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Why Doing Business on a Handshake is a Very Bad Idea

Through my many years of practice, I have had many clients seek my legal advice on breach of contract cases. Invariably, I will begin by asking them to produce a contract or agreement that delineates the rights and liabilities of the parties to the agreement. In those situations where a client cannot produce an agreement the reason usually provided is that the "deal" was done on a handshake. Of course, the justification for doing business on a handshake is often based on the fact that the parties were doing business as friends and/or family and there was, as such, no need to have a contract in the first instance. Nothing could be further from the truth and nothing could be more disastrous for your business. 

In the first instance, contracts by a handshake are oral contracts. With any kind of oral contract, it is difficult to enforce because it is difficult, in many cases, to understand what the particular terms and provisions were that supported the oral contract at the time of its making. Without an underlying written document, spoken terms are often forgotten, remembered incorrectly, or even disregarded entirely. Even for seasoned business owners, remembering the specifics of any contract is not often easy. As well, spoken words are subject to constant misinterpretation based on the inflection, tone, and mood attached to the particular words used. There are also language barriers that often arise in today's more multicultural, multilingual society.  Where a contract by a handshake is oral in nature, one party may interpret a word one way and the other party another way at the time the parties "consummate" their understanding. 

The business world has changed forever. Gone are the halcyon days when handshakes were taken seriously and where companies and individuals stood behind their handshakes. When parties want to change the terms of a previous contract by handshake they usually further complicate the situation because they have no idea what they are amending in the first place. When a contract by a handshake goes bad there is only one place to go- to the local courthouse. The problem for both parties is that it will cost even more money to litigate contracts by a handshake because, more often than not, contracts by a handshake as they are verbal in nature, require a trial. Not to mention the fact that with oral contract cases there are all kinds of proof and evidence issues that arise in the course of litigation. Ultimately, a judge or jury will be the ones to "fill in the blanks" as to the contract's terms and provisions.

If you want to avoid the problems that arise with a contract by a handshake you should consider the following terms in written contracts:

A. Use a sophisticated business lawyer to help guide you through the labyrinth of the business world. Remember, a solid written contract is not only solid because it contains all of the material terms and provisions necessary to understand what the parties intended but, also, that the contract reflects current changes in industry and commerce that may affect the way the contract is drafted.

B. A well-written contract may include a reasonable attorney's fees provided for the non-breaching party if they win at trial.  From my experience, such a provision works as a deterrent against future litigation and will force a potentially unethical party to think twice about litigation if there is a possibility of having attorney's fees awarded against them.

C. Having a mediation and/or arbitration provision in a carefully drafted contract is a good way to avoid the court system altogether. In some cases, if there is a mandatory mediation clause then the parties must avail themselves to mediation before going to arbitration. This can save time and money for all parties to the transaction.

D. Venue and jurisdiction clauses are critical particularly if your company does a lot of business out of state. Carefully tailored venue and jurisdiction clauses can help save you time and money in the event that the underlying dispute requires legal action.

E. With a written contract a client has the ability to evaluate the terms and provisions of the deal. In fact, in many cases, I have been able to guide clients out of potentially bad business decisions because it became clear after ongoing negotiation that the deal was a bad one for my client.

Before you enter into a contract by a handshake stop and carefully consider what you are doing and never, ever fall for the line, "Why do we need an attorney... don't you trust me" as a reason not to have a written contract. If someone suggests "don't you trust me" as a reason not to have a written contract then you do not want to do business with them anyway. At the Katz Law Group, we have assisted many clients in contract negotiation and execution based on the combined experience of being a trial and business practice law firm for 37 years. Please feel free to call us at 508-480-8202.

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