When would-be clients meet with me regarding contract issues or disputes, I often find myself discussing the nostalgia for the days of handshake agreements. Unfortunately, if those times ever existed, they have definitely ended. To explain why my clients should enter into written agreements, I remind them: “Everyone who entered into handshake agreements were put out of business by people who put their agreements in writing.” I came to this belief because: 1) handshake agreements rarely give the detail required for most business deals; 2) handshake agreements are sometimes not enforceable.
Understanding of the Agreement
When individuals enter into handshake agreements, one side effect of the business arrangement being verbal is the total lack of recording of the agreement. This is one major edge of written agreements: they prove how the parties intended to define their duties. Without written proof, it’s easy for parties to claim (honestly or not) that they “don’t remember” part of a deal. Written agreements also reduce confusion by making all parties’ obligations well defined and understood.
Another benefit of written agreements – especially those reviewed by skilled lawyers – is the chance to identify possible disputes about the parties’ duties or rights before they cause a dispute. It’s much easier to resolve issues about who promised what before anyone’s committed to anything – and trading drafts can account for those issues and let you know if a deal will work. Better yet, an experienced business contract lawyer can draft procedures for the parties to follow in deciding when their rights arise and how their duties are satisfied.
Written Agreements in Reality
For instance, two key parts of construction agreements are payment obligations and warranty obligations. Many construction agreements delay payment for services until after the client (or general contractor) has reviewed and accepted the product that the subcontractor promised to deliver. This condition to payment protects the client (or general contractor) from products that are obviously defective, and from failure to deliver at all.
But what happens if the defect isn’t obvious? Unless the agreement has warranties (or the law imposes them), the subcontractor’s job is done (the agreement is complete) and the client is out of luck. This is why agreements must establish in their warranty provisions that “accepting” goods does not relieve the subcontractor of its other obligations. These duties may include making repairs, obtaining manufacturer’s warranties, and complying with the contract’s specs (where they exist). The law may impose (and a given contract may or may not disclaim) other warranties such as the statutory warranty of merchantability or fitness for a particular purpose or (for services only) the implied warranty of good and workmanlike manner.
Why it is so important to get all this in writing up front? The answer is simple: I have never seen a party that did not agree to a written warranty or indemnification take on that obligation after its services or goods fail and the other party has suffered massive damages. This goes double when the written agreements require one or both parties to obtain (and usually provide proof of) insurance coverage, so that any possible failure of the goods or services at issue are covered by an insurer. This prevents both parties from suffering financial setbacks due to any fault in satisfying obligations under the written agreement – which is protection that a handshake, no matter how firm, will never provide you.
Statute of Frauds
There’s one more key edge that a handshake agreement lacks: consistency. In some situations (which are laid out in Section 26.01 of the Texas Business and Commerce Code), an agreement or promise that isn’t in writing isn’t enforceable at all. This includes any commission on the sale of oil and gas, contracts to sell real estate, promising to answer for another person’s debts, and any agreement that can’t be performed within a year. Plenty of cases hold that promises like “I’ll care for you for life” can’t be enforced – even when employees have spent literally their whole lives working for a company based on that promise. The same applies to commissions – if you can’t show a written agreement that gives you a cut of sales, Texas law usually won’t enforce your commission deal.
There are a few exceptions where a handshake agreement may still be enforceable. Usually, this requires you to rely on the other side’s fraud that there was an agreement. But even this only lets you recover out-of-pocket damages – not the benefit of the bargain like a written contract does. As such, any and all agreements, whether complex or simple, should be in writing.