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Oral Contract


An oral contract is a type of business contract that is outlined and agreed upon verbally. These contracts are legally binding, contingent upon the fact that all contractual elements such as offer, acceptance, and consideration are satisfied. However, they can be difficult to enforce due to lack of proof compared to written contracts.


The phonetic pronunciation of “Oral Contract” is “ɔːrəl kɒn.trækt”.

Key Takeaways

  1. Legally Binding: Oral contracts are legally binding and enforceable, just like written contracts. The parties involved must fulfill the terms agreed upon verbally. It’s important to note that this is true in the majority of situations, although some types of agreements still need to be in writing.
  2. Evidence: Despite their legality, oral contracts can present difficulties when it comes to proving their existence or terms in case of a dispute. This is because they lack the tangible evidence that written contracts provide. Therefore, it’s recommended to back up verbal agreements with written evidence where possible for security.
  3. Exceptions: Not all contracts can be oral. Some contracts such as those dealing with real estate, contracts for goods over a certain value, or contracts that cannot be performed within a year, need to be in writing to be enforceable as per the Statute of Frauds.


Oral contracts are significant in the business/finance realm because they symbolize verbal agreements or promises between parties that are legally binding. Yet, even though oral contracts can be enforced by law, they are often harder to prove, and therefore less secure than written contracts, possibly leading to disputes and misunderstandings about the terms and conditions. Their informal nature allows greater flexibility which can be valuable in certain business situations where rapid agreements are necessary. However, the significance of an oral contract lies in the trust of the parties involved and their mutual understanding of the agreed terms. Understanding the concept of an oral contract helps individuals and businesses to properly navigate negotiations and agreements in their respective financial transactions.


An oral contract, also known as a verbal agreement, serves a critical role in everyday transactional relationships, providing a convenient, informal mechanism for parties to enter into an agreement without the necessity for written documentation. It enables people to have flexible, swift negotiations and allows for the immediate commencement of agreed-upon actions. This immediacy can be especially beneficial in business relationships where an opportunity must be exploited quickly, and there isn’t necessarily time for drawn-out contract discussions or formal written documentation.Despite its convenience, it is worth noting that the purpose of an oral contract is not to evade the legal framework but rather to promote quicker transactions. It is legally binding, assuming it meets standard contract principles like mutual consent, consideration, and capacity of the parties. In business, they can be used for various transactions, such as agreements on service provisions or product sales, providing both parties understand and agree to the essential terms. However, the inherent uncertainty of verbal agreements concerning proof of its existence or terms should make written contracts the preferred option for significant business transactions.


1. Buying Personal Items or Services: One common example of an oral contract is a situation where you verbally agree to buy someone’s bicycle for a certain amount. If you show up with the mutually agreed upon money and the person fails to deliver the item, they could technically be in breach of an oral contract. Similarly, if you hired a neighbor kid to mow the lawn or shovel the snow, that’s also an oral contract.2. Freelancing or Consulting Work: A freelance graphic designer or a consultant may agree to do a specific set of tasks for a client on the basis of a phone conversation or an informal meeting. They might agree on terms verbally such as deadlines, the scope of the work, and payment. 3. Restaurant Orders: Each time you order food in a restaurant or a café, you enter into an oral contract. You order what you want and agree to pay the menu price in return for the specified food items. When you have eaten and ask for the check, the restaurant can legally insist on payment because of the oral contract formed when you ordered the food.

Frequently Asked Questions(FAQ)

What is an oral contract?

An oral contract is an agreement discussed and agreed upon verbally, not recorded or written down. While less common than written contracts, they can be just as legally binding if certain elements are present.

Are oral contracts legally binding?

Yes, oral contracts can be legally binding if they involve a clear offer, acceptance, and consideration. However, proving the terms and conditions of an oral contract in court can be difficult without written or tangible evidence.

What kind of evidence is admissible in a dispute involving an oral contract?

Witnesses, emails, text messages, or other evidence that indirectly proves the terms of the contract or the intention to create a contract can be used in dispute cases involving an oral contract.

What types of contracts need to be in writing to be legally binding?

Contracts involving the sale of real estate or vehicles, contracts for marriage, and contracts that cannot be completed within a year must be in writing to be legally binding.

Why are written contracts preferred over oral contracts?

Written contracts are often preferred as they provide a clear record of all terms, conditions, and expectations of all parties involved. It provides more legal protection and clarity, reducing the likelihood of misunderstandings.

Can oral contracts be modified?

Yes, oral contracts can be modified. However, similar to creating the original agreement, mutually agreed-upon changes are usually required. Again, proving these changes in court can be challenging without written evidence.

What are the challenges in enforcing an oral contract?

The main challenge in enforcing an oral contract is the lack of physical proof and reliance on memory or testimony. Other challenges include unclear terms or expectations and lack of details.

Can businesses rely on oral contracts?

While businesses can theoretically rely on oral contracts, it is far from the best practice. Due to their informal nature and the difficulty in enforcing them, it is generally recommended for businesses to use written contracts for any agreement.

Related Finance Terms

  • Verbal Agreement
  • Implied Contract
  • Express Contract
  • Legal Binding
  • Contractual Law

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