an agreement

an injury

a relationship

a purchase

Agreements (also known as "Contracts") on a handshake are typically classed as verbal agreements. Establishing the existence of a verbal agreement can be tricky to prove mainly due to the lack of a documented record.

The difficulty arises in working out what the "Terms" (also known as "Terms and Conditions" or "Terms of Agreement") that both parties have agreed on and what each party is expected to do. Compare this to a written agreement, where the terms are set out in numbered paragraphs.

Below are the basic elements that a court requires to be proven for a verbal agreement to be enforceable. The requirements are the same as a written agreement.

Verbal Agreements: What needs to be proved

1

An offer


Watch out for

offer was rejected

offer was withdrawn

expiry of offer

there was a counter-offer

uncertain or incomplete terms

commercial offers over $40,000

2

Acceptance


Watch out for

acceptance must be communicated

proof of acceptance

3

Consideration


Watch out for

adequacy of consideration

4
Intention to create legal relations


Watch out for

where no consideration provided

commercial agreements

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What might a court do?


Consider the following

look at if an agreement exists

look at the terms of the agreement

make and order for breaching or terminating the agreement

And here's some more detail

1An offer

An offer by the party offering something in exchange for something such as a product or service. The verbal agreement must be on proposed terms (e.g. the product/service being offered and the price to be paid). An example of an offer is a verbal quotation over the phone from a product or service supplier.

Circumstances to watch out for

offer was rejected

If an offer was rejected by the party it was directed to, then it ceases to be an offer.

offer was withdrawn

If the party who made the offer then withdraws it, then it ceases to be an offer provided that it was not already accepted by the party the offer was directed to.

expiry of offer

If the offer expires, then it ceases to be an offer. If the verbal agreement does not include a specific discussion on how long the offer is open for, the offer expires at what would be a "reasonable" time for that kind of product or service.

there was a counter-offer

If an offer was not accepted, but the person who the offer was directed to made a counter-offer, then the orginal offer ceases to be an offer.

uncertain or incomplete of terms

If important or "essential" terms in an agreement are uncertain, incomplete, vague or meaningless; and if additional evidence cannot establish what the term was meant to mean, then there cannot be a valid offer.

commercial offers over $40,000

The Australian Consumer Law will imply terms (e.g. guarantees that products are fit for their intended purpose) into verbal agreements unless it is a business related transaction where the value of the product or service is over $40,000.

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2Acceptance

Acceptance by the party who the offer is directed to. An acceptance shows a willingness by that party to accept the offer without further negotiation, and be bound by the proposed terms in the offer.

Verbal agreements are considered informal agreements that can be accepted verbally, as opposed to formal agreements such as some written agreements (e.g. contracts for the purchase of land) that can only be accepted validly by signature.

Circumstances to watch out for

acceptance must be communicated

An offer cannot be considered accepted if it was not communicated to the party that made the offer. A verbal acceptance to the party who made the offer is therefore a valid way to communicate acceptance unless the party offering has previously indicated how acceptance must be communicated (e.g. by post or by email).

proof of acceptance

While a verbal acceptance is a valid acceptance, it is wise to have a witness present or to send an email confirming acceptance, so that there is proof establishing the agreement should an issue occur at a later date. A verbal acceptance followed by both parties performing their obligations under a verbal agreement will also be sufficient to establish proof of acceptance.

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3Consideration

Something of value exchanged for what was offered. It could be something of value given or promised such as money, a service or even a peppercorn.

Circumstances to watch out for

adequacy of consideration

Any consideration can be good consideration, therefore it need not be adequate consideration. This means that an agreement will be valid even if one party to the agreement does a bad deal and offers greater value than what is exchanged in return.

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4Intention to create legal relations

This is to ensure that both parties wanted to be legally bound by the agreement. Being legally bound means that the agreement is enforceable in a court. Compare this with being morally bound which is not enforceable in a court, no matter how much one party feels hard done by by the other party.

Circumstances to watch out for

where no consideration provided

If there was no consideration exchanged then it may stand to reason that the parties did not intend to be legally bound by the agreement.

commercial agreements

In business to business or commercial agreements, it is usually presumed that the parties are intended to be legally bound.

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What might a court do?

:{look at if an agreement exists

It may be that one party will deny that the verbal agreement exists at all which will require the court to look at whether there was an offer and acceptance. An agreement may be found not to exist if the party claiming that there was agreement cannot provide proof. This is less likely to be an issue where there is a witness to the agreement, some follow-up documentation, or some action showing the parties performing their obligations of the agreement.

:{look at the terms of the agreement

Disputes around handshake/verbal agreements will usually occur because one party will want to get out of performing their part of it. In making their decision, courts will focus on the detail of the terms of the agreement to determine what it was that the parties agreed to. Because the terms will be verbal, the most difficult situation will occur where it will come down to one party's word against the other. To do this, the court may look to the credibility of each party's claim on what the terms were, and the actions each have taken since the agreement was made and infer what the terms were from their analysis.

If the terms are uncertain, incomplete or unfair (in the case of consumer agreements) in spite of all the 4 elements above being present on the face of it, a contract may be void, or a court may remove a term to keep a contract on-foot, or vary or imply a term to reflect the presumed intentions of the parties. Importantly to know, courts will be reluctant to void an agreement and will do what they can to keep a contract on-foot.

:{make and order for breaching or terminating the agreement

Verbal agreements are unlikely to contain a term that specifically caters for terminating agreements, if such a term exists then courts will look at the circumstances that termination is allowed. There can be serious consequences if a party decides to not fulfil their part of an agreement (called "repudiation") or to terminate an agreement because the other party breached a term - these can include a monetary award (called "damages") or ordering that a party perform their part of the agreement. A party can only terminate an agreement for breach of an "essential" term, which is a term so fundamental to the agreement, that the terminating party would not have entered into an agreement unless they were assured that the obligation in the term would be strictly performed. The point here is that termination should not be taken lightly as courts may penalise a party for wrongfully terminating an agreement.

Consult a lawyer if you are unsure about your legal situation.

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