Corporate

Handshake Agreements: Still a Good Idea?

 I’ve seen this many times before: entrepreneurs enter into handshake agreements with others, trying to save on legal fees. Often, the counterparties are contractors, employees, investors, or co-founders. These entrepreneurs are not entirely wrong to do so. Oral agreements are still enforceable for the most part. Here is a short summary of when handshake agreements can be enforced in a court of law, when agreements must be in writing, and why it is still a good idea to write it all down. 

What You Need to Do To Make an Oral Agreement Enforceable

Most agreements can be oral. The exception is agreements that are required to be in writing by the Statute of Frauds (see below). Like any other contract, oral agreements are enforceable if they have all the requisite terms: an offer, an unconditional acceptance of that offer, and an exchange of consideration. The contracting parties must be capable of contracting (no minors please), and they must be in consensus, i.e, have a “meeting of the minds.” The existence of oral agreements may be difficult to prove: a party’s word might not be enough. So, you need to dig up other evidence that a contract existed, such as receipts, emails, photographs, memos, testimony of third parties, etc.

These Agreements Must Be in Writing

I’d like to introduce a new (for some) legal concept: the Statute of Frauds. The exact requirements vary state by state, but here are the essentials: the Statute of Frauds tells us which contracts MUST be in writing in order to be enforceable. Here is the list:

  • Contracts that cannot be performed within a year
  • Contracts relating to transfer of interests in real property (including options to purchase and leases)
  • Contracts by which a person agrees to pay or guarantee another person’s debt
  • Prenuptial agreements
  • Contracts for the sale of goods for $500 or more.

Even if a contract does not specify its duration, courts can infer it from the intention of the parties. For example, this can happen to oral employment agreements if the court determines that the intended duration of the employment relationship was for over a year. 

Why It is Still Better To Write Things Down

We are all optimistic about the future of our relationships. We firmly believe that nothing bad will happen to our venture because we trust one another. Unfortunately, few things can happen. First, without even realizing it, we may fail to agree on ALL aspects of our business deal. Yes, we discussed the essentials, but perhaps failed to think through all of the steps. Second, memory fades. If we base our agreement only on a handshake, we may find it difficult to recall some of the terms down the road. Third, we may have misunderstood one another, and won’t realize it until it is too late. 

Writing things down allows parties to negotiate all of the aspects of the proposed transaction. Let’s take a software consulting agreement as an example. Defining the scope of services, the time frame for the delivery of services, the acceptance process, the payment amount and timetable, ownership of IP (both created and pre-existing), the term of the agreement, who can terminate the agreement and with what consequences, etc. takes time and effort. Often I find that parties haven’t even thought about some of the specific terms that they need to agree on in order for their project to work. A contract can be viewed as an ultimate expression of the parties' intentions. It should overrule everything that’s been said during the negotiations. Only what is in writing matters. That’s why a well-written contract should address all scenarios that can happen in a project. A party failed to deliver services on time? No problem, check Section 3(a) for the remedies available to you. You are not satisfied with the quality of the service? Check Section 4. You still haven’t received payment? Go to Section 5… and so on. 

Conclusion

It is not always necessary to hire lawyers to draft contracts. A quick summary of all essential terms, signed by both parties, even if it is in an email or on the back of a napkin, will suffice. But if you can afford it, hire a professional to help you draft a full-blown agreement. It is like having insurance, - it might protect you down the road. 

This article is not a legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga. Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

 Read more commentary from Arina Shulga on the legal aspects of operating new and growing businesses at Business Law Post.

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