table of contents
Share This Story, Choose Your Platform!
n business, speed often becomes a priority when making decisions. Many business owners—especially those running Micro, Small, and Medium Enterprises (MSMEs)—often take shortcuts when entering into partnerships or transactions, one of which is by relying on verbal agreements. The most common reasons are:
- Considered more practical and quick
- Involves no administrative costs
- Based on personal trust
- Relationship has existed for a long time
However, behind this convenience lie significant legal, financial, and operational risks. Verbal agreements may be valid under the law, but they are very weak in terms of evidence and legal protection.
What Is a Verbal Agreement?
A verbal agreement is a mutual understanding or deal made orally between parties, without being documented in writing or formalized into a contract. Both parties depend on memory, good faith, and mutual trust.
According to Article 1320 of the Indonesian Civil Code (KUHPerdata), a valid agreement must fulfill four conditions:
- Mutual consent of the parties
- Legal capacity of the parties
- A specific subject matter (object)
- A lawful cause
While verbal agreements may technically meet these requirements, in practice, written agreements are much stronger and safer—especially in legal disputes where proof is required.
Legal and Business Risks of Verbal Agreements
1. Difficult to Prove in Court
Verbal agreements lack formal documentation. If a dispute arises, proving the agreement relies heavily on witness testimony, voice recordings (if legally accepted), or indirect evidence such as texts or emails. These are vulnerable to rejection and often deemed insufficient by courts.
In civil litigation, written evidence is considered the most reliable and primary form of proof.
2. Susceptible to Misunderstanding
Without a written reference, each party may have different interpretations of the agreement. For example:
- What does “payment within 1 month” mean? Calendar or business days?
- Who is responsible for delivery costs?
- How is termination of the agreement handled?
Such ambiguity often leads to conflict.
3. High Risk of Breach of Agreement (Default)
Without a contract, it’s difficult to hold a defaulting party accountable. This may include:
- Delayed or refused payment
- Unilateral changes to specifications
- Failure to deliver goods or services
You’ll have no solid legal ground to file a claim or request compensation without concrete proof.
4. Financial Loss and Business Reputation Damage
Verbal agreements gone wrong can directly impact:
- Cash flow
- Operational disruptions
- Losses due to excess or missing inventory
- Decrease in business credibility and trust
The cost of preparing a contract is much lower than the potential losses from a legal dispute.
Why Written Agreements Are Safer?
Oral agreements generally have weaknesses in terms of legal evidence, as they heavily rely on witness testimony, whereas written agreements are much stronger because they are supported by physical documents that can be presented in court.
In terms of clarity, oral agreements are prone to multiple interpretations, while written agreements provide certainty and can be referred to at any time. When it comes to enforcing rights, oral agreements are limited and often difficult to use as a basis for legal claims or arbitration. On the other hand, written agreements carry legal weight and can be used to support lawsuits. Moreover, written agreements offer better protection for assets and capital, as the terms are clearly and legally stated.
Tips to Avoid the Risks of Verbal Agreements
1. Always use written agreements, even in simple transactions
Use a basic format that includes parties’ identities, rights and obligations, object of transaction, value, and time frame.
2. Use official stamp duty or digital signatures
Stamp duty enhances the evidentiary power. For digital transactions, use certified e-signature platforms.
3. Document every revision or additional agreement
Any changes in price, volume, or timelines must be updated in writing and agreed upon by all parties.
4. Store documents both physically and digitally
Use cloud storage or secure local systems to archive contracts.
5.Seek legal advice when necessary
High-risk or high-value partnerships should be reviewed by a lawyer or legal consultant beforehand.
Case Study
Mr. Joko runs a clothing store and regularly purchases fabric from a local supplier. They agreed—verbally—that payment would be made 30 days after delivery. However, after the third shipment, the supplier suddenly demanded full payment within 7 days and threatened to halt future deliveries.
Because there was no written contract:
- Mr. Joko could not refuse the sudden change
- He had no legal basis to claim damages for disrupted supply
- He had to close his store temporarily due to stock shortage
This experience taught Mr. Joko the importance of using written contracts—even with long-time partners.
Conclusion
Verbal agreements are not illegal, but they are highly risky in business. In today’s increasingly complex commercial environment, written contracts are a basic necessity to ensure operational continuity and legal protection.
Don’t let your business fall into dispute just because there’s no documentation. Remember: The law requires proof, not assumptions.
Need Help Drafting a Secure Business Contract?
AUFAR & Co Law Office is ready to assist you in:
- Drafting and reviewing contracts for trade, suppliers, distributors, or employees
- Creating clear and enforceable written agreements
- Providing legal consultation to avoid legal risk in business partnerships
Free initial consultation available. Let AUFAR & Co protect your business legally.
