“We Had a Deal”: When Handshake Agreements Go Wrong

Introduction

Sometimes it begins as a conversation over coffee, a handshake agreement or a quick “yes, let’s do it” between people who have worked together for years.

For small businesses in particular, these types of arrangements can feel practical and efficient, especially where the parties have an established relationship of trust.

However, the fact that an agreement is made informally does not necessarily mean it will be enforceable.

When something goes wrong, it becomes difficult to establish exactly what was agreed, what each party was expected to do and what happens when one party doesn’t follow through.

Are handshake agreements legally binding?

A contract does not need to be in writing to be legally enforceable. Depending on the circumstances, an agreement made verbally or through conduct may give rise to a binding contract.

Generally, the key question in determining whether there is a binding contract is whether the parties intended to create legal relations and whether the other requirements for a contract, including offer and acceptance, consideration and sufficiently certain terms, are present.

However, proving the existence of an unwritten agreement can be considerably more difficult than proving the terms of a signed contract.

The difficulty increases where the parties remember the conversations differently even more and the parties have different understandings of the commercial terms of the agreement.

The handshake deal itself is rarely the actual problem. Rather, the uncertainty around what was agreed is often the issue.

When are handshake deals risky?

The risks of relying on an informal arrangement become more significant when a handshake deal involves:

• Significant amounts of money;
• Ongoing services or obligations;
• Intellectual property;
• Ownership of assets or shares;
• Employees, contractors or consultants;
• Confidentiality or commercially sensitive information;
• Exclusivity or restraints;
• Payment milestones or performance requirements;
• Termination rights; or
• Multiple parties with potentially different understandings of the arrangement.

In these circumstances, a handshake deal can quickly become expensive.

Different understandings

One of the biggest risks with verbal agreements is that there may be no reliable written record of what was discussed.

Emails, text messages, invoices and the conduct of the parties may help establish what was agreed, but reconstructing an agreement after a dispute arises can be time consuming and costly.

By comparison, a written contract gives the parties a reference point before a dispute arises.

Missing Terms

A handshake agreement often focuses on the main commercial points such as “You will do X and I will pay Y”.

However, informal arrangements often do not address situations that have not yet arisen such as:

• What if the work is late?
• What if the price changes?
• Who owns the intellectual property?
• Can either party terminate?
• What happens if something goes wrong?

These issues may not have been discussed at all.

A well drafted contract does more than record the key commercial terms of the deal. It also identifies the practical issues that are likely to arise during the relationship and establishes how those issues will be dealt with.

Relationship Changes

Many small businesses are built on trust and trust can be a perfectly reasonable basis for entering into a business relationship.

However, businesses evolve, people leave, companies are sold, financial circumstances shift and relationships can deteriorate.

The arrangement that felt clear and straightforward when the relationship was strong can look very different when there is a dispute.

Written Agreements

There is a common misconception that putting an agreement in writing means preparing a lengthy, heavily negotiated legal document.

While some matters require detailed and heavily negotiated contracts, this is not always necessary.

For many small business arrangements, a short and commercially focused agreement can provide significantly more certainty than a handshake deal while still being easy to understand and implement. Businesses can also use templates containing standard commercial terms that can be amended depending on the nature of each particular arrangement.

At a minimum, businesses should consider documenting:

• Who is involved and what each party is responsible for;
• What is being provided or delivered;
• When obligations need to be performed;
• How much will be paid and when;
• What happens if something goes wrong;
• How the arrangement can be terminated;
• Who owns the intellectual property or other assets created as part of the arrangement.

The terms that should be included will depend on the nature and value of the transaction.

Trust is Valuable. Clarity is Better

Good business relationships are built on trust. A written contract does not undermine this.

In fact, a clear agreement can protect the relationship by ensuring everyone starts with the same understanding.

The best time to clarify what happens if things go wrong is before something goes wrong.

Conclusion

A written agreement is not about expecting a relationship to fail. It is about making sure the parties have a shared understanding from the outset and know what happens if circumstances change.

Before you shake on a deal, you should ask yourself whether you would be able to prove what was agreed if there was a dispute in six months’ time. If the answer is no, it may be time to put the agreement in writing.

Additional resources

Frequently asked questions