What is a verbal partnership agreement?
A verbal partnership agreement is a business contract outlined and agreed to via spoken communication but not written down. Although it can be difficult to prove the terms of an oral contract in case of a breach, this type of contract is legally binding. Verbal partnership agreements are often mistakenly referred to as verbal contracts, but a verbal contract is any contract since all warranties are created using language.
Understanding verbal partnership agreements
Verbal partnership agreements are generally considered as valid as written contracts, although this depends on the jurisdiction and, often, the type of contract. In some jurisdictions, some types of contracts must be written to be considered legally binding. For example, a contract involving the conveyance of real estate must be written to be legally binding.
In some cases, a verbal partnership agreement can be considered binding, but only if a written contract evidences it. This means that once the verbal partnership agreement has been agreed upon, the parties must write down the contract terms. Other evidence that can be used to bolster the enforceability of an oral contract includes the testimony of witnesses to the creation of the contract. When one or both parties act on the contract, this, too, can be construed as evidence that a contract existed. Furthermore, letters, memos, bills, receipts, emails, and faxes can all be used as evidence to support the enforceability of an oral contract.
A famous example of the enforceability of a verbal partnership agreement occurred in the 1990s when actress Kim Basinger backed out of her promise to star in Jennifer Lynch’s film Boxing Helena. A jury awarded the producers $8 million in damages. Basinger appealed the decision and later settled for a lower amount, but not before filing bankruptcy.
The existence of a partnership agreement is determined in the same way as any other contract. It may arise from verbal conduct, informal documents, or a formal partnership agreement. A formal partnership deed is desirable as it gives greater certainty concerning partners’ legal relationships and rights.
Where there is a partnership agreement, it will usually govern the position. In some cases, there may be a partnership agreement, but it may not reflect the actual practice and relationship of the parties. In this case, it may be supervened by another verbal or implied contract.
When verbal partnership agreements fall apart
Verbal partnership agreements are best used for simple agreements. For example, an oral contract to trade a used lawn mower for a used clothes dryer need not require much detail. The simpler the verbal partnership agreement, the lower the chances the parties involved will need to go to court. But more complex contracts, such as those for employment, typically should involve written agreements. Complex oral contracts are more likely to fall apart when held up to the scrutiny of a court, usually because the parties can’t reach an accord over the finer points of the agreement.
Are verbal partnership agreements binding?
Once you agree to do something, people generally expect you to do it—but are you legally obligated? When two or more parties reach an agreement without written documentation, they create a verbal partnership agreement (known formally as an oral contract). However, the authority of these verbal partnership agreements can be a bit of a gray area for those unfamiliar with contract law. Most verbal partnership agreements are legally binding. However, there are some exceptions, depending on the construction of the agreement and the purpose of the contract. In many cases, it’s best to create a written agreement to avoid disputes.
For instance, employers, employees, and independent contractors may find it invaluable to document the terms of their agreements in an Employment Contract or Service Agreement. Although a verbal partnership agreement may be legally enforceable, it can be tough to prove in court.
What are the elements of a valid verbal partnership agreement?
Depending on your source, there can be anywhere from four to six elements that make a verbal partnership agreement legally binding. Some sources consolidate elements under the same title. The six potential elements are:
- Offer and acceptance
- Lawful purpose
- Lawful consideration
- Certainty and completeness of terms
- Free consent of the parties
- Capacity
For a verbal partnership agreement to be binding, the elements of a valid contract need to be in place. To illustrate how the elements of a contract create binding terms in a verbal partnership agreement, we’ll use the example of a man borrowing $200 from his aunt to replace a flat tire.
- Offer and acceptance
In a valid verbal partnership agreement, one party makes an offer, and the other accepts. This is commonly known as a “meeting of the minds” because both parties agree to these terms. In our example, the aunt offers to loan her nephew money on the condition that he pay it back within a reasonable time frame. The nephew accepts her offer and promises to pay her back in full after he’s purchased his new tire.
- Lawful purpose
The purpose of the contract must be lawful. In our example, the nephew’s reason for borrowing money from his aunt is to replace a flat tire on his car. As such, the contract between them is of lawful purpose. However, suppose the nephew wanted to borrow money to modify his car illegally (such as installing lights to imitate a police car). In that case, the purpose becomes unlawful, and the contract is void.
- Lawful consideration
The parties must exchange something of value (monetary or otherwise), known as consideration. Plus, the exchanged item must be legal. The $200 and the promise to return are examples of lawful consideration in our example. The nephew could not, for instance, substitute his repayment of money with illegal drugs.
- Certainty and completeness of terms
The terms of the verbal partnership agreement cannot be vague, incomplete, or misrepresented. In other words, there should be an agreement on who the parties to the contract are, the obligations of each party, the price to be paid, and what the subject matter of the contract is. The terms between the aunt and nephew are very clear; the aunt loans the nephew $200 for the purchase of a new tire (and nothing else) on the condition that he pay her back the $200 at a specific time (such as when he gets his next paycheck).
- Free consent of the parties
Both parties of sound mind should consent to the terms of the agreement freely, meaning without undue influence, coercion, duress, or misrepresentation of facts. The nephew and aunt both consent to the contract terms without pressuring each other and intending to fulfill their obligations.
- Capacity
The parties must be able to enter the contract, meaning they are above the age of majority and are of sound mind. In our example, the nephew and aunt are both over 18 years old, are not under the influence of mind-altering substances, and do not have cognitive impairments such as dementia.
When are verbal partnership agreements not binding?
If a verbal partnership agreement misses one or more elements of a valid contract, a court or tribunal will likely deem the deal void and unenforceable. Many states have regulations for certain warranties to be in writing, which considers that verbal partnership agreements are insufficient. These rules can differ from state to state, but generally, a written contract is necessary:
- For the sale or transfer of an interest in land or real estate
- When the terms of the contract outlast the lifetime of one of the parties (e.g., copyright)
- When selling goods valued greater than $500
- In marriage or divorce agreements that promise an exchange of consideration
- If the terms of the contract will take longer than one year to carry out
- If the contract involves someone’s promise to pay someone else’s debt
- Be sure to check your state’s laws or statutes of fraud if you’re unsure whether or not you’ll need a written agreement.
Verbal vs. written contracts
Many verbal partnership agreements are legally binding, but the possibility that a party doesn’t fulfill their obligation still exists; this is why people often prefer to get their agreements in writing. An instance of an imaginary scenario: if the nephew decides not to pay his aunt back when he gets his next paycheck after getting his new tire, the aunt can take him to court. Since this case would be held in civil court (rather than a criminal court), the burden of proof is based on the balance of probabilities rather than beyond a reasonable doubt.
To win the case, the aunt must prove with evidence that her nephew borrowed the money to pay it back, while the nephew must prove he agreed to no such thing. Without documentation of the agreement, it becomes a matter of he-said-she-said. In the end, a judge decides which party’s case is more probable.
Although the aunt can prove she loaned her nephew money with bank statements showing $200 transferred to her nephew on the day in question, she still doesn’t have physical evidence of him agreeing to pay it back. He might even deny he made such a promise (committing perjury in the process). Without a witness to the agreement, the aunt could be out $200—and a decent relationship with her nephew.
Does a partnership agreement have to be in writing?
A partnership agreement must be in writing if you want to avoid conflicts and misunderstandings in the future. Forming a written contract instead of a verbal partnership agreement allows you and your partner to delegate each party’s rights and responsibilities in a way that fits your company’s needs. When determining how to write up a business partnership agreement, keep in mind that you should consider how much ownership or capital each partner has. This will help you establish the shares of profits and losses in a way that lines up with each partner’s investment. The problem with verbal partnership agreements is that there is no official document to refer back to when there are questions regarding the terms and conditions of the deal. On the other hand, when the agreement is in writing, both parties can see what the contract entails, mitigating confusion and arguments.
Misunderstandings arising from verbal partnership agreements between partners can lead to:
- Legal action
Lawsuits that involve verbal partnership agreements are never cheap, easy, or quick to resolve. This is because when there is nothing in writing, the parties involved in the deal typically have completely different interpretations of what was included in the verbal partnership agreements. As a result, the partners spend unnecessary time and money in court over an issue that could have been avoided with a written contract.
- Revenue leakage
When the parties don’t agree on the verbal partnership agreement’s terms, it may not be as beneficial as you had expected. For example, the other stakeholder could take home more profits than you because the terms of the agreement are not set in stone. Also, verbal contracts are not as easy to alter as written agreements, so it’s more challenging to forge a more beneficial working partnership.
- Damaged relationships
Misunderstandings create tension, stress, and lower trust between business partners. With verbal partnership agreements, the two parties are likely to disagree on the terms of the contract, leading to arguments about who’s right. However, this does not allow for healthy collaboration since the parties are butting heads instead of trying to work together on a deal that will benefit both businesses.
Types of verbal partnership agreement partnership agreements
When deciding how to structure a verbal partnership agreement, you must first consider the different types, which include:
- General partnership (GP)
A general partnership agreement is the most basic kind of partnership. Profits and ownership of the company are typically split evenly between the partners. In this partnership, each party has a total liability, meaning they are all personally responsible for the company’s debts and legal obligations. A general partnership agreement is also easy to create and dissolve since it does not require forming a business entity with the state.
A partnership generally is required to include two people. All partners must agree upon any liabilities that the partnership may bear. Though verbal partnership agreements are lawful, it is preferable to document the collaboration with a formal written partnership agreement. A general partnership agreement should cover, anticipate, and settle any dispute.
Make sure to discuss, agree on, and include the following components in your working partnership agreement while you and your partner(s) are drafting it:
- General information
Include the names of all partners, the business name, and the purpose of the partnership. Set the date on which you wish the partnership to become legally active.
- Contributions
Specify each member’s initial capital contribution (the amount each partner will put into the business). Generally, general partnership agreements usually include a deadline for initial capital contribution deposits.
- Ownership
Enter the proportion of ownership in the partnership for each member. General partnerships typically distribute ownership equally among partners.
- Losses and profits
Plan how the partnership will split earnings and losses and how often profits will be delivered to members. It’s smart to provide the option of preserving revenue to reinvest in the business, especially if you’re starting.
- Management and decision-making
Determine how you will make business choices, keeping in mind that it is advisable to prevent a tie vote. This is a common issue when you have an even number of partners and need a majority vote to make decisions regarding the business.
- Limited partnership (LP)
Limited partnerships have at least one general partner who is entirely responsible for the company. Also, one or more limited partners supply funds but are not actively involved in business management, and they are only at risk for the amount they invest. LPs are formal business entities, meaning the state must authorize them.
- Limited liability partnership (LLP)
Limited liability partnerships are similar to general partnerships because all the partners are actively managing the company. Each partner still has full responsibility for the business’s debts and legal liabilities, but they aren’t held accountable for the errors and omissions of the other partners.
The common verbal partnership agreement elements
A firm verbal partnership agreement includes elements in a partnership agreement checklist. The common verbal partnership agreement elements include:
- One main verbal partnership agreement is the name of your business. At the start of your contract, you need to state your business name, its purpose, and the names of your partners. This ensures that each party will be held accountable for the terms and provisions of the contract.
- Explain what your business does since it is the main element of a verbal partnership agreement Partners’ information. Providing all partners’ names and contact information is also an element of a verbal partnership agreement.
- Capital contributions: Describe the capital such as money, assets, tangible items, and property each partner provided. The preceding is the main element of a verbal partnership agreement. Ownership interest is also an element of a verbal partnership agreement. Offer the specific percentage of the company that each partner owns.
- Profit and loss distribution. Explain the percentage of profit and loss assigned to each partner and how the company will distribute revenue.
- Management and voting. In providing for the verbal partnership agreement, outline how the partners will manage the company by delineating individual responsibilities and explaining decision-making and voting between partners.
- Adding or removing partners. Create specific guidelines for adding new partners, removing partners who want to leave, and removing partners who don’t want to leave. Such is a key element of a verbal partnership agreement.
- Describe how you’ll liquidate the business and share any profits should the company dissolve as an element of a verbal partnership agreement.
- Partnership tax elections. Assign a partnership representative to manage all tax communications.
- Death or disability. Provide clear instructions for how each partner’s ownership in the company should be liquidated or redistributed in the unlikely event of their death or disability.
Other verbal partnership agreement elements
Other verbal partnership agreement elements include:
- Allocations – profits and losses
It’s crucial for your contract to state how the profits and losses of the business will be allocated to each partner. This can include how much each will be paid or how losses will be distributed based on the investment. The preceding is a key element of a verbal partnership agreement.
- Ownership
All business partnership contracts should include an outline of how the company’s ownership is divided as a significant element of a verbal partnership agreement. It should also have different scenarios that would influence the division of ownership. For example, how will ownership be divided if a partner wants out or the company needs to be sold?
To avoid stepping on each other’s toes, you should set up a decision-making structure in your contract. Ideally, each partner should be able to make decisions based on how much they invested in the company. Setting a foundation for authority before decisions must be made can prevent future arguments.
- Contribution
Contribution is also a significant element of a verbal partnership agreement. In case of later disagreement, you want to ensure that each partner’s financial contribution is written into your contract. This is because you may not remember the amount each member invested upon start-up, which could pose an issue when dividing out labor, profits, and losses.
- Workload
Division of work between partners is one of the most common causes for disagreements in joint business ventures hence a key element of a verbal partnership agreement. Therefore, it’s critical to get this sorted out before you start your company operations.
- Compensation
The primary goal of any business is to make a profit, but how will these profits be paid out to each partner? And where do you draw the line between income and profits? These are important things to consider in your agreement. That way, you can ensure that each individual is fairly compensated for their efforts.
- Dispute Resolution
Many partners prefer not to think about disputes until they become an issue hence an element of a verbal partnership agreement. However, this can lead to significant problems, including litigation and business failure. One of the easiest ways to resolve disputes is by turning them over to a predetermined mediator. Another method is to use your business advisory board to give you the best advice on what to do in the situation. Whatever you choose, it’s crucial to ensure it’s written into your contract.
- Death
Death is also one of the key verbal partnership agreements. Making arrangements in case of a partner’s death ahead of time may be the difference in your business continuing or collapsing. This means that your contract should include a buyout agreement that specifies what happens in terms of business owners if a partner cannot continue running the company.
- New Partners
New partners can arise due to a variety of circumstances, including the death of a partner, someone dropping out of the partnership, or you finding someone interested in investing in your company. The aspects relating to the admission or otherwise of new partners are a significant element of a verbal partnership agreement. This is why you should state what you will do if new partners join the business in your agreement. How will they be paid?
Extra elements of a verbal partnership agreement
When partners enter a business partnership, they probably aren’t thinking about all the ways things could go wrong. At this stage, most entrepreneurs are more focused on launching their operations than the day-to-day mechanics that come with owning a partnership. Still, you should create a Business Partnership Agreement between yourself and your partners. It’s an important document for any partnership. No matter your industry or goals, there are a few key provisions that everyone will want to include in their agreements. Such is the key element of a verbal partnership agreement. They include:
- Ownership
One of the first things that any Partnership Agreement should address is the percentage of ownership each partner has in the company hence a significant element of a verbal partnership agreement. This is typically based on each partner’s contribution to the company, which should be similarly recorded. A partner can contribute more than just financially – they can also contribute equipment, intellectual property, and other things of value. This can even include “sweat equity,” which refers to the work, labor, and effort a partner invests in getting the company up and running.
- Splitting of losses and profits
Next, you’ll need to decide how the profits and losses will be divided. By default, this is based on the partner’s percentage of ownership in the business. If you want a different arrangement, say an equal split regardless of ownership interest, then you will need to include that provision in your Partnership Agreement. You’ll also want your agreement to note if the partners will be allowed to take “draws.” Like a paycheck, a draw is an advance payment of the profits made to the partner regularly with no withholding requirements.
- Partners that have binding authority in a verbal partnership agreement
“Binding authority” is the ability of a partner to make contractual commitments on behalf of the company without first consulting the other partners. Unless stated in your verbal partnership agreement, all partners will have binding authority. This can leave you financially and legally liable should one of your partners make a bad call. If your partners don’t always demonstrate the best judgment, then it might be smart to limit this authority.
- What is the decision-making process like?
Next to money, feeling left out or ignored during the decision-making process is one of the fastest ways for resentment to grow within a partnership. After all, even the best teams will clash and disagree from time to time. A good verbal partnership agreement lays out procedures that help to avoid gridlock and full-on arguments. They accomplish this by standardizing the decision-making process and creating contingencies for when the partners cannot agree. This is critical to running a successful partnership.
- Termination of partnership
It’s easy to imagine your partnership lasting forever when you first start. But things are bound to change as your business grows. Even the closest partners can grow estranged and bitter throughout their relationship. Sometimes a partner grows tired of their status quo and wants to break out in a new direction. No matter how good things might seem initially, your verbal partnership agreement should have a procedure for dissociating from the company. Typically, this is done with a Buy/Sell Agreement. It might be unpleasant, but you should also consider what to do in case of the death of a partner.
- Does your business partnership agreement include provisions for irreconcilable differences?
A verbal partnership agreement exists to guide you, your partners, and your business through the worst of times, and few times are worse than when the relationship between two or more partners disintegrates beyond repair. These are conflicts that are much more serious than a typical argument. Sometimes this can even lead to litigation. Requiring partners to enter mediation before taking things to court can save everyone time, money, and energy.
References
https://www.upcounsel.com/how-to-make-a-partnership-agreement-legally-binding
https://www.patriotsoftware.com/blog/accounting/create-small-business-partnership-agreement/
https://www.lawdepot.com/blog/are-verbal-agreements-legally-binding/
https://parleypro.com/blog/how-to-write-a-partnership-agreement/
https://mcmahonsolicitors.ie/partnership-agreements/
https://legalvision.com.au/q-and-a/partnership-agreement-need-writing/
https://www.investopedia.com/terms/o/oral-contract.asp
https://en-int.seekeb.com/search/nairobi
https://business-in-a-box.com/tenplate/partnership
https://smartanswersonline.com/nearyou/smartanswer
https://.zapmeta.ws/web/results
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