Do Oral Agreements Hold Legal Weight in Texas?

What Is an Oral Agreement?

A verbal (or oral) agreement is a contract that is either spoken or written. Although oral contracts are often enforceable under Texas law, they are difficult to prove if either party later denies them. The court must make a finding as to the substance of the agreement to determine enforceability. This is more difficult when an agreement is oral and more expensive, which is why most contracts are put in writing.
A verbal agreement is one that is negotiated orally, not through a written document. The terms of the verbal agreement may be communicated in written or electronic form, such as emails or text messages, but without a formal, comprehensive written agreement addressing and memorializing all of the terms .
Verbal agreements are generally not advisable. While verbal agreements are often legally binding, their informality and lack of definiteness may make it difficult to resolve any later disagreements that may arise, and to enforce the agreement. For example, each party may have a different recollection of what was said. When negotiating a verbal agreement, it is important:
•to be clear about what terms are being accepted;
•to put them into writing, even if doing so isn’t required for validity.

The Law regarding Oral Agreements in Texas

In Texas, the legal framework governing verbal agreements is primarily outlined in the Business and Commerce Code (Title 10). Although written agreements are generally preferred for clarity and enforceability, oral contracts can be legally binding. Under Chapter 26 of the Texas Business and Commerce Code, verbal contracts are valid, provided that the parties can demonstrate material terms and mutual assent.
Some transactions are exempted from the general rules, however. The Texas Statute of Frauds in Title 14 of the Civil Practice and Remedies Code outlines situations where oral contracts are not enforceable, or invalid. Section 26.01(a) of the Business and Commerce Code specifies that only agreements for goods priced at over $500 require a written contract, while the Statute of Frauds sets the limit at $500 in Section 26.02(a).
In addition to stating that certain contracts require a writing for enforceability, the Texas Statute of Frauds also pertains to how a contract needs to be "signed." To be enforceable under the Statute of Frauds, the writing does not need to be "signed" by all parties, though it does need to contain an "authoritative representation" of the "signature" of the party to be charged. While courts have addressed the technicalities of what qualifies as an "authoritative representation" of a "signature," a contract may also be enforceable if the party to be charged in the enforcement action admits to the contract in court.
While any agreement within the statute of frauds requires compliance with the Statute of Frauds, some agreements may be subject to the parol evidence rule, which limits the oral evidence that can be presented to clarify the meaning of a contract. Article 31.33 of the Texas Business and Commerce Code specifies that the parol evidence rule does not apply to oral agreements made before a written contract contemporaneously with the written contract.
The general standard for proving the existence of a contract for the sale of goods is a preponderance of the evidence. Section 26.01(b) of the Texas Business and Commerce Code states that "a contract for the sale of goods may be found . . . regardless of whether the contract is oral, continues over a period of time and is supported by evidence of partial performance." In evaluating the evidence presented for the existence of a verbal contract, courts will consider the nature of the agreement, the material terms of the agreement, and the intentions and actions of the parties over the life of the agreement.

Enforceability Conditions

If the party challenging the enforceability of a verbal agreement is successful in overcoming the hurdle that there was no written document for the court to consider, it must then overcome the additional hurdle that the verbal agreement is voidable because it does not follow the strict requirements of some oral contracts, namely, it lacks mutual consent of the parties and consideration.
Generally speaking, in order to be enforceable in a court of law, "the terms of a contract must be sufficiently definite and certain so that the court can give it an exact meaning" (e.g., both parties’ signatures are on the agreement). When a contract is clear and specific about its terms, the law assumes that the agreement between the parties is covered by the Statute of Frauds and no additional proof is necessary to bind the parties to the terms and conditions therein.
As stated above, mutual consent entails that each person must mutually agree to the same thing. In addition, a meeting of the minds, when referred to in the context of mutual consent, means both parties know exactly what they are getting into and that both will fulfill their parts of the bargain. The courts therefore rely on some third-party evidence that establishes that the contract was agreed to by each party, therefore, establishing mutual consent. The court requires proof that the parties actually came to an understanding about the agreement’s terms, i.e., the specific intention of each party at the time of entering into the contract, as certain contracts require more specific expressions of intent before enforcement will be allowed.
Next, the parties’ exchange of consideration is also a requirement of an enforceable contract. For a valid and binding agreement to be enforceable, both parties must pay or offer something of value under the agreement. Consideration must arise as the result of the contract’s execution, and cannot consist of total past or future benefit provided or to be provided by one party in exchange for partial performance by the other party (also known as a "gratuitous promise" in Texas law).
For a contract to be enforceable, the law requires that one party perform or promise to perform some act necessary to complete the agreement at the time the contract is entered into, and that the other party complete the performance required by the contract. There must be something done in the present, and possibly the future, at the time of entering into the contract. Without such exchange of value (a "bilateral contract"), the contract is not enforceable and does not create a valid agreement between the parties.

Common Limitations and Exceptions

While verbal agreements are generally binding on the parties, there are exceptions and limitations on such agreements. For example, the statute of frauds, codified at Texas Business & Commerce Code Section 26.01, places many agreements outside the oral contract canon. The statute of frauds requires that certain agreements be in writing. These include agreements involving the sale of real property, agreements that cannot be performed within one year, agreements which may not be performed without the assistance of an agent, agreements involving the sale of goods worth more than $500, and agreements involving the assumption of debt by a promisee.
Essentially, if an agreement is required to be in writing under the statute of frauds, an oral agreement is unenforceable regardless of any other provision permitting oral agreements. For example, if two parties enter into an agreement for the sale of real property, which is not written, then the agreement may be unenforceable even if the statute of frauds itself states that an oral agreement for such a transaction may be enforceable.

Establishing the Existence of a Verbal Agreement

Evidence of a verbal agreement can be hard to track down. Without a written document like an agreement, how do you prove a verbal contract in Texas? The most effective way to prove the existence of an oral agreement is to identify witnesses who heard the spoken words of the contract and can testify as to what those words were.
Witnesses can be anyone present during the negotiations or during the agreement itself; for instance, if you had dinner with a business partner and a third party where the contract was discussed, the third party could be called upon to testify . While witness testimony is one of the primary ways to prove a verbal contract, you may also be able to use other types of evidence such as:
A verbal agreement must contain essential elements, which means you must be able to identify key aspects of the contract to be legally binding. Generally, the following elements need to be identified:
To prove the existence of a verbal agreement, you must identify at least two of these crucial elements: offer, acceptance, and consideration. In addition, the contract must not be related to something illegal, the statute of frauds, or the state’s fraud laws.

Potential Risks and Issues

When it comes to legal agreements, the old adage "what you see is what you get" is not entirely accurate. Just because a deal is reached verbally does not mean that the terms are clear or that everyone remembers or understands them the same way. From a legal standpoint, there are a number of uncertainties. The ability to reference a written contract often lends clarity that is simply lacking when it comes to verbal contracts. At the same time, verbal agreements can have the effect of altering written contracts.
Some of the potential issues with verbal contracts include:
• Whether the statute of frauds applies – this refers to a law that requires certain types of contracts to be in writing, particularly those covering the sale of real property, for example. If the statute of frauds were to apply, it could render the verbal agreement unenforceable.
• Whether the alleged verbal contact is even truly what the parties intended or agreed upon – to what extent are the terms of the verbal agreement clear?
• Whether the verbal agreement is, in fact, a modification of a pre-existing written contract or an independent agreement – challenges to an alleged verbal agreement could be made on this point.
• Whether modifications to a written contract need to be in writing – again, the statute of frauds could apply, or perhaps a specific provision in the written contract requires that modifications be in writing.
• Which party’s account of the verbal contract should prevail and what evidence should be considered – since a verbal contract is difficult to prove, which evidence would be necessary to substantiate an alleged contract? For example, if it is alleged that the verbal contract was made at a business meeting between company executives, what evidence would substantiate that assertion?
• Whether the verbal contract comports with a party’s internal authority – in other words, did a person who entered into the verbal contract on behalf of a company have authority to do so?

Tips and Strategies for Oral Agreements

Although oral agreements can be legally binding in Texas, they are almost never advised for business use. Unless there is a strong reason not to, transactional attorneys always advise their clients to document their deals in writing. Verbal agreements are extremely difficult to enforce because no one can agree on what was said and by which person. In that situation, the court must make credibility determinations, and no one wins because a credibility determination is often a "guess." Even when there is enough evidence to require the court to enforce the mutual obligations (i.e., under certain statutory laws), the lack of documentation means that the enforceable laws will probably not be clearly stated, the documents or evidence supporting the claims will be incomplete, and, more than likely, the damages (if any) will be hard to prove. Therefore, depending on the circumstances, clients can enforce oral agreements based on a variety of oral and written evidence, other relevant documents , and parol evidence.
This doesn’t mean that you should never make verbal agreements. If the transaction is very simple and the damage is very low (e.g., a $20 lunch), then a verbal agreement is probably sufficient. However, if the transaction is complicated or the damages are high, it’s always better to put the agreement in writing. When is a verbal agreement binding? The issue depends on the complexities of the agreement, including the amount of money at stake. It is best to avoid vague agreements or agreements addressing material facts about the agreement. Generally, the larger or more complex the transaction, the more likely it will be that courts will treat the verbal agreement as legally binding.
In sum, in most situations, written contracts are the safest way to make an agreement. If you do not want to execute a written agreement at the outset, then at least consider executing a letter of intent. If you do make a verbal agreement, we recommend that you memorialize the agreement by reducing it to writing after the fact or drafting a formal contract.