Avoiding disputes in handshake agreements

Many business deals are carried out on a ‘handshake agreement’ (a verbal agreement that isn’t recorded formally), but not many business owners know that this in itself can form a contract that will be legally binding on the parties, with potentially problematic consequences.

Contracts don’t have to be set out in writing to be binding, and they don’t even have to be formally signed to be valid. In fact, a recent court case found that a conversation in a kitchen 10 years ago was deemed a valid contract.

Recent Case

In Burgess v Kempson [2023] EWHC 2216 (Ch), a 15-minute conversation was held between two individuals. Burgess offered to introduce Kempson to a property developer on a “no win, no fee” basis in exchange for a percentage of the increased value of Kempson’s land if they managed to sell the property with that property developer.

The property was sold 10 years after the conversation, but Burgess received no payment for introducing the developer.

The judge said an agreement was “unquestionably” reached but that the terms of the agreement were not clear. In this case, the judge determined that to receive the payment, Burgess had to have used his professional skills in order to increase Kempson's property value. However, the cause of the increase in the property value was not attributable to Burgess’ input, so Kempson did not have to pay.

This meant that Burgess lost out on payment for services he had provided despite proceeding on the understanding that he would receive some compensation.

What are the risks of a handshake agreement?

Handshake agreements can cause ambiguity in a business relationship. As a result, if the relationship breaks down, it can be difficult to determine what, when or why any terms were agreed. This form of agreement often only deals with the main commercial aspects of a business relationship.

Goods and service providers

If you are providing services, the risk to your business is that you spend time and money performing services only to be told that the customer will not pay you what you thought you would be paid. This is effectively what happened in the case above; as the terms were unclear, the judge interpreted the oral contract in a way that meant Burgess could not get paid even though Burgess believed he was entitled to some payment.

There are also terms that are implied by law, adding conditions to your contracts. Conditions are terms that, if broken, can allow your customer to terminate the agreement. For example, in a sale of goods contract, an implied term might be that the goods conform with their description, or for the supply of services, that the services will be performed with reasonable care and skill. Having a written contract gives suppliers the opportunity to contract out of these conditions.

Customers

If you are the customer, the risk is not receiving the level of service you expected or paying for services but not getting exactly what you requested. An oral contract might not deal with when services are to be performed or any important deadlines you may need to meet.

As such, you may find that you are unable to comply with your own agreements (for example, if you are supplying goods to end-customers and they are delayed because of your supplier).

Let’s take an online shop, for example. They want to create an app to sell through and contact a web developer. They discuss the app and the client’s requirements and agree that the developer will produce it in exchange for a payment of £10,000. The developer then goes away and starts the development process.

However, this neglects several important terms: When does the customer require the app? How many iterations or redesigns of the app will the developer allow before charging additional fees? How much design input does the client want, and who will own any intellectual property? Who is responsible if anything goes wrong with the app?

These are important factors that, if undecided at the start of the business relationship, might significantly impact a business if the relationship were to deteriorate.

Even if these terms are discussed, how do you prove what has been agreed without a written contract?

Why do I need written contracts?

Whilst we always hope that a business relationship never breaks down, in the unfortunate circumstance that it does, having clear, unambiguous written contracts means there is certainty and stability in a business relationship, reducing the risk of disagreements or disputes around what was agreed.

Typically, written contracts will also deal with other key areas of the relationship, such as how long the contract will last, the process for amicably ending the business relationship, and particularly for creative industries, the handling of intellectual property, such as copyright.

Most importantly, in business-to-business contracts, written contracts let you attempt to reduce your liability if anything goes wrong. This can be essential, especially when you consider that your insurance policies likely have a cap on the amount of liability they will cover.

How can Birkett Long help?

At Birkett Long, we regularly advise our clients on their contractual needs and help draft contracts that suit their business relationships. Our contract solicitors can assist with reviewing and drafting a range of commercial contracts, including online terms and conditions, business-to-business contracts for supplying goods or services, software and development agreements, or distribution and retailer agreements.

Please get in touch to discuss your requirements, and we can let you know how we can help your business. I can be contacted on 01206 217352 or via email at [email protected].