bound by the promise. So you can’t just say after the fact “I never intended to be bound”.

In most cases where something of value has been exchanged, courts will usually presume that the parties intended to be bound.

Biggest barrier in proving a verbal agreement – evidence!

The onus is on the person arguing for the existence of a contract to show the verbal agreement was a legally enforceable contract.

This is a tough task, because it really will be one person’s word against another’s. If there is nothing in writing about the conversation it will be extremely difficult to prove exactly what was said and what was promised. The human memory is flawed and people sometimes remember what they wish had happened, not what actually did happen.

Either way you should try to make it clear when you’re making verbal agreements when you do and do not intend to be bound and when you are and are not promising something.

Don’t over commit yourself! Under-sell and over-deliver every time.