Is a Verbal Agreement legally binding in Australia?

Author: Jasmine Burrows, Progressive Legal

When it comes to agreements, many people often assume that a written contract is the only legally binding form. Not true. Verbal agreements also can be enforceable if conditions are met and there are some agreements which must be in writing (e.g. sale of land etc – see below).  

In Australia, the question of whether a verbal agreement is legally binding depends on several factors.  

This article will explore the legal standing of verbal agreements in Australia, examining the conditions under which they can be enforceable, and the limitations associated with them. 

What is a Verbal Agreement? 

A verbal agreement, also known as an oral agreement, is a spoken arrangement between two or more parties. These agreements are based on mutual understanding and verbal communication, without the involvement of written documentation. Many people choose to solidify verbal agreements via hand-shaking, however, this is not necessary.  

In a verbal agreement, the parties involved express their intentions, negotiate terms, and reach an agreement using spoken words. These agreements can cover a wide range of matters, such as buying or selling goods, providing services, or even settling disputes. 

What is required to make a verbal agreement enforceable? 

In order for a verbal agreement to be legally binding, it must satisfy the five elements of a contract.  

There are 5 elements of a binding contract, they include: 

1. Offer and Acceptance

For a verbal agreement to be legally binding, there must be a clear offer made by one party and clear acceptance by the other party. Both the offer and acceptance need to be communicated clearly to communicate mutual consent.  

2.  Consideration

Consideration is the value that each party is offering as part of the agreement. There should be an exchange of value to display valid consideration. Generally, it involves the payment of money, but it can also include an object that has value like a piece of jewellery. It could also be a promise, an act, or refraining from doing something. It is the often considered ‘the motive behind the deal’ or the ‘the price you have to pay’ for the agreement.  

Remember, the value that each party is exchanging is irrelevant when enforcing a legally binding verbal contract. It does not matter whether it is equal in value or not. So long as all parties are offering something to exchange. This is because the role of the Magistrate/Judge/Court officer is to determine whether or not there was a legally binding agreement on the balance of probabilities, and not to evaluate the value of an offering.  

3.  Intention to create legal relations

There must be an intention to create legal relations to form a legally binding verbal agreement. This is what differentiates a legally binding verbal agreement from an informal verbal agreement.  

For example, in a commercial context, often it may be assumed that a verbal agreement would be legally binding. This is because it is established in a business setting and it is standard practice for commercial parties to create legal relations with each other. On the other hand, in a social context, you may agree with your friend to go out for coffee which would not be deemed as legally binding. This is because it is too difficult to establish an intention to create legal relations because the setting is too informal and social.  

4.  Legal capacity

The parties involved in a verbal agreement must have the legal capacity to enter into a contract. ‘Capacity’ is the legal ability to enter into a binding agreement. If an agreement was made with someone who does not possess the legal capacity to do so, there will be no legally binding contract. For example, individuals must be of sound mind, over the age of 18, not bankrupt, and not under the influence of any drugs or alcohol that may impair their judgment. 

5.  Certainty

A vital element of any contract, including verbal agreements, is certainty of terms. The terms of the agreement must be clear, specific, and unambiguous, leaving no room for misinterpretation. Unclear or vague terms may weaken the enforceability of a verbal agreement. 

This means that if either party disagrees on the terms of a verbal agreement, then the agreement cannot be seen as ‘certain’ from a legal perspective. If you do make a verbal agreement with someone, it is significantly important to ensure that you are both clear on the specific terms of the agreement. If you are unsure about anything, make sure you clarify.  

What are the risks of a Verbal agreement?

While verbal agreements can be legally binding under certain circumstances, there also risks to keep in mind when entering one.  

Difficult to Prove Terms

With verbal agreements, it is very challenging to prove the exact terms of the agreement. Without written evidence, it becomes one party’s word against the other’s. i.e., he said / she said. This can lead to arguments and disputes over the interpretation of the terms of the agreement. Obviously, it is difficult to prove in those cases especially if the other party is lying, however it is still a contractual agreement. It is more difficult to argue if it is in black and white.  

Limited Legal Protection

Verbal agreements are more limited than written agreements because you are more likely to encounter misunderstandings and miscommunications. Each party may have different recollections or interpretations of what exactly was agreed upon. Considering there is no substantial evidence, this can jeopardise your position when asserting your rights or seeking legal remedies.  

Difficult to Enforce

Without a written contract to present as evidence, it may be harder to argue the existence of certain terms in Court. This increases the risk of disagreement and litigation when recalling specific terms like timelines, obligations, and costs. It can lead to significant delays, uncertainty, and higher legal costs. 

How do you prove that a verbal agreement exists?

Proving that a verbal agreement has been made can be difficult due to the lack of tangible written evidence. Some ways you can prove that a verbal agreement exists include: 

Witness testimony

If witnesses were present when the agreement was established, they can provide testimony. They can present their firsthand account of the parties’ negotiations and the terms agreed upon. This will include when the agreement was made, what was said, where you were, who you were with etc.  

Emails or Correspondence

Although the agreement itself may be verbal, there may be email exchanges, text messages, or other forms of written correspondence that reference or discuss the terms of the agreement. These electronic records can serve as supporting evidence of the existence of the verbal agreement. 

Performance of the Agreement

If one or both parties have already started performing the terms of the verbal agreement, their actions can be used as evidence to prove the existence and terms of the agreement. For example, if one party has already made payments or provided services as per the agreement, it demonstrates that there was a mutual understanding and acceptance of the agreement. 

What types of agreements are legally required to be in writing?

Some agreements must be in writing for them to be considered enforceable and legally binding according to specific legislative requirements.  

These agreements include: 

• Financial agreements or credit agreements; 
• All types of deeds; 
• Assignments of copyright protection; 
• Payment orders; 
• Agreements for buying, selling or mortgaging land and houses; and 
• Agreements for the sale of a motor vehicle from a licensed trader. 

Case Law Examples

Moore v Aubusson [2020] NSWSC 1466 

The recent decision of Moore v Aubusson [2020] NSWSC 1466 demonstrates the capacity for a verbal agreement to be legally binding. In this case, the Supreme Court of New South Wales (NSW) issued a ruling in support of a married couple, Mr. Moore and Ms. Andreasen. The Court awarded them their neighbour’s estate valued at $9 million. This decision was made on the grounds that a verbal agreement between the couple and the deceased neighbour overrode the provisions outlined in her Will. 

Chambers v Brice [2013] QSC 232 

In the case of Chambers v Brice [2013] QSC 232, Mr Chambers alleged that he entered into a binding verbal agreement with his accountant, Mr Brice. The verbal agreement required Mr Brice to pay $3.2 million to Mr. Chambers. The agreement was said to be formed during three telephone conversations and during a meeting. The Court decided in favour of Mr. Chambers. They noted that the parties had engaged in a distinct pattern of behaviour which was consistent with the existence of the alleged agreement. This demonstrates that the conduct of the parties can be considered when deciding whether there is a binding verbal agreement. 

Key Takeaways

Verbal agreements may be legally enforceable if they meet the required elements of a contract. They do, however, carry legal risks and limitations. It is advisable to reduce important agreements to writing whenever possible to mitigate these risks and ensure clarity between the parties. 

When entering into a verbal agreement, it is crucial to seek legal advice to understand the applicable laws, rights, and obligations. If you are uncertain whether your verbal agreement is legally binding, consult our team at Progressive Legal. Feel free to fill out the contact form on this page or contact our office at 1800 820 083.