A verbal promise can be made legally binding if it satisfies all of the elements of a contract.
To work as a contract, whether verbal or written, two parties should have the following,
- Offer and acceptance
- Agreed terms
- Intention to be legally bound
- Free consent
- Legal capacity
Let’s break down what this means!
Offer And Acceptance
Let’s look at a casual conversation between two friends:
Groom: ‘Would you play the guitar at my wedding for one hour? I’ll pay you $100.’
Here, the offer is a specific payment ($100) for a service (playing guitar), and the acceptance is the musician agreeing to perform the service.
The musician and the groom work out finer details – they agree the musician will bring his PA system and all equipment needed to play his guitar, and the groom promises to not be more than 20 minutes late. They agree the payment will be made by bank transfer the day before the wedding, and that free parking will be made available for the musician. The musician also agrees to play a particular playlist the groom has selected.
These details, also known as terms, are all part of the verbal contract. If the musician were to have a written service agreement, this would all be in there in far more detail.
These agreed terms between both parties all help make the contract more complete, and thus legally binding.
Intention To Be Legally Bound
Put simply, this means both parties intended to stand by their promise of what they agreed. So for example, a verbal promise probably wouldn’t be legally binding if someone said ‘I will let you choose my first born’s name if you give me that chocolate cake’.
Here, the intention may be to show how much one party wants the chocolate cake, rather than demonstrating their intention to be legally bound to let the other party choose their first born’s name.
However, using our other example, the guitarist expects he will be legally bound to the agreement and have to perform at the wedding for payment, while the groom expects he will have to pay the guitarist in exchange for what they agreed on.
This one is a big one! This means both parties should get something of value out of the contract. It doesn’t have to be money, but this is pretty common.
Here, the musician and groom exchange services for payment, so the thing of value, in other words consideration, is money for one party and music for the other.
As with any contract to be legally binding, the parties must have entered into the contract voluntarily and not under duress, through coercion or undue influence.
Let’s quickly go over what these mean.
- Duress – this is where one party forces the other party to enter into an agreement against their will. In these cases, the agreement will be rescinded (in other words, cancelled)
- Coercion – this is similar to duress, except it involves the use of threats or violence to force someone to enter into a contract.
- Undue influence – this is where one party abuses their power over another person due to the special relationship they have (for example, a parent might influence their child in a way that forces or unfairly influences them to enter into an agreement).
Generally speaking, a contract that involves these factors will not be enforced (however, this isn’t always the case!).
Legal capacity is not fixed, or black and white. A lot can affect whether someone has legal capacity at the time they entered into a verbal promise/ contract.
For instance, someone might be drunk at the time they make the agreement but otherwise normally has legal capacity. There are a few things that can make legal capacity a little tricky, so let’s go through them in more detail.
Generally speaking, if you aren’t capable of giving consent when entering into an agreement, the agreement won’t be valid. But again, this depends on the individual circumstances.
If you enter into a contract while suffering from a mental impairment, you’d have to prove the following things:
- The other party knew, or should have known, about the person’s mental impairment and unfairly took advantage of it
- The benefit received was not given to a third party
For example, if the musician was intoxicated when he agreed to play music for the groom, and the groom was aware of this, this might cause issues with the agreement’s validity.
The Age of Majority Act 1977 (Vic) defines a ‘young person’ as anyone under the age of 18. Generally speaking, a contract that involves the supply or provision of ‘necessaries’ (for example, food and clothing) will be binding and enforceable.
However, this isn’t the case for all contracts. More specifically, contracts may not necessarily be binding if they involve:
- Something other than ‘necessaries’; and
- Repayment of borrowed money
When it comes to repayments of loans, contracts can be quite flexible and lenient in favour of young people. So, in some cases, a young person will not be required to pay off a loan under an Agreement, even where some of that money has already been paid by them.
Individuals who are declared bankrupt can still enter into contracts (in other words, they are still deemed to have legal capacity). However, bankrupt people should look into the Bankruptcy Act 1966 (Cth) as there are some limits on what kinds of agreements they can enter into.
For example, in some cases, they will need to disclose their bankruptcy before entering into agreements.
If you’ve dealt with business law a lot, you might be familiar with the term ‘separate legal personality’. This just means that a business is considered its own legal person, and as such, they can enter into contracts just as a regular person would.
This also means businesses or corporations are capable of owing money and being owed money. So, a corporation also has the legal capacity to enter into contracts. However, this is subject to certain rules, such as the need to obtain the company’s authority.
There are a whole lot of laws surrounding corporations entering into contracts and who can do so on behalf of the company, so if this applies to you, it’s worth looking closely at the Corporations Act 2001 (Cth).
When we converse with different people, we might find ourselves making promises in exchange for certain things. While they might satisfy the basic elements of a contract, at what point does it become legally binding, and how do you know?
It can be a tricky area to navigate, so it’s a good idea to ask for some legal help. You can reach out to email@example.com or contact us on 1800 730 617 for a free, no obligation chat.
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