Some handshakes are to be avoided.

I was in Charlottesville on Jan 14 to present a legal seminar to the Virginia Auctioneers Association. The Omni Hotel was the venue, and there was a strong turnout making for a fine event. One of the topics that I touched on was the mossy reverence some people bestow on a “handshake deal.”

Such an agreement results when two parties enter into a contract on the basis of oral assent and then shake hands to seal the deal. The long and wide use of handshake deals is a fact. The proposition that such agreements are suitable and desirable in lieu of written contracts is fiction.

Aside from a simple transaction for a nominal amount that is completely performed on the spot (example: two parties agree to the sale of a bicycle for $10 and simultaneously exchange the bike and cash to conclude the deal), there is neither wisdom nor benefit in using a handshake deal. These oral agreements are too weak and unreliable to be given much weight and consequently should be eschewed.

While handshake deals were never a good idea, there was at least more justification for them in the “old days” when much that we have today did not exist or was not readily available. Back then, if two cowboys wanted to bargain for the sale of a horse and neither was literate (I’m not speaking of the horse), or had access to a lawyer or someone else to assist in making a written agreement, a handshake deal was all that was available. Nevertheless, that does not mean these deals always worked and it was not unusual for them to go bad.

People often revere what is old and traditional (like our love for antiques), but that does not mean that such things are always best. Patients today surely would prefer a surgeon be equipped with the most up-to-date tools, as opposed to using the crude implements from an eighteenth century surgical kit.

The same can be said for replacing oral agreements with written contracts. Like important medical procedures warrant the best equipment, important business deserves the same level of procedures to ensure correctness and certainty.

Still, quite a few auctioneers regularly remind me that they long for the halcyon days of handshake deals.

A handshake deal opens the gate for dishonesty to torpedo a transaction. Scoundrels in deals, like unseen snakes, have a long history of inflicting pain on innocent victims. Our English forefathers knew this well.

Even centuries ago, there were many fraudfeasors who claimed benefits were owed to them under oral contracts that never existed, as well as others who denied the existence of such contracts that they had helped create. Fraud and perjury were major issues in the olden days and the English Parliament acted to remedy the problem via the passage in 1677 of the “Statute of Frauds.”

The law was intended to eliminate fraud in some types of contracts by requiring that these agreements be in writing and signed before they could be enforced. The Statute of Frauds crossed “the pond” to our shores and was subsequently incorporated into the law of most states by statutory enactment.

Several areas that these statutes commonly cover are (a) contracts for the sale of real estate, (b) contracts to pay a debt owed by another person, and (c) contracts that cannot be performed within one year following creation.

Agreements on these and other matters covered by the statutes are not enforceable in the absence of a writing signed by the party against whom enforcement is sought.

While potential harm from a party’s dishonesty is an obvious and important reason to avoid a handshake deal, it is not the only one. Here are several others.

First, how many times have you had a discussion with someone about an important point and realized later that the two of you had honestly misunderstood one another? That is a common occurrence and it happens frequently in oral contracts. If you shake hands on a misunderstanding, what do you have? You have confusion and trouble, because the parties did not grasp the error in the terms that they expected to have in their “contract.”

Second, we all forget things. Sometimes what we forget is important and that is a prime reason to carefully record and preserve such matters in writing – like a contract. What good is a handshake deal when one or both parties forget or misremember key terms to the agreement? It is not good.

Third, I have a good friend who suffered a stroke. Another fellow I know had a bad wreck and head injury that resulted in impaired cognitive ability. These events caused medical disability and this could happen at any time to anyone. If someone is relying upon such a victim to accurately recall and perform an oral contract, that person is often expecting the impossible. The result will be a frustrated and unperformed agreement.

Fourth, reevaluation is a threat to any oral agreement. This is what I call the “wiggle-room factor.” When someone buys something at auction and subsequently regrets it (usually out of concern that the selling price was too high), buyer’s remorse creeps into the buyer’s thinking and spurs a desire to escape the deal. The buyer might be an honest enough person, but the pull and sway of financial interest are so strong that the buyer will envision legitimate reasons not to complete the purchase – e.g., misrepresentation by the seller, wrongdoing by the auctioneer, overriding personal issues, etc. There is a lot more space in which to look for an exit from a handshake deal than there is from a good, written contract and this principle applies to contracts of every kind.

Fifth, the law is another pitfall for handshake deals. We have seen that a “contract” for the sale of real estate is no contract at all when not written and signed by the party to be charged with performance (i.e., either the seller or buyer). Additionally the statutes of frauds adopted by some states include a threshold like $5,000 as the peak amount that an oral contract for sale of “personal property” will be valid. If the property is commercial goods, that maximum threshold is under $500.

The final threat to a handshake deal is the ultimate trump card – death! When the deal is made orally and sealed only with a handshake, each party depends upon the next heartbeat of the other to see the matter through to conclusion.

What astute businessperson would want to be in such a position and have to undertake that risk? The answer is no one would. I know of several people who took their chances with oral agreements for important sales and each of them lost when the reaper came calling for the opposite party.

Next week we will consider why written contracts are vastly superior to handshake deals.

The views and opinions expressed in this column are those of the author and not necessarily those of Farm World. Readers with questions or comments for Steve Proffitt may write to him in care of this publication.