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Contractor Management

The risks associated with verbal contracts

By 8 August 2022No Comments

A contract is a verbal or written agreement to do work in exchange for some benefit, usually a payment. The agreement is able to be enforced in the courts.

Verbal contracts
Many independent contracting arrangements use verbal contracts, which only work well if there are no disputes. A handshake agreement may still be a contract and may (though often with difficulty) be enforced by a court. However, verbal contracts can lead to uncertainty about each party’s rights and obligations. A dispute may arise if you have nothing in writing explaining what you both agreed to do.

Risks of having a verbal contract

When a contract is not in writing, you are exposing yourself and your business to a number of risks:

  • the risk that you or the hirer misunderstood an important part of the agreement, such as how much was to be paid for the job or what work was to be carried out
  • the risk that you will have a dispute with the hirer over what was agreed because you are both relying on memory
  • the risk that a court won’t enforce the contract because you may not be able to prove the existence of the contract or its terms.

Before you sign a contract, it is a good idea to seek advice from your industry association, lawyer, business adviser or union.

Part verbal, part written contracts
Some agreements may be only partly verbal. For example, there may be supporting paperwork such as a quote or a list of specifications that also forms part of the contract. At the very least, you should write down the main points that you agreed with the hirer to avoid relying on memory. Keep any paperwork associated with the contract. The paperwork can later be used in discussions with the hirer to try to resolve a problem. If the dispute becomes serious, it may be used as evidence in court.

The most important thing is that each party clearly understands what work will be done, when it will be completed and how much will be paid for the work.

Examples of paperwork that may support a verbal contract

  • E-mails
  • Quotes with relevant details
  • Lists of specifications and materials
  • Notes about your discussion—for example, the basics of your contract written on the back of an envelope (whether signed by both of you or not).

If the contract is only partly written or the terms of the work are set out in a number of separate documents (e-mail, quote etc.), it is to your benefit to make sure that any formal agreement you are being asked to sign refers to or incorporates those documents. At the very least, make sure the contract does not contain a term to the effect that the formal document is the ‘entire agreement’.

If you have any further questions, contact us at [email protected]