The Trouble with Handshake Deals

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1. Feature: The Trouble with Handshake Deals (3 min)

2. From the Archive:

   • How to Build a Customer Agreement That Works for You and Your Clients

   • Employee Reviews: A Simple Guide to Doing Them Well

-TCoL

Missed our last feature article? A Board of Directors for your LLC

When in doubt, put the deal in writing. When you are still in doubt after trying, hire an attorney. That advice may sound cautious, but it reflects how experienced business owners and lawyers manage risk. It is not about mistrust or over lawyering. It is about understanding how agreements actually work under state law and where informal arrangements tend to break down.

Every agreement a business enters into, whether written or oral, is governed by state law. A handshake does not place a deal outside the legal system. If the required elements are present, an oral agreement can be enforceable — sometimes in ways the parties did not anticipate. The difference is that with a written agreement, you control how the deal is defined and enforced. With an oral agreement, that control shifts to memory, inference, and, eventually, a judge.

The Law Supplies the Framework Whether You Ask for It or Not

Many business owners assume contracts exist to create rules. In reality, most of the rules already exist. State laws and court decisions address offer and acceptance, consideration, breach, remedies, and interpretation. A contract’s main job is not to restate the law but to define the business terms that matter to the parties.

This is why experienced attorneys often favor brief, focused agreements. There is a long-standing saying in the legal profession: if you cannot draft an effective contract on a typical business subject in five pages or less, you probably do not understand the topic well enough. The point is not brevity for its own sake. It is precision. Each extra page increases the chance that something is misstated, inconsistent, or inadvertently waived.

Handshake deals fail when the key terms that should supplement the law are never clearly articulated at all.

What Makes a Contract Enforceable

The elements of a contract are the same whether it is written or oral. There must be an offer and an acceptance showing mutual assent. There must be consideration, meaning each side gives or promises something of value. The parties must have legal capacity, the subject must be lawful, and the terms must be definite enough that a court can determine what was agreed to and whether a breach occurred.

Most handshake deals that end in dispute do not fail because these elements were missing. They fail because the terms were vague, incomplete, or understood differently by each side. Price adjustments, changes in scope, timing expectations, and termination rights are common pressure points that are rarely discussed clearly in informal settings.

Why Enforcing Oral Agreements Is So Difficult

When an oral agreement falls apart, the dispute usually shifts from performance to proof. Courts look at emails, messages, invoices, calendars, partial performance, meetings, and witness testimony to reconstruct what the parties likely agreed to. That reconstruction is uncertain and often expensive.

Even when an owner believes the facts are clear, the absence of a written record gives the other side room to dispute details and create delay. The cost is not only legal fees. It is lost management time, distraction, and uncertainty that can persist long after the deal should have been completed.

The practical question is rarely whether an oral contract can be enforced. It is whether going with an oral deal is worth the risk and expense of not putting the deal in writing.

Five Rules to Decide When a Handshake Is Not Enough

Not every business arrangement requires a formal contract, but some should never rely on memory alone. The following five rules offer a practical test for when to put a deal in writing.

First, does the agreement involve real estate or an interest in land?
Deals involving the sale, lease (and other forms of possession like access and easements), or transfer of real property almost always require a written contract under state “statute of frauds” laws. Even when they do not, the value, duration, and complexity involved make informality unwise.

Second, do you know and trust how the other party behaves when things go wrong?
Trust is not about friendliness or reputation. It is about experience. If you have not seen how a person handles payments, delays, cost overruns, or disputes, do not rely on a handshake. A written agreement provides structure when goodwill is tested.

Third, are the dollars meaningful or the obligations long term?
Low-dollar, short-term transactions are easier to resolve informally. As the money or commitment increases, ambiguity becomes more expensive. Writing the terms down is far cheaper than sorting them out later.

Fourth, does performance depend on details, timing, or evolving scope?
If success depends on milestones, quality standards, deadlines, or approvals, a handshake invites trouble. A written agreement that spells out scope, timing, and payment triggers can prevent most disputes before they start.

Fifth, would a third party ever need to understand or rely on this agreement?
Investors, lenders, insurers, regulators, and future buyers care about documentation, not recollections. If the deal could affect financing, compliance, ownership, or a purchase or sale of your business, a written agreement is a must.

Clarity Is the Objective

The real choice is not between trust and paperwork. It is between clarity now and conflict later. In many cases, the right answer is not a long contract but a clear one — sometimes no more than a few pages or a carefully written summary.

Handshake deals tend to work when the stakes are low and assumptions align. They tend to fail when the stakes rise and clarity is postponed. Experienced business owners recognize that moment early. When doubt appears, they write it down. When doubt persists, they get help.

Editor’s Note:When in doubt, reduce it to writing. When doubt lingers, hire a lawyer. This discussion is for general information only and should not be taken or utilized as legal advice.

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