The Enforceability of Handshake Agreements

1. Lawful object. The object of a contract is the thing to which the parties agree. The object must be lawful when the contract is made and possible to perform. Possible objects include an exchange of money for goods and services, an exchange of work (e.g., “I’ll shingle your roof if you pour my driveway”), or an agreement not to perform certain actions. Impossible objects include illegal services (e.g., the sale of drugs), exempting anyone from their own fraudulent acts, or things that one party does not have the power to give (e.g., land not titled in that person’s name).

1. Sufficient consideration. Consideration is simply something of value, given by one party to the other. A simple transaction where one person gives money in exchange for an item is sufficient consideration. Consideration does not need to be monetary. Anything with value, even something as simple as a pencil, given by the party who lawfully owns it to the party who is not lawfully entitled to it before the contract is made, is sufficient consideration.

The Statue of Frauds: Some Contracts Must Be In Writing

Verbal contracts and their terms are just as enforceable as written contracts. However, by law, some contracts must be in writing in order to be enforceable. These contracts fall under the Statute of Frauds.

The Statute of Frauds is a law requiring certain contracts to be in writing and signed by parties. If any of the following contracts are not in writing, any verbal agreements on these matters are not enforceable.

• An agreement that by its terms is not to be performed within one year from the making of the agreement.

• A promise to answer for the debt of another person. Limited exceptions exist for personal and commercial guarantees.

• An agreement to lease property for a period longer than one year.

• An agreement for the sale of real property.
• An agreement for the promise to lend money or extend credit in an amount greater than $25,000.
• An agreement to alter repayment of a debt or forgive some or all of a debt of greater than $25,000.

If the parties make a verbal agreement regarding any of these scenarios, the verbal agreement is unenforceable (with very limited exceptions) unless the verbal agreement is reduced to writing and signed by the parties.

Rescission of Contract

What if one party later has regret or remorse for the handshake agreement? Parties to a verbal agreement may have the power to rescind a contract. The ability to rescind a contract is limited, though. A party who was induced to enter a contract through duress, menace, fraud, or undue influence by the other party may rescind the contract. Rescission allows the deceived party to restore everything of value received under the contract. Basically, the parties are put back in the positions they were in before the contract was made (the status quo). The consideration and object are returned to the respective parties.

Alternatively, the parties could mutually agree to cancel or terminate the verbal agreement. In this situation, the parties would need another “meeting of the minds” to cancel or terminate the agreement.

Unlawful and Voidable Contracts

By their very terms, some verbal agreements are unlawful and voidable. They cannot be enforced, even if all the elements of contract formation are met. These include:

• Contracts exempting anyone from responsibility for their own fraud or willful injury to the person or property of another.
• Contracts exempting anyone from responsibility for their own violation of the law.
• Contracts making a contractor liable for the errors and omissions of the property owner or owner’s agents in the plans and specifications of a building contract.
• Contracts imposing penalties for nonperformance of contract obligations.
• Contracts that fix a set amount of damages to be paid for breach.
• Contracts restricting a party from enforcing the party’s rights through a lawsuit.
• Contracts that restrain a person from exercising their lawful profession, trade, or business, except when the restrained person sells the goodwill of a business or when a company is dissolved.
• Contracts restraining the marriage of any person, except a minor.

Enforcing the Handshake Agreement

What if a dispute arises between the two parties? How can a court determine what the terms of the verbal agreement were if nothing was written down? The court looks at several factors:

• Course of dealing. A course of dealing is a sequence of previous conduct between the parties which is used to establish a common basis of understanding for interpreting the parties’ expressions and other conduct. If the parties have an established track record of dealing with each other through handshake agreements, those past dealings will be helpful in determining what the current dispute is about. If one party always delivered a certain type of decorative ceiling tile for interior design projects in the past, the other party could rely on that type of decorative ceiling tile being delivered again at no additional cost.

• Course of performance. A course of performance relates to the conduct of the parties under the specific verbal agreement in question regarding its formation and the parties’ contractual obligations to each other. If one party has consistently delivered a certain brand of fertilizer under the terms of the agreement, that party has an expectation that the other party will not start charging an additional cost for that brand of fertilizer.

• Detrimental reliance. One party, to its own detriment, acts consistent with the terms of the verbal agreement. The understanding is that one party would not voluntarily deprive itself of its own property without receiving consideration back. If a subcontractor hangs drywall at the request of the general contractor, the subcontractor would necessarily expect some sort of compensation for the work.

• Usage of trade or industry standard. A usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. If a business owner hires a contractor to pour a concrete parking lot, the business owner necessarily expects the contractor will pour the slab in accordance with concrete construction industry standards for the expected use of the parking lot.
• Partial performance. At the time of the dispute between the parties, one or both parties had partially performed their contractual obligations consistent with the terms of the original agreement. If a supplier accepts monthly payments from its customer instead of full upfront payment, the customer has an expectation that the supplier will continue to accept monthly payments instead of demanding the entire balance.
• Complete performance. At the time of the dispute between the parties, one or both parties had completely performed their contractual obligations to establish the terms of the original agreement. This would show that the parties had a true “meeting of the minds” on the original terms of the handshake agreement.

Best Practices

Now that you know how handshake agreements are formed and enforced, what should you do when you find yourself involved in one? As an attorney, I often have to recreate the terms of the handshake agreement and the “meeting of the minds” not only with my client, who is one party to the agreement, but with the other party. And when these disputes get to the attorney, it’s often a jumbled mess of memories and “I don’t remember.” The terms always become more favorable to you and less favorable to the other party, as you tend to remember them. But this cuts both ways.

In a perfect world, a handshake agreement is later confirmed in writing. Memorialize the agreement with a follow-up email, text, or any other digital message. Just put it in writing. Ask the other party to confirm if these are the terms. Create a written contract that plainly states the terms and the parties’ obligations. Get everyone to sign the agreement. Our memory of events, terms, and what was said fades over time. Memories and recollections will begin to diverge so put the agreement in writing as soon as you can.

Handshake agreements are enforceable contracts. They are binding on all parties just like written contracts. The hurdle to enforcement is remembering all the terms the parties agreed to. This may be hard to do in the middle of a round of golf.

Disclaimer — This article is provided for informational purposes only and is not intended as legal advice. It should not be used as a substitute for consulting with a qualified legal professional. No legal services are offered through this article, and no attorney-client relationship is established by reading it. Please consult with an attorney for advice on any specific legal issues you may be facing.

SW&L Attorneys