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Why handshake agreements cause headaches for business owners

Disputes

“I always stand by my word.”

“I’ve been doing business with Bob for 15 years.  We’ve never had a problem that we couldn’t sort out over the phone.”

“It’s simple. “There’s no room for confusion.”

“We didn’t have time.”

“We don’t worry about that in our industry.”

We commonly hear these sorts of explanations as to why a business didn’t have a written contract in place. Oral contracts are legal and permissible, it’s just not necessarily a wise course for a business relationship. Disputes often arise at the end of an otherwise harmonious business relationship.

Of course, you may not always need a full written contract.  As an individual, you probably trust your hairdresser to cut your hair without a written document.  You might not read the complete T&Cs on a cheap airline ticket to Byron Bay.  However, you will likely read and enter a written contract to buy a car.  You should certainly seek legal advice on a contract to buy a house.  Why?  Because the value of the purchase is worth properly documenting the agreement to ensure you receive what you think you are paying for.

Just as you protect yourself in major personal purchases, businesses should take steps to protect themselves with a written contract with their customers, suppliers, distributors, manufacturers, associates, partners, employees and nearly any third parties the business commonly interacts with. Contracts do not need to be overly complicated or unbalanced.  Contracts are not just for the protection of interests.

Contracts are usually the best method to:

  1. ensure the terms of the agreement are clear between the parties.  This is often a key problem with oral agreements;
  2. ensure the parties can agree to the terms proposed, e.g. there may be a statutory prohibition;
  3. ensure that the parties have discussed terms that they think may arise, such as if there is a problem caused by third parties;
  4. allow the parties to consider and seek legal advice on their liability both under the agreement and as a result of the relationship;
  5. to ensure that the parties include a termination clause setting out what happens to end the relationship.  This is commonly forgotten in a handshake deal;
  6. allow the parties to work out in advance what should occur if disputes between them arise down the track;
  7. to add terms to encourage compliance in specific circumstances, such as whether interest is payable; and
  8. to protect the interests of both parties.

In the dispute resolution context, we routinely consider enforcement options of oral agreements, which were never documented by the parties, in circumstances where the parties are no longer getting along and want to know their rights.  Whilst this is interesting for lawyers, business owners are usually frustrated with their options because, when the contract was oral, generally;

  1. it is more difficult to know your rights and obligations confidently;
  2. it is more difficult to enforce terms that you believe were part of the deal;
  3. it is more expensive to run a court case regarding an oral agreement, when the business must prove each term of the contract and how it was agreed between the parties;
  4. the other party/parties may dispute that a term was ever agreed at all; and
  5. any potential court application inherently involves more risk, more costs and a heavier reliance on the key individuals involved in the initial negotiation.  Those individuals will need to be available and believed by the court. This may be challenging if they no longer work for the company or have difficulty remembering specific conversations that may have occurred some time ago.

Prevention is always better than the cure. Whenever possible, whilst the parties are on friendly terms or when their interests align, the best course is to negotiate and document a written contract, which should be properly entered between the parties.  This allows the business to obtain legal advice, which in turn should result in a documented agreement that the business can turn to, to understand its rights, obligations and what happens at the end of the relationship.  It provides the business with certainty, confidence and should, at least, reduce the issues in any dispute.

If you wish to update any of your contracts, please contact our Commercial Team.