Many entrepreneurs I work with say they will only do business with someone they trust. they’re quite content to do a deal on a handshake and feel that written agreements somehow undermine the trust they have between them.
However, when Im advising on a contractual dispute, those same entrepreneurs will want to know how binding a handshake is. Depending on which side of the argument they are on, they may want to hold the other party to the deal or they may be looking for a way out.
So, is shaking hands on a deal legally binding or not?
Unfortunately, there isnt a clear cut answer because whilst a handshake is very symbolic, it means very little from a legal perspective. Therefore, we need to put the handshake aside and see what we are left with.
For any contract to be legally binding (so this includes both written and verbal contracts) five essential elements must be present. If any are missing, the contract won’t be legally binding.
Legally binding example
To illustrate this point, imagine you are hiring a graphic designer to create a new logo for your business. You meet and discuss what you’re looking for. You look through a portfolio of previous work and you love what you see. This is the designer for you so you work out a deal between you.
The first element we need is an offer, but it doesnt matter who makes it. The designer could make the opening offer saying I will design your new logo for 700. Alternatively, you could make the opening offer saying I have a budget of 700, can you design my new logo for that
The other party must then accept the offer. This is the second essential element were looking for.
If the designer made the offer and you replied with OK, 700 it is, but will you do my business cards as part of the deal , this wouldnt be acceptance. This would be a counter-offer because you have changed the terms of the original offer. The ball is then back in the designer’s court to either accept your offer or make another counter offer and this to-and-fro will continue until there are no further negotiations.
Let’s say your counter-offer is accepted.
The next essential element is consideration, i.e., payment. The consideration in this agreement is 700. Even if the payment isnt made until the work is complete, both parties know what the consideration is and have agreed to it.
The fourth essential element is an intention to be legally bound by the agreement. In a commercial transaction, as this is, there is an automatic presumption that the parties intend to be bound by the agreement. If this isnt their intention they must show clear evidence for this.
So far so good, and at this point you and the designer may be shaking hands thinking the deal is done. But there’s one final element to look for and that’s certainty. Both parties must be crystal clear about the terms of the agreement they have entered into.
Are we clear in this case?
The part about designing a logo might be clear, as is the price.
But what about the business cards?
You asked Will you do my business cards as part of the price
What does do? mean?
The designer may think he is only designing your business cards, but you may think they are being designed and printed. There’s some uncertainty here.
Now let’s think about the design process. You may think 700 is a premium service and the designer will prepare as many concepts and go through as many iterations as you need until you are completely happy with the result. However, from the designer’s perspective, 700 is at the lower end of the scale of services he provides. For 700 he may be expecting to provide two concepts for you to choose from and then make two further iterations.
Unless these details are worked out between you there is the potential for a dispute and the possibility that the contract is unenforceable.
David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry, advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.
The CEO of legal comparison site LawyerFair on why changes in technology have meant micro businesses can shop around for legal services just as they would for other supplies, and why you should be taking advantage of it. more»
Following a spate of tribunal rulings against HMRC, The Association of Taxation Technicians (ATT) has called for the tax authority to update its guidance on the categories that determine which flat-rate of VAT should be paid by sole traders. more»
In theory contract management should be straightforward, yet it is frequently misunderstood. Here, CEO at procurement consultancy Positive Purchasing, Jonathan Obrien, shares his advice on getting the most out of supplier contracts. more»