A handshake may, in fact, legally seal a deal. In many instances an agreement can be legally binding even if it is not formalised in writing. In other situations, though a writing might be necessary. Contract law is an ancient practice and some very old traditions still shape the way oral agreements are applied and enforced today.
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At its core, what makes a contract legally binding is that it involves the exchange of valuable consideration. A promise to do something for nothing is gratuitous and, in general, not enforceable unless other conditions are met. But, an agreement to do something, give something, or forego some legal right in exchange for a reciprocal promise is a binding contract. Such verbal contracts, or handshake deals, are legally binding if they can be evidenced in court.
Statute of Frauds
An old legal principle known as the statute of frauds requires that certain types of agreements be made in writing. These include contracts for an interest in land, agreements to honour the debts or obligations of another, purchases of more than £325 in goods and contracts that cannot be fully performed within a year. An oral agreement involving any of these types of transactions will most likely not be enforceable as a binding contract.
Another legal principle, the parol evidence rule, gives a final written version of an agreement more weight than oral agreements. When an agreement is reduced to a final writing, prior oral agreements and even those made at the same time as the written contract are superseded. In some jurisdictions, however, it may be possible to use terms of a previous oral agreement to supplement a writing if they are consistent with the written agreement.
A written contract can also be modified orally. Generally, a contract modification must be treated like a sort of new contract, and therefore it must contain a new exchange of consideration. Some contracts have no-oral-modification clauses that attempt to prevent subsequent oral modifications, but these are not always enforceable. A contract subject to the statute of frauds cannot be modified orally unless manifest injustice would otherwise result.
Even if an oral agreement cannot be enforced as a binding contract, a person making an oral promise may be required to compensate someone who relied on the promise to their detriment. This is a legal cause of action called promissory estoppel. Recovery under promissory estoppel is usually limited to actual out-of-pocket expenses, can include full performance of the promise if required to prevent injustice.
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