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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.

You can't force one person to pay another's debt, unless the promise to pay is in writing. Fair enough. But you have to be wary even here. Bone International Inc., for instance, had repaired John Brooks's trucks for a long time. Brooks incorporated his business as John C. Brooks Inc., notified all his suppliers that he was now a corporation, and started paying his debts with checks marked "John C. Brooks Inc." The crunch came two years later when Brooks refused to pay a $4,141.84 bill, claiming that Bone hadn't done its work properly. Bone International sued John Brooks personally. The company knew it had been doing business with Brooks's corporation, but it claimed that Brooks had promised he personally would pay his corporation's bills.

The judge wasn't interested. As far as the law is concerned, John C. Brooks Inc. is an entirely different entity from John Brooks.

When a handshake isn't enough, you often can get the kind of written protection you need without spending money on legal fees and without lengthy formal contracts. A receipt, a note scribbled on the back of a check, a telegram, and in some cases even public records may be enough if they cover four essentials areas:

* Name all of the people involved in the transaction and the roles that they play. If you claim that someone has promised to sell you something, for example, a memo of the agreement must show both that the party promised to sell it and that the party promised to sell it specifically to you.

* Describe your transaction in detail. You can use abbreviations or trade jargon -- a formal description isn't necessary -- so long as the information is specific. A judge in Sangamon County, Ill., decided that a disputed contract signed by Alfreda Silvernail was not specific enough, because it described some property for sale to George McDaniel as "the house on R.R. 2 in which he now lives, plus two acres. . . ." Since Silvernail owned 40 acres surrounding the house, and the memo didn't give any indication how the 2 acres should be carved out, the agreement was scotched.

* Specify the value of your deal. While that seems obvious, it is easy to overlook critical details in a complicated transaction. In another property-sale dispute, this time in Michigan, Morris Farrington and his wife, Hazel, agreed in a memo to sell Charles Tucson and his wife, Jean, their farm for $50,000, and, in the same memo, agreed that the Tucsons could pay them in installments. The agreement wasn't binding, however, since it didn't specify the down payment required, when and how often the Tucsons had to make installments, or how much each installment had to be.

In the sale of goods, the price doesn't generally have to be explicitly stated in your memo, so long as anyone could figure it out from something like a published price list or market transactions. The danger of not being explicit, though, is that a jury may end up dictating the price at which you buy or sell.

* Get the signature of the person you're doing business with. The best proof that somebody owes you something is his or her signature on the contract. You can't make any assumptions without it, as Henry Dorman, chairman of the International Board of Industrial Advisors, sadly learned.

After negotiations were completed, Dorman wrote to Robert Cohen, of Hudson County News Co., confirming they had a five-year consulting contract that only Dorman could terminate. He asked Cohen in a second letter to let him know "if that is not our understanding." Six months later, when Cohen refused to pay Dorman, saying he didn't want his services anymore, Dorman sued and pointed to his two letters as evidence that Cohen had agreed to a five-year unbreakable contract. Since Cohen had never signed the second letter, the court ruled that whatever Dorman had understood about the contract, there was no evidence that Cohen shared the understanding. The two did not have an enforceable agreement.

Even if you have a lawyer-written, solid contract, you can't rest on your laurels entirely. If you are like a lot of other people, after you work out the terms and get everything in writing, you file your contract and forget it. But, alas, an outdated contract is about as valid as no contract at all. Just ask business broker E. Ray Koontz.

Koontz's business was retained by Kevin Keane, president of Astronics Corp., in Erie County, N.Y., who was looking for an acquisition. Their written contract of June 1975 specified that if Astronics bought one of Koontz's candidates within a year, Astronics would pay E. R. Koontz & Associates a commission. Koontz proposed United Business Equipment Corp., which negotiated with Astronics for seven months before the deal fell through. In February 1977, Keane and Koontz met again to discuss United Business, and Keane allegedly asked Koontz to get negotiations rolling again. If United Business would accept a lower down payment, he said, they could probably make a deal. Koontz then met with United Business's officers and president several times, and seven months later, Astronics bought United Business. Keane refused to pay Koontz, however, since the contract had expired. Koontz sued for his $71,540 commission, but the courts won't enforce an expired contract.

The outdated contract is not alone in giving a false sense of security. If you have a perfectly valid contract, but agree with a customer, client, or vendor that the contract should be modified, put that in writing as well. If the law requires you to have a written contract for an agreement to be enforceable, any extensions or modifications of that agreement must also be in writing. Otherwise, the courts could care less.

Last updated: Jun 1, 1986




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