Doing Business on a Handshake? Be ready to Litigate!

Recently, we have had a number of clients come to us to help them litigate a particular kind of mess: they were doing business on a handshake – that is, without putting their terms in writing – and ended up at the wrong end of a demand letter.

First, there was the client who bought into a franchise with a family member. Since it was a family member, our client never thought that formalizing their agreement by putting anything in writing was necessary. But when collections agents started calling, each party pointed at the other and said, “This is your problem!” They never bothered to write a contract stating who was responsible for what or even who owns what. As a result, they both may bear personal liability for certain debts in this case.

Next, there’s the casual partnership among friends in a real estate business. One partner bought the houses, the other fixed them up and rented them out. Nothing was ever put into writing. Now, the property owner wants to oust their business partner, claiming that they were just the contractor hired by the property owner. It’s tough to prove a partnership existed without a written agreement.

Finally, there are the divorcing business owners that filed their own divorce and tried to handle the division of business assets on their own. The only documentation of who got what in the divorce is their Marital Settlement Agreement, and it states that the wife will get “cash value” for her interest in jointly-owned stock in the business but never says how they’ll determine what the “cash value” is or when she’ll get paid. That was a side discussion between the two of them, and now they each think their agreement means something else.

Contracts are all about deciding for yourselves what the terms should be and what should happen if there is a dispute. Business litigation is usually about letting a court decide what will happen when two parties disagree about the terms of their contract. If you do not put the contract in writing, you are just letting the court interpret your contract based on what you each have to say. Putting it in writing memorializes what you both intend at the outset. As a result, a written contract often avoids litigation altogether.