Let's Shake On That

When it comes to making business deals that stand up in court, you'll be smart to save your handshakes for introductions.

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If you've never concluded a business deal with a simple handshake, you're probably the exception. Maybe it was when you ordered supplies, lined up financing, or confirmed an agreement with your partner. And a handshake works fine so long as things are running smoothly. If disagreements arise, however, you may be in for a nasty surprise -- because the courts have their own ideas about when a deal is really a deal.

One rule of thumb is never to rely on just a handshake if your deal can't be wrapped up in one year. That sounds simple enough, but its application isn't always obvious.

Consider this. Robert Montgomery, a producer of videotape to train salespeople, agreed to develop 25 scripts and produce tapes for Futuristic Foods Inc., a company doing business in New York. As part of their deal, Montgomery made Futuristic promise it would use the tapes only for training its own people and would never sell the tapes to others. Montgomery finished his tapes in two months, as had been agreed upon, and collected $1,600. A couple of months later, Futuristic formed Mind Trek Inc. to sell Montgomery's tapes. Montgomery sued to stop Futuristic, but lost. The judge explained that courts won't enforce an oral agreement that covers more than a year. Consequently, the proviso that Futuristic could never, ever sell the tapes was invalid. To be enforceable, the agreement had to be in writing.

Leases are another variation on this theme. Courts generally will enforce oral leases for less than a year's duration. But there's a twist.If you've got an oral lease for a year with an option to extend for one year, your agreement isn't enforceable. Courts look at the whole agreement when they decide whether it has to be in writing, and they won't enforce just those parts that would be valid without a written agreement. The same rule applies to an assignment of a lease or a sublease, and to an agreement to enter into a lease.

When you're buying or selling goods for big money, the courts insist on written evidence of the deal before they'll help you enforce it. Five hundred dollars is the most a handshake will cover. Then again, sometimes what you think is written evidence isn't seen that way by the courts, as Martco Inc., a Texas firm, discovered.

Martco, which had been buying truck chassis from Doran Chevrolet Inc. and turning them into custom-made trucks, asked Doran for a quote on 24 chassis to fill back orders. Doran replied with a price quote written on corporate stationery, saying it would be willing to sell 24 chassis at the quoted price. Martco ordered one chassis, and Doran delivered, but when Martco ordered more, Doran refused to ship. Martco sued for delivery of the other chassis at the quoted price, but all it got for its legal fees was an order from the judge to pay for the chassis it had already received. Even a written quote isn't a firm contract to sell.

Courts seldom enforce an oral agreement when only one side of the bargain is around to testify about it. That sounds reasonable enough in theory, but it can cause problems in practice. Partnerships are particularly vulnerable.

Like many partners, those at the Greller & Co. accounting firm worked out an arrangement to protect their families and their business if one of them should die. Proceeds of the partnership's life insurance policy would go to the estate of the deceased, and the remaining partners would be entitled to all other partnership assets -- as well as debts. And that settled that. But after partner Rubin Dreher died, his widow, Rose, filed suit, claiming she was entitled to a split of partnership assets -- not just the $40,000 she got from insurance. The court wouldn't even consider evidence that the partners had a different agreement, since it wasn't in writing.

Courts are also reluctant to become involved in disputes between consultants and clients unless an agreement is in writing. And such disputes are legion, usually over the value of the consultant's services. If you are dealing in such intangibles as consulting and brokerage services, the courts argue, you must protect yourself with a written agreement. For industrial consultant Benjamin Freedman, that turned out to be a $2.05-million lesson.

Freedman had pitched David Fulton, an officer of Chemical Construction Corp., in New York City, on the idea of building a plant in Saudi Arabia to convert flared-off natural gas to fertilizer. The deal would be worth $41 million to Chemical, and, for acting as broker, Freedman would be entitled to a 5% fee. The two men met several times; Freedman brought his Syrian associate, Issa Nakhleh, into the deal, and Nakhleh negotiated directly with the Saudi government at Chemical's request. Chemical won the contract, and finished construction of the plant four years later, but refused to pay Freedman's fee. Despite interoffice memos signed by Fulton acknowledging that Freedman was involved in the transaction, Freedman lost his lawsuit to force Fulton to pay. There was no written agreement.

Almost every contract dealing in any way with real estate ownership must be in writing -- or there is no contract. Richard Carey, a sophisticated developer, found this out the hard way. Construction on his office building near New York's Long Island Expressway came to a halt when Franklin National Bank folded. The bank had agreed to make Carey's company a $5-million construction loan under certain conditions, and, in the meantime, tided him over with short-term loans. As collateral for these loans, Carey mortgaged off more than $3 million worth of land. If he couldn't get funds to finish the project, there would be no rent to pay off his debts, and whoever bought Franklin National Bank's receivables could foreclose.

A solution seemed to be at hand when European-American Bank said it would make Carey the kind of construction loan the defunct Franklin had worked out with him. The new lender gave Carey $100,000 to pay off some suppliers, but just a few weeks later, decided not to make the loan. Carey was out of options. The short-term funds he'd borrowed from Franklin were due, and he had no money to pay them off. Desperate, he sued European-American for the construction loan it had promised him. But no dice: the promise was not put in writing.

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