Let's Shake on It

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Both these books may perhaps remind us of a humbler truth: There's a reason we have our laws and our contracts.

4. Your Word and the Law

"A verbal agreement isn't worth the paper it's written on," said the realist Sam Goldwyn. (He meant an oral agreement, but for some reason it's funnier his way.) Yet despite this famous dictum, federal law in fact gives some considerable standing to oral agreements.

Constance Bagley, a professor of business law at the Harvard Business School, explains that many oral agreements are "fully enforceable as binding contracts as long as all essential terms are agreed upon and there is intent to be bound." There are, as she notes, many significant exceptions. You can't be bound to a real estate transaction, a prenuptial agreement, or even a deal to buy a refrigerator without a contract. And then there is the question of witnesses and proof.

Still, this provision of the law has been actually used to powerful effect. In her book Managers and the Legal Environment, Professor Bagley discusses the landmark case in which Pennzoil sued Texaco, alleging interference in Pennzoil's deal to buy the Getty Oil Co. Texaco's defense argued in effect, "What deal?" No written contract had been executed between the two merging companies, only a four- or five-page memorandum recorded the basic terms, and that went unsigned. However, there had been a board meeting, a vote to approve the deal as amended by the memo in question, and there were handshakes all around. That was enough for the jury, which awarded Pennzoil $10.5 billion in damages. (The case was ultimately settled for about $3 billion.)

The prudent lesson, I suppose, is not that the law will always come to your rescue if someone welshes on a deal. The lesson is the flip side: That even without having signed anything, you may still have entered into an agreement.

There is an argument for learning to love contracts that has little to do with holding the other guy to his word. Richard Evans, a Massachusetts attorney specializing in real estate law, has a natural affinity for the contractual sense of life. But he points out that the best reason to draw up a contract is not in fact to protect yourself legally. He says, "It simply forces you to think through what you are doing." Besides, it may help you blink away the mists of sentimentality.

Not long ago I had occasion to recognize the wisdom of this advice, and to find out for myself the perils -- to both the heart and wallet -- of the handshake deal. The worst part of this tale is that I'm the villain.

5. Making (and Losing) Hay

The deal in question involves hay, and the short version of the story is that I sold a field out from under the guy who was mowing it. As you might expect, the long version offers some mitigating evidence, but it doesn't redeem me entirely.

Last fall I sold the small farm where my wife and I had lived for some years. A melancholy moment for me, and a reluctant decision, but a necessary one. We had gotten ourselves into a restoration project on another old place -- well, anyway, something had to give.

I had an informal deal with my neighbor -- let's call him Hamm -- that allowed him to hay the field without charge, to supplement the feed for his hobby herd of beef cattle. This was a good arrangement for both of us. He got the hay, and the field was kept open without any effort on my part. Now, Hamm is not one to do things halfway. He's a farmer by avocation but a heavy-equipment dealer by trade, and he likes to move machinery around. One day he said he'd like to make some improvements on the field -- and here, in retrospect, is where we might have gotten a few things down on paper. The next day a fleet of machines began to arrive, pulling up rocks, harrowing, applying an herbicide that turned the place into a brown wasteland, and then reseeding. This was more than I imagined he would do, and some of it (the herbicide) I disapproved of -- but now he was invested in my field.

Hamm knew that it was possible I'd sell the farm, but I think we each let ourselves indulge in a bit of wishful thinking. First of all, I was very reluctant to sell and he knew it, and we both thought it would never happen. Moreover, the place was too small and marginal ever to be a full-time farm, and the overwhelming likelihood was that any new owner would be happy to go on with our haying arrangement. Then along came the offer that couldn't be refused. As it turned out, the new buyer would be happy to let Hamm hay, but he intended to keep a few head of cattle himself and he wanted some of the hay. Not unreasonable, it seemed to me, but not what Hamm had in mind.

I presently got a bill for Hamm's expenses in "refurbishing" the field. It was $7,000. It included everything from limestone to repairs on the harrow he broke, with a substantial allowance for his labor. (On second thought, the labor charge may have been a good deal; Hamm is very successful, and if he had charged me what he really earns in an hour I would have been in worse trouble!)

Needless to say, we had a phone call, and I realized what was really troubling Hamm: that I had gotten too much for the place. I really think that if I'd been forced to sell at a loss Hamm would have forgotten all about the field. As it was, he was saying that he deserved some of the money.

I found this particular line of argument very easy to resist. But then Hamm sent a letter, and the letter took a different tack. He went over our understanding, not exactly as I recalled it, but his tone was reasonable. Toward the end he suggested, "let your conscience be your guide."

He had me. My conscience was uneasy. I did make a deal I couldn't deliver on. And that is how I came to spend $7,000 for work I didn't want done on a field I don't own.

And that is also how I learned the worst danger of the handshake deal. It is not that you'll be cheated but that you will cheat yourself, a more complicated and generally more unpleasant feeling. You will end up agreeing to something your lawyer wouldn't approve of and that no court would impose. The trouble is, most of us really do want to be the guy who can look at himself in the mirror, whose word is gold, who honors the deal no matter what it costs.

Write it down first, then shake hands.

Richard Todd writes frequently about the culture of money. Cara Cannella provided reporting assistance for this article.

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