Suppose you were to come to a verbal agreement on a deal with another person and shake hands on it. Sometime later, the other person fails to complete their side of the deal. Where does the law stand? Are handshake agreements enforceable? Or are they worth zilch?

You may be surprised to learn that verbal agreements can be enforceable under Australian law.

Handshake agreements are commonplace

We commit to handshake agreements all the time. Ordering a meal at a restaurant requires a verbal agreement. You have agreed to pay for the meal that the restaurant serves you. Filling your tank with petrol requires an unspoken agreement, where it is assumed that you'll pay for the fuel.

However, when it comes to big-ticket items such as buying real estate, getting a mortgage, or taking out insurance, a handshake agreement does not apply. A signed agreement is required for such matters to be legal.

Three requirements for a handshake agreement to be legally binding

As outlined by Fair Trading NSW, three requirements make a handshake agreement legally binding. First, there must be an offer where one person offers an exchange. Secondly, there must be a form of acceptance, where the other person accepts the offer.

Thirdly, a binding handshake agreement must have the element of "consideration", that is, the price or value. This is the motivation to seal the deal, which is usually an exchange of money. Alternatively, it can involve the provision of services, such as washing a car or even providing companionship.

In law, the value of the exchange is not an important factor - it's the consideration that matters. This is what decrees an agreement to be a legally binding commercial deal, rather than just a social or domestic understanding.

Handshake deal must be fair to all parties

For a handshake agreement to be considered binding, each person must be clear on exactly what they are agreeing to and what is required from each of them to complete the deal.

If one person is disadvantaged by age, placed under pressure or does not understand what they are agreeing to, then the agreement may not be enforceable. There are protections under consumer law for unfair contracts.

Can a verbal agreement made over the telephone be enforced?

Say that you receive a phone call from your accounting software company, offering to upgrade your existing package to the latest release at a discounted rate of $300. You accept the offer and pay via credit card over the phone.

You then receive an email with the link to upgrade your package, but notice that it applies to an annual licence, rather than the perpetual licence that you'd originally purchased. Upon your complaint to the company, they tell you they're unable to meet your requirements. They offer you the choice of a refund or an extension of the annual licence to 18 months.

Can this verbal contract be enforced?

Checking terms and conditions before you agree to the deal

Based on these details, it's arguable that the software provider must let you have the upgraded software package on the same basis as your original software package, that is, including a perpetual license. If the offer was to upgrade your existing accounting software package and it includes a perpetual license, the upgrade should also include a perpetual license.

However, the devil may be in the detail. If the offer included a reference to terms and conditions which specified that the upgrade would include an annual license only, you might not be able to insist that your upgrade include a perpetual license. It's always wise to have the terms and conditions read out over the phone or emailed to you before committing to a deal.

Details of handshake agreements can be tricky to determine if the deal goes awry

Suppose you own an auto scratch repair company and had quoted to repair the scratches on a car door which was also dented. You inform the car owner that you don't repair dents, and she replies that she's selling the car and all she requires is that the dent is not noticeable.

You repair the car, take photos and note that the repair is not visible at all. The car owner picks up the car, returns to her workplace and then calls you with her boss on speakerphone. She informs you that she isn't happy with the job and is refusing to pay you. Her boss, who wasn't present to witness the quotation or repair, interjects that it looks like no repair has been made.

Where do you stand as a small business?

Performance of service as agreed under verbal contract

The question in this situation is whether you did perform the service which was the subject of your contract with the car owner.

If your verbal agreement was limited to repairing scratches that had been identified by the car owner at the time the agreement was entered into, then assuming those scratches were repaired, you have satisfied your obligations under the contract and you are entitled to be paid.

The car owner's boss should have no part in your discussions with the car owner, as he was not present when you and the car owner negotiated, and entered into, your verbal contract. As you informed the car owner that you do not repair dents, the car owner cannot complain that you did not repair the dent on her car.

To enforce a verbal contract, it must be determined which person's recollection of the agreed terms is most compelling. While a verbal contract is legally binding, it is always better to have the terms of a contract recorded in writing.

Proving that a handshake agreement exists can be difficult

If a handshake deal breaks down, it may be difficult to prove to a court or tribunal that it existed as you envisaged. That's why it's wise to make a handwritten note of the verbal agreement and date it, preferably with a witness. It's also advisable to keep a record of communications such as emails, texts, phone logs and bills.

If the deal is substantial and involves a lot of money, it's best to get legal advice and have a written contract drawn up. Many close relationships have soured over a simple handshake agreement, where details have not been officially recorded and those involved have misunderstood or misinterpreted the deal.

Tony Mitchell
Wills and wealth protection
Stacks Law Firm

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.