The Risks of Verbal Agreements in Business Deals

August 24, 2025

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Why Spoken Words Can Be Risky in Business

A handshake deal or spoken agreement might feel convenient and built on trust, but relying on verbal contracts in business transactions carries serious risks. Unlike written contracts, verbal agreements lack written documentation that courts and lawyers can easily review. This absence creates uncertainty in business relationships, exposes parties to legal disputes, and increases the burden of proof when conflicts arise.

Understanding the limits of oral contracts is critical for every business owner. While mutual consent and offer and acceptance can form a legally binding deal, proving terms without documentation often leads to costly challenges.

What Are Verbal Agreements?

A verbal agreement (also called a spoken agreement or oral contract) is an arrangement where the terms are agreed upon through spoken words rather than being captured in a written format. These agreements are common in daily business deals, employment arrangements, or smaller business transactions.

For example, a supplier and retailer may verbally agree on delivery dates, pricing, or quality standards without signing a contract. While both sides may intend to honor their commitments, misunderstandings often arise without contract language to rely on later.

Legal Binding Nature of Oral Contracts

Under general contract law, an oral contract can be legally binding if it includes the following:

Offer and acceptance
Mutual consideration (something of value exchanged)
Intention to create legal relations
Defined contract terms

However, enforceability depends heavily on jurisdictional factors and the type of agreement. Some contracts must be in writing under the Statute of Frauds, particularly those involving real estate, Mortgage Agreements, or commitments that extend beyond one year.

Common Uses of Verbal Agreements in Business

Although risky, verbal contracts are still used in:

Employment law contexts such as informal hiring or short-term tasks
Contract for Deed or Service Level Agreements discussed orally before drafting terms
Informal business relationships, where a “deal in principle” is accepted before formal paperwork is completed
Small-scale business transactions, where both sides trust each other without requiring a contract management system

The issue arises when mismatched expectations or disputes emerge, leaving no clear contract evidence.

Challenges with Verbal Agreements

The main disadvantages of relying on oral contracts include:

Lack of Tangible Evidence

Without written documentation, parties must rely on oral testimony, witness testimonies, or text messages to reconstruct the deal. This creates uncertainty when pursuing a court claim.

Potential for Misunderstandings

Spoken words may be interpreted differently, leading to mismatched expectations about pricing, delivery dates, or contract scope.

Burden of Proof in Court

In disputes, the burden of proof rests on the party seeking enforcement. Without Invoices and Receipts or other contract evidence, proving performance or partial performance becomes an uphill battle.

Legal Considerations Across Jurisdictions

The enforceability of verbal agreements varies:

California law enforces some oral contracts but requires written agreements for certain transactions under the Statute of Frauds. California courts often emphasize the need for clear documentation, especially in Los Angeles business disputes.
In the European Union, directives emphasize the use of written contracts for consumer protection.
The UK Government and Australian Government similarly highlight risks of spoken agreements, encouraging businesses to rely on electronic records and contract management software.

The Uniform Commercial Code (UCC) in the United States also requires certain contracts, such as those for goods exceeding $500, to be in writing.

Risks Associated with Verbal Agreements

Businesses relying solely on oral arrangements face several risks:

Unlimited liability exposure when no liability clause or limiting liability provisions exist
Limited legal protection without formal confidentiality clauses or force majeure clauses
Dispute resolution challenges when no dispute resolution clauses or defined jurisdictional factors are included
Difficulty in enforcing Representations and Warranties, Term and Renewal, or confidentiality agreements in court

These gaps leave businesses vulnerable to business litigation attorneys pressing claims or disputing terms.

Mitigating Risks in Business Deals

To reduce exposure, business owners should:

Confirm Terms in Writing

Even after a verbal discussion, always follow up with a written contract or at minimum, written confirmation via electronic records, emails, or text messages.

Utilize Contract Management Systems

Digital tools like contract management software help centralize agreements, schedule contract review, and ensure compliance with data protection laws.

Seek Legal Counsel

Consulting with contract lawyers or a business litigation attorney ensures contract drafting includes essential protections such as a liability clause, dispute resolution clauses, and compliance with employment law where relevant.

Case Studies and Real-World Lessons

History is full of examples where handshake deals collapsed due to unclear terms. Courts frequently see disputes involving real estate purchase agreements, stock purchase agreements, or prenuptial/postnuptial agreements that began as verbal commitments.

For instance, disputes over contractual obligations like delivery schedules or performance evidence often end in litigation because spoken promises lacked enforceable contract language. The lesson: good faith is valuable, but written contracts provide the legal protection businesses need.

Conclusion: Prioritize Written Contracts for Legal Protection

While spoken agreements may seem convenient, the risks far outweigh the benefits. Written contracts ensure clarity, provide strong contract evidence, and protect businesses from legal challenges.

For lasting and reliable business relationships, every business owner should insist on written documentation that covers key areas like contract scope, liability clauses, confidentiality agreements, and dispute resolution. By using proper contract management practices and seeking legal counsel, organizations safeguard their interests and avoid costly business litigation.