Ask a Lawyer: What’s Wrong with Handshake Deals?

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In last week’s post, I made a case for why business owners need to anticipate the unknowns. I gave several examples illustrating why workplaces can’t afford to wait until something becomes a problem to learn about some of the more complicated and technical aspects of managing a workplace.

This week, business attorney and fellow planning evangelist Joan Teich is back for another installment of “Ask a Lawyer,” in which she analyzes a business law case from a recent movie and provides another perfect example of the risks of not understanding the implications of a business decision.

So with no further ado, here’s Joan!

In addition to the latest Star Wars, over the holidays I also watched ‘The Founder,’ a biopic of Ray Kroc, the man who turned McDonalds into a household name while pushing out the McDonald brothers who actually had the idea for and started the restaurant. While there are several scenes of morally questionable decisions and business ethics, one scene in particular had me yelling at my screen. In the scene, Kroc persuades the brothers to agree in writing to sell him their entire interest in the company for an agreed sum, and sweetens the arrangement with a side deal in which he’d pay the brothers a percentage of the company profits for life. The catch? The side deal was sealed via an oral agreement and a handshake. It may not surprise you to hear the brothers never saw a dime!

I understand the appeal of a simple handshake deal. You may think having a lawyer create a written agreement will be tedious, expensive and time-consuming, and after all, a person’s word should be their bond, right?

After 30 years of legal experience, what I tell people is that I hope you only work with people you can trust on a handshake -  BUT, even so, don’t make important business agreements on a handshake alone. There are just too many ways things can go wrong.

The Founder example is especially complicated because there was a written agreement covering the sale of the business, plus an oral agreement for shared revenues. In general, if the legal document completely covers the subject of agreement, it is said to include or ‘integrate’ all prior oral negotiations and agreements discussed before the writing. The ‘Parole Evidence Rule’ generally says that such oral evidence will not be allowed in court to vary the terms of a written contract. The only exception is if the court finds the contract was only a partial integration – that is, the parties did leave some terms out in an oral agreement and then, if they are not inconsistent with the written terms and depending on the intent of the parties, the court might allow it in so the oral terms could be enforced. Whew – complicated, right? Do you really want to depend on a court that might enforce your deal?

This problem is actually unlikely to come up in a contract written with a lawyer – they will include a section entitled ‘Entire Agreement’ or ‘Integration’ that explicitly says no other understandings outside the four corners of the agreement will have any effect, that this written contract is the entire agreement of the parties. If this is included, no oral evidence or agreements will be allowed or enforced. You can see the problem with oral side deals – the McDonalds were probably out of luck from the moment they signed the written sale agreement. You don’t want to be in that position - put all of the agreed terms into one written document.

A handshake deal is an oral agreement - and while an oral agreement is a real contract and can be enforceable, its terms are often the subject of dispute. Even with the best intentions, people’s memories fade over time and it may be hard to recall exactly what was agreed to, or parties recall differently. Maybe some important terms were not even discussed or agreed to – in that case there could be no ‘meeting of the minds’ and no valid contract. All of this is a recipe for destroying a working relationship, even friendship, and ending up in court with a stressful, time-consuming and expensive fight to have a judge determine what was agreed to. Even worse, you may not like that decision! People change, circumstances change but documents don’t change. If you put your agreement into writing, signed by the parties, they are bound to its terms, so it is much easier to enforce if you have to. Even better, if you have a written agreement with clear terms spelling out each parties’ rights, obligations and liabilities that in itself can often prevent any need for litigation. This is much easier and cost-effective in the long run than relying on fallible memory.

As you can see, even when both parties are acting in good faith, things can go horribly wrong in a handshake deal. What happens when one party is acting in bad faith - the con who says “do we really need this in writing?” and “don’t you trust me?” but will blithely steal your hard-earned money may be very convincing and plausible? Not every villain looks like Snideley Whiplash (am I dating myself here? Go watch Rocky and Bullwinkle on Youtube),that is, crooks and cons don’t always look or act the part!

Even if you are a good judge of character, your good nature (of course I trust you) could be abused. Unfortunately, these things happen every day. Why risk such a catastrophe, whether the other party is a good guy or a bad one, when you can protect your interests by simply using a well-crafted written contract? A handshake deal is fine if it is to have the local teenagers wash your car, or some other simple immediate performance of services or transfer of goods. But for any longer term and/or complex relationship with partners, vendors, customers or affiliates - a good written contract is actually a very cost-effective and helpful way to start and build that relationship. It will help things run smoothly and save you from a lot of stress and sleepless nights!