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Verbal contracts are made through spoken words, whether it is in person, through a phone call or any form of verbal communication. Although a verbal contract is legally binding, it can be difficult to prove its terms. As a result, you may find yourself in a situation where the other party waives the agreement or even denies ever having a conversation about it.
Imagine the following scenario:
John is a helpful guy who works as a plumber and always offers help to neighbours and friends when they need it. When his neighbour Anna tells him that there is severe water leak from her ceiling under her bathroom, he offers to come take look at the damage and see what can be done. John finds that the shower drain has been damaged and will need to be replaced.
Under a verbal contract, he agrees to replace Anna’s shower drain for £3,500 the very next day. However, once John has completed the work, Anna fails to make payment as promised. Can John take legal action against her to enforce the terms of the contract?
Establishing a contract
The elements that must be satisfied for a contract to be enforceable are :
- An offer from the seller.
- Acceptance by another party.
- Intention– the parties must intend to enter into a legally binding agreement.
- Capacity– the parties must have legal capacity to enter into the contract (for instance, an agreement concluded in a social setting under the influence of alcohol is unlikely to be enforceable).
Considering our example, Anna and John’s verbal agreement must meet the essential requirements for the formation of a contract in order to establish whether there is a breach for non-payment of the £3,500 for the repair as well as the remedies available for the outstanding fees.
Keep in mind that there are a few exceptions where the law requires that you have a contract in writing. These include, for example, contract for sale of land, obtaining credit and when a guarantee is provided.
Express and implied terms
For Anna to be liable for breach of contract, there must be a term relating to non-payment of fees and she should have breached it.
The terms of a contract can either be express or implied:
• Express terms will either appear in writing at the time the contract is made or are openly discussed between parties to agree upon them beforehand.
• Implied terms are not explicitly mentioned in the contract but result from the actions taken by the parties during the course of their agreement. These terms may be implied by fact, law or custom.
In our example, it is assumed that there is no specific contractual term concerning the breach of payment terms.
Consequently, the court must objectively construe a term for non-payment. It will be up to the court, with regard to all the relevant facts and the language used at the time of the conclusion of the contract, to determine what each party meant (Prenn v Simmonds).
Moreover, the Supreme Court’s decision in Marks & Spencer v BNP Paribas will have a particular impact when it comes time for assessing the type of contractual implied term that should be imposed ‘in the light of the express terms, commercial common sense, and the facts known to both parties at the time the contract was made’.
Evidencing a verbal contract
This can be a difficult task because it is likely that John and Anna are going to have different versions of what happened. Indeed, in cases like these, where both parties dispute what was originally agreed, weighing arguments becomes complicated. Therefore, it is best to have some form of written communication saved – letters, emails, text messages or quotes would provide objective evidence of the existence of a verbal agreement. Third-party witnesses present at the time of the agreement could also be very helpful regarding liability!
Breach of a contract
Anna will then be in breach of contract if she fails to perform any obligations under the agreement, as specified by both parties.
There are three different types of terms that can be found in a contract: conditions, warranties and innominate terms
Whereas if Anna breaches a condition of her verbal contract, John can easily get out of it by terminating the contract and claiming damages, breaches of warranty will only allow him to claim damages. Innominate terms are neither conditions nor guarantees. Therefore, the consequence of their breach will depend on the nature of such a breach and what happens as a result of it.
The court must then determine objectively what the intentions of the parties were as to the status of the term in question.
The idea behind this example is that Anna has broken her contract with John by not paying the £3,500. This may amount to a repudiatory breach of contract, which occurs when one party decides they will not fulfil their primary obligations under the contract.
Where one of the parties has breached a contract, the innocent party is given two options: either to accept the repudiation and terminate the contract so that both parties involved can just walk away from the deal without any financial loss. The second option is to affirm the contract and seek damages.
Remedies for breach of contract
As for what happens when a breach of contract is proven, the usual remedies for breach of contract apply.
Damages and recovery of a debt
The purpose of damages is to put the innocent party in the position they would have been had the contract been properly performed. Put simply, damages compensate for the loss suffered by the innocent party.
In this case, Anna’s refusal to pay the £3,500 that she owes John becomes a matter of debt. John will be entitled to the usual remedies for breach of contract, and in this case recovery of a debt will allow him to get his money back!
Unjust enrichment
However, if no breach of contract can be established, John may have a claim in unjust enrichment. This legal action can be brought against someone who has benefited from something they did not deserve. It would work in a situation where there was no contract between Anna and John, but where John still feels entitled to some compensation for his assistance with her problem. Such a claim is based on the law of restitution, which states that if one party breaks a contract, they will have to pay compensation of an equivalent amount.
Remember that the limitations for a verbal contract is also 6 years, but as people’s memories fade over time, it is better to pursue a claim in a shorter period of time.
Verbal contracts are tricky. If you find yourself in a dispute over one and need help proving your case or defending against a claim, please contact Freeman Harris for legal advice.