A verbal agreement is an agreement made without a formal written contract. Simple verbal agreements can be the product of negotiation, like who will do dishes or who will take the dog on a walk each day. With verbal agreements, no document is executed showing that one party will wash the dishes or walk the dog however, it is understood by both parties in spoken words.
Technically, most verbal agreements are in fact legally binding. Practically speaking, the problems come if or when you ever need to prove exactly what you and another party agreed to. While written agreements spell out all the terms and conditions, and attest to each parties’ approval through signatures, verbal agreements are much more open to interpretation.
For example, let’s discuss what happens if you and your sister are discussing a family loan or an intra-family loan. Under rules set forth in the Internal Revenue Code, it is possible to make loans to family members at lower rates than those charged by commercial lenders without it being deemed a gift.
Before you decide whether or not to move forward, discuss the loan in detail. If either the borrower or lender is married (or in a lifelong relationship), both partners need to be involved in the discussion. In addition to the borrower and lender, think about anybody who is dependent on the lender—children or other relatives under the lender’s care, for example.
There’s no such thing as being too detailed in these discussions. It’s easy to assume that others see the world the same way you do, and that’s not always true—especially when money is involved.
Intra-family loans are just one example of how only having a verbal agreement isn’t smart.
Say you loan $30,000 to your sister to start her bakery and you charge her an interest rate of 1.18% for three to nine years with the interest paid annually. However, if you don’t have a formal written agreement with your sister, she could be under the impression that she has 15 years to pay you back with zero interest. If your sister fails to make the annual interest payments for six years, you may be forced to sue her prior to the end of six years or the promissory note will no longer be enforceable. That could be an experience that seriously harms your relationship.
Also, if there is an ambiguity in the written agreement, it could cause problems. Changes to a written agreements must also be in writing.
The real issue with verbal agreements is the lack of evidence. Verbal contracts can very quickly devolve into a war of words between two parties. If you do need to take legal action to enforce the terms of a verbal agreement, you’re going to need more than “your word against theirs.” It may be impossible to show what terms were actually agreed to on either side. If terms can’t be established, then it stands to reason that a breach of contract can’t be established either.
While small matters may not seem worthy of drafting contract, most attorneys recommend that you do so anyway. If you make a handshake deal, follow it up with written communication stating the terms and requesting the other party advise you if they have a different understanding. A simple contract can save a lot of money and time should the matter go to court. Courts historically look to written contracts to resolve disputes. They view written contracts as providing individual freedom for people to conduct business the way they choose. They are reluctant to force people into something to which they didn’t originally agree. Written contracts are their insurance — and yours — that your intentions are upheld.
Instead of trying to prove what the other party agreed to, you can provide a written document which states in clear language the terms and what each party is obligated to do.
If you have any further questions regarding verbal agreements, intra-family loans, or would like to make an appointment with Gloria Petroni, call 775.420.4221.