Why Can’t We Do Business by Handshake?, You Ask

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After a set of transaction documents evidencing a planned long-term business economic relationship has been negotiated, reviewed, re-reviewed, and signed, parties often will say, “why can’t we simply have done this by handshake, because if something goes wrong, we won’t even look at these documents, we’ll just figure out what do based on the commercial realities at that later date.”  The parties might be the stakeholders to a new venture, or an agreement with an outside investor, or some other long-term relationship.

It’s true that oral contracts are enforceable, if by their terms they can be fully performed within one year.  So, isn’t a handshake, a look in the eye, establishing and maintaining trust, the most essential parts of the business relationship?

I’m sure that in Silicon Valley and some other parts of the country, some well-heeled and experienced investors will write and deliver a check to an entrepreneur they have come to know, based on the entreprenuer’s pitch, and these parties either have a simple agreement or no agreement at all, because that’s the way business is conducted out in the Valley.

And it’s true that in many cases in which there’s a need for a business workout later on in the relationship, the contract documents may be ignored and the parties agree to use their collective experience to figure out the best way to resolve the problems that are causing the enterprise to flounder or fail.

Of course, over time, a writing is needed if only because in many instances the parties may change, memories may become hazy over percentages or incentives, and basic misunderstandings can frequently occur.  Trust is an essential part of a successful business arrangement, but the old saw, “trust, but verify” also applies.

So, maybe the documents are drafted by a lawyer with a strong background in contracts and torts and the various events of defaults and remedies for breach are spelled out, and disputes and resolution thereof (mediation, arbitration, litigation, indemnification) are also detailed.  The parties roll their eyes, thinking of costs involved in something that “of course will never happen”—a dispute (!) down the road—and of course, the documents are signed, and promptly put in the bottom drawer of their desk (until such time as and when they may be needed).

Yes, a handshake deal is something that many people in business today long for, as if the oral contract was ever commonplace.  We all know full well that the parties, either in their role as fiduciaries or otherwise, expect well-drafted contracts as an essential part of the deal.

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