Handshake Deals and Written Contracts

George BenaurBusinessLeave a Comment

 

By George Benaur

Business people often rely on handshake deals without a written contract. Even large multi-million dollar transactions are often based on trust and promises, rather than a written document. Some business people think lawyers only complicate matters when they get involved to paper the deal that was already agreed upon, and perhaps they are sometimes correct. On the other hand, however, people very often create ambiguities in their deals precisely because they do not understand the legal implications of what they agree upon. Although the right balance between the role of the lawyer-draftsman and the businessperson-negotiator is not always easy to attain, it is critical to mitigate risk and to limit the chances for disputes in the future.

Although it may be possible to enforce oral agreements in certain instances, conducting business transactions without a written contract is generally not a good idea. Proving the elements of the claim for breach of an oral agreement may require protracted litigation over the issues (such as what the terms of the agreement were, whether a deal was reached, or whether the Statute of Frauds makes the contract unenforceable). Courts definitely prefer to have a written agreement to turn to when adjudicating contractual disputes.

To be effective, the written agreement should clearly spell out the terms of the contract. When people decide to draft up agreements themselves, without lawyers, they often create unclear or incomplete documents that leave many ambiguities. Such ambiguous contracts tend to overlook many open issues and leave holes that could serve as grounds for a dispute over material terms. If the parties do not clearly express their terms in a written agreement, the dispute could turn into examining volumes of “extrinsic” evidence (course of dealing, emails, industry standards, depositions, etc.). Countless disputes and litigations have been fought because people lacked a clear written contract to show what they agreed upon.

It is generally advisable to enter into a written contract in virtually all circumstances when handling business transactions. The challenge, however, is how to find the right balance between effectively and efficiently documenting the deal and not overcomplicating it with long protracted negotiation between lawyers.

Finding the right balance begins with having good, open communication between counsel and the business people before the deal is finalized, and perhaps even before the negotiations begin. Business people do not always want the lawyers involved during the initial negotiations stages, which is often a mistake. Lay people, without understanding the law, often make mistakes precisely because they did not consult with counsel. If they choose to not involve the lawyers during the negotiations, they do so at their own peril.

Clients can help their counsel to do their job efficiently by at least keeping a clear record of their discussions and communications, and especially keeping records of any documents supporting what are the material terms of the deal. Businesses are advised to keep a file for every contract with copies of the contract itself, key communications, as well as the “course of dealing” of contractual performance. Clients should not expect that lawyers will read their minds to download the history pertaining to the contract. Nor should clients think that the lawyer will always be able to renegotiate a bad deal into a good deal. The drafting of the contract and any negotiations with opposing counsel over the deal are definitely going to be more efficient and productive if the lawyer receives clear direction from his or her client and the client did his or her due diligence during the negotiations over the deal.

 

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