Verbal Contracts: Are They Really Binding?

Musk v Lemon: what this case teaches us about verbal agreements.

What are Verbal Contracts? ? 

Verbal contracts or verbal agreements are deals made through spoken words instead of written contracts. Whether they can be enforced in court depends on two things: if both sides intended to make a binding contract and if there’s proof of that intent at the time they made the agreement.

Daily Verbal Agreements

Imagine you’re in luck – you’ve just found the perfect pair of rare and collectible sneakers. But there’s one problem: you left your wallet in the car. You explain your situation to the shopkeeper and ask him to hold onto that pair until you return in 10 minutes, to which he agrees. And just like that you have a verbal agreement in place: you made an offer to buy the shoes in 10 minutes, and the shopkeeper accepted. 

You’ve returned with the wallet, only to find that the shopkeeper has sold the sneakers to another customer. The shopkeeper broke his promise of holding on to the sneakers and sell them to you in 10 minutes. In a normal world, you would not pursue the breach of verbal contract as your loss was intangible – you did not get the shoes you wanted but did not lose any money. 

The Ongoing Case of Musk Vs Lemon 

Elon Musk and Don Lemon (a former CNN journalist) got into a similar predicament earlier this year, with potentially far bigger implications. Musk and X (formerly known as Twitter) pursued an exclusive partnership with  Lemon to create content for X. In January 2023 the parties verbally agreed to a one-year exclusive deal for $1.5 million plus 60% advertising revenue generated from content Lemon created. Musk also told Lemon that there would be no need for formal written agreement and Lemon would have full control and authority in creating the content.

Based on the verbal understanding, Lemon incurred costs on staff and equipment to produce the content. Musk was not pleased with some of the intrusive questions Lemon posed during the show’s first interview. He texted Lemon that the ‘contract was canceled’. A detailed recounting of the events can be found Here. 

Lemon is now suing Musk for breach of contract. Musk’s legal team argues that the verbal agreement isn't binding, and therefore no money is owed to Don. Musk maintains that as a sophisticated party Lemon should not have relied on vague representations that a written agreement was unnecessary to structure a multi-million-dollar deal. 

While the dispute is yet to be settled, on the face of it, it appears that Don does have a case. A valid contract (whether verbal or written) should have the following elements: 

• Offer and acceptance 

• Consideration or quid pro quo (not required in certain jurisdictions)

• Intention to enter into binding obligations 

• Legality of purpose 

• Capacity to contract

If you examine the details reported, the verbal discussions between Mr. Musk and Mr. Lemon appear to include all the essential elements of a contract. Furthermore, Musk’s message to Lemon stating “Contract is Canceled” suggests that Musk himself recognized the existence of an agreement and intended to create binding obligations. It’s likely that Musk’s perspective would have been different if Don hadn’t upheld his part of the bargain.

Even assuming that the verbal agreement between Musk and Lemon was valid, enforcing it in court would be complex. In a standard written contract, you would find specific terms outlining each party’s responsibilities, permissible grounds for termination, and agreed-upon damages in the event of a breach. Without these written specifics, even if Lemon successfully proves the existence of a contract, Musk could still argue that they had different understandings of the terms. He could claim that he terminated the agreement because Lemon did not meet the minimum standards expected in their arrangement.

When are verbal contracts not permitted? 

Despite verbal agreements being recognised by courts (provided you meet those high standards), the law requires certain contracts to be in writing to be enforceable. This dates back to a common law principle to prevent injury and fraud. Most states have adopted statutes that identify these, they commonly include: 

• Contracts for sale of property (real estate and securities) 

• Contracts for selling goods over a certain value 

How do  courts view verbal contracts? 

While courts do recognize verbal agreements, the evidentiary standards to prove the existence of a verbal contract is quite high. Courts will call upon evidence (given these are verbal agreements, evidence would be witness testimony, whatsapp/text messages), and they will look at the evidence to determine if all the elements of a valid contract exist. So,If you’re serious about securing an agreement, it’s worth taking the time to record any unique terms and conditions in writing to avoid ambiguity and strengthen enforceability.  

Going back to our illustrations, without a written contract, the shopkeeper may challenge the existence of intention to create binding obligations. On the other hand, in the case of Musk V Lemon that becomes harder given the circumstances – Musk appears for the interview, discusses commercials and sent a message that the ‘contract is canceled’. However, without specific terms detailed between Musk and Lemon, critical aspects of the agreement remain ambiguous. A court could interpret or even impose terms that might not align with either party’s intentions, such as setting industry-standard expectations or customary practices for content production. This leaves significant room for interpretation, meaning that Musk and Lemon’s verbal agreement could be shaped by factors outside their control, potentially leading to unforeseen obligations or liabilities.

Risks with Verbal Agreement

In conclusion, while verbal contracts can be legally binding, they are often risky due to the lack of written specifics. This ambiguity can lead to disputes over intent, terms, and obligations, leaving courts to interpret the agreement based on available evidence or customary practices. In cases where a clear contract cannot be proven, courts may still apply the doctrine of promissory estoppel if one party reasonably relied on the other’s promises to their detriment. However, promissory estoppel is often a fallback option, not a substitute for a formal contract. Ultimately, documenting agreements in writing remains the most reliable way to secure expectations and protect against potential misunderstandings or disputes.

The Fix 

Clearly, the burden of proving a verbal agreement, along with the risk of courts interpreting it in ways the parties never intended, outweighs the convenience of a quick, spoken agreement. Beyond the challenge of establishing that a valid contract exists, verbal agreements carry the added risk of undefined expectations, which can easily lead to misunderstandings and disputes.

Disputes between parties often arise from the nitty gritty of the transaction. In the example of Musk v Lemon, if the parties had put in place a written agreement there would be clear expectations outlined on what  Lemon can cover in his content on Musk and what are off limits, the duration and volume of the content, the target audience, and other such details. This would have helped prevent the relationship from souring. It is for these reasons that written contracts are always superior. 

What do you do if you already have a verbal contract in place?

There are a few approaches you can take to formalize your contract depending on the circumstances of your relationship with the counter-party. 

• If the verbal arrangement is already in motion and it is a one-time supply, you may benefit from informal recording of the arrangement on email or message. You would also benefit from sending an email/ message when any milestone has been completed.  This would be appropriate when you don’t want to rock the boat by asking for a signed contract. 

• If the verbal arrangement is an ongoing one such as continuing supply of goods/ services or you plan on incurring any expenses or commitments to fulfil your end of the contract, you should consider putting in place a formal contract.