A business owner sits down in front of me, sharing a familiar story. “I’ve known him for years and I trust him. A contract felt too formal, so we shook on it.” Now, the deal is falling apart, and the business owner wants to know what his options are. Sometimes, he has some. Often, he doesn’t. The difference usually comes down to the documentation available.
What is a “Handshake Deal”?
A handshake deal is a verbal agreement between two parties. And yes, a “verbal” agreement can still be a legal, binding agreement (more on that below). The terms of the agreement might be negotiated but often aren’t as comprehensive as you would find in a formal written contract. The two parties place their trust in each other that the work will get done and that the agreement will be honored.
Handshake deals are common in small businesses. A contractor you’re friendly with may agree to renovate your office for $40,000. A supplier has agreed to extend last year’s pricing for the rest of the year. A business partner agrees that over the next three years, he will buy your shares of the company. Usually, these deals turn out just fine. But when they don’t, it can turn into a costly headache.
Are Handshake Deals Legally Binding?
You might be surprised to learn that verbal agreements are legally binding. A contract is formed when one party makes an offer, the other party accepts, and something of value is exchanged on both sides. The contractor offers to renovate your office, and you accept. He provides services in exchange for $40,000. This is a legal contract, whether it’s in writing or not.
But “legally valid” does not mean “easy to enforce.” When you want to hold another person legally responsible, you must prove your case to a judge. Without documentation, you go into court with only your memory and the memory of the other person. With only memories to work with, the judge is likely to decide that you don’t have enough proof.
Where Handshake Deals Go Wrong
When a handshake deal goes wrong, it usually isn’t because one person wanted to deceive the other. Instead, it happens because the people involved are human, with human memories and emotions. Let’s look at some common scenarios.
Circumstances change. The office renovation made sense when you agreed to it, but now the contractor’s business is struggling. The supply chain has changed. He says he’s certain the price didn’t include premium flooring, but you are certain that it did. Is your memory wrong, or does the contractor have an incentive to “remember” the deal differently?
Scope Changes. You own a successful restaurant and decide to open a second, larger location. Your vegetable supplier agrees to service the new restaurant, too. You assume the new restaurant will have similar terms. He has a hard time meeting the increased demand and wants extra payment. Neither of you intended to take advantage, but the scope of the agreement changed, and the terms didn’t.
One party leaves the picture. Your business partner dies, and his spouse takes over. She is certain the two of you agreed to one thing, and you insist she is mistaken. She wasn’t there when the deal was made, so the question is, did she ever know the full extent of the deal to begin with?
Money gets tight. You remember your business partner agreed to purchase all your shares. Recently, you’ve both had a tough time financially. He insists the agreement was for him to purchase half of your shares. You need the money and want him to purchase all. He doesn’t have the money and can only buy half. Each of you claims the other has an incentive to remember the deal incorrectly.
Who wins?
At this point, you might choose to involve a lawyer. You give her everything you have: Text messages, emails, bank records. Sometimes she can put together a case, but not always. And even if she can help you, it’s likely going to cost you more in legal fees than the case is worth.
What I Recommend
Get a written agreement in place before any money or time is exchanged. You may be tempted to agree to a “handshake deal” because you know the other person well, and it feels strange or awkward to request something more formal. You might be worried that it is a sign of distrust.
It’s natural to feel this way, but you can (and should) push back on that feeling. Not only does a contract protect against incorrect memories, but it may force you into a deeper conversation over specifics (Did that price include premium flooring? What happens if your supply doesn’t meet my demand?). If everything goes as planned, you can put the contract in a drawer and never look at it again.
If the deal hits a snag, the contract is there to protect both of you against faulty memories, misunderstandings, or occasionally, misrepresentation. Not to mention, it is usually cheaper and less painful to draft a contract from the beginning than it is to try and recreate the agreement after a problem arises.
Have questions about protecting your business with the right agreements in place? Reach out to an attorney. These conversations are usually shorter and easier than you might expect.
Ashley Smith is a business law attorney and founder of AGS Law based in Alpine, Utah and can be found at agslawfirm.com. This article is for informational purposes only and does not constitute legal advice. For guidance specific to your situation, consult a licensed attorney in your jurisdiction.
