Key Takeaways:

  • An informal contract does not require formalities like seals, witnesses, or specific legal wording to be enforceable; oral or simple written agreements often qualify.
  • These contracts are valid if they include essential elements: mutual assent, offer and acceptance, consideration, legal capacity of parties, and no law rendering them void.
  • Informal contracts are also referred to as simple contracts or social contracts, commonly used for sales, services, and day-to-day agreements.
  • Compared to formal contracts, informal agreements rely heavily on trust and performance, and proof can be challenging without documentation.
  • Knowing when to use a formal versus an informal contract helps reduce the risk of disputes or unenforceable obligations.

An informal contract is any sort of contract that you enter into without any formal legal influence. A verbal agreement or a sales contract are two examples of informal contracts. It is important that you understand this type of contract before entering into one to avoid any issues if certain promises are not kept.

Informal Contract

An informal contract is a type of agreement that will not require any sort of legal intervention to be considered enforceable. They are different from formal contracts because they do not need to be sealed, witnessed, or written.

An informal contract is often called a social contract. This type of contract needs to be avoided if there is no trust with the other party you are contracting with. A verbal contract is considered informal and only works when the other party can be trusted to perform their contractual duties without a written assurance.

A sales contract is an informal contract that is most common. They are specific to every situation and will not always include specific legalities. For instance, a sales contract will not be the same when buying a used car versus a brand-new car.

It could also be different if two people were buying the same car but in a different color. Everyone’s contract will be completely different based on individual circumstances.

For it to be legally binding, an informal contract has to include mutual assent, offer and acceptance, and consideration. It is not based in formalities, but in the observation of people making promises and intent.

There are five main elements when forming an informal contract:

1.     Mutual assent

2.     Consideration or validation

3.     Two or more parties entering a contract

4.     Parties have to have legal rights to contract

5.     No statute or rules declaring a contract void

Elements Required for a Valid Informal Contract

While informal contracts are more flexible, they must still meet the core requirements for legal enforceability, which mirror those of formal contracts:

  1. Offer and Acceptance – A clear proposal by one party and an unambiguous acceptance by the other.
  2. Mutual Assent (Meeting of the Minds) – Both parties understand and agree to the contract terms.
  3. Consideration – Something of value (money, service, goods, or a promise) is exchanged.
  4. Capacity to Contract – Each party must have the legal ability to enter into the agreement.
  5. Legality – The contract cannot involve illegal activity or violate public policy.

Even without formalities, these elements must be present; otherwise, the informal agreement could be unenforceable in court.

Characteristics and Enforceability of Informal Contracts

Informal contracts, also known as simple contracts, are agreements that do not require the traditional formalities of legal documentation, such as notarization or sealed execution, to be enforceable. They can be oral or written and are primarily governed by the intent of the parties and the basic principles of contract law.

Key characteristics of an informal contract include:

  • No required format: They may be oral, written on paper, or even implied by conduct.
  • Flexibility: The terms are customized to the parties’ needs without standardized language.
  • Enforceability based on content, not form: Courts focus on whether the core elements of a contract exist, not on formal structure.
  • Higher risk of disputes: Lack of formal documentation can make proving terms or breaches more difficult if disagreements arise.

Common examples include:

  • Verbal agreements for home repairs
  • Informal service arrangements, like freelance work without a formal contract
  • Day-to-day sales agreements between private parties

Because informal contracts rely heavily on mutual trust and the ability to prove their terms, maintaining written evidence or witnesses is highly recommended even when a formal document is not required.

Other Types of Contracts

·      A bilateral contract is different than others in that they do not have any consideration, also known as money provided for contract security. It is based solely on promises and could or could not include a promise of specific performance. The most crucial part of a bilateral contract is that it requires all parties to benefit equally. Business deals typically have an exchange among two different parties. This means most contracts are bilateral.

·      A unilateral contract is a one-sided contract. One party will agree to perform without the promise that the other party will hold up its end of the bargain. These contracts are often avoided because it cannot be enforced until after the performance is done. When you enter a unilateral contract, you could perform thousands of dollars in work with no sure guarantee you will be paid. Homeowners insurance is a type of unilateral contract. You meet your end of the contract by paying your premium. The insurance company promises to take care of problems if they happen, but you will not get any money back if nothing happens to your home. This is considered one-sided because the company does not have to perform but you still have to pay each month.

·      A Formal contract is one that is written to be valid and enforceable. It is not considered legal unless specific language required by law is included. These contracts must be sealed and act as a negotiable instrument. A sealed contract is not used often today due to the lack of ability to make any changes to it. If you enter into a sealed contract you are bound by that contract unless amendments are included or the contract is destroyed. One example is a check that you write. It has to be destroyed to signal the end of the deal.  A personal or business check is considered a negotiable instrument, or a legal contract that lists the amount of a fixed payment.

·      An express contract is when all the terms are very clear and straightforward. There is no chance of misinterpretation, no matter if it is oral or written in form. There are no actions a party can take to have an effect on the contract’s validity.

Informal vs. Formal Contracts

Understanding the distinction between informal and formal contracts helps determine when a formal document is advisable:

  • Informal Contracts
    • May be oral, written, or implied
    • Enforceable as long as the core contract elements are met
    • Common for small transactions, services, and day-to-day agreements
    • Greater risk of disputes due to lack of documentation
  • Formal Contracts
    • Must follow specific legal requirements (e.g., seals, notarization, or statutory language)
    • Often used in high-value or regulated transactions
    • Provide clear evidence in case of disputes
    • Examples include deeds, negotiable instruments, and certain real estate contracts

A best practice is to use a formal written contract when:

  • Significant money or assets are involved
  • The relationship is long-term or high-risk
  • Regulatory compliance requires it (e.g., real estate, UCC-governed sales)

While informal contracts are legally valid, formalizing agreements reduces the likelihood of costly misunderstandings.

Frequently Asked Questions

1. Are informal contracts legally binding? Yes. As long as the contract includes the essential elements—offer, acceptance, consideration, capacity, and legality—an informal contract is enforceable.

2. Can an informal contract be oral? Absolutely. Oral agreements are a common form of informal contract, but they can be harder to prove in court.

3. When should I avoid using an informal contract? Avoid informal contracts for high-value, complex, or regulated transactions where written documentation provides clarity and legal protection.

4. What happens if one party breaches an informal contract? The non-breaching party can still pursue legal remedies, but proving the terms and breach may be more challenging without a written record.

5. What is the main difference between informal and formal contracts? Informal contracts focus on the content and mutual agreement rather than legal formalities, while formal contracts follow prescribed legal requirements to enhance enforceability.

If you need help with navigating informal contracts, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.