Business Planning

Does a handshake form a legally binding contract?

David Walker | 26 September 2016 | 8 years ago

The handshake might feel like a "done deal" but business owners need to ensure certain steps are adhered to
The handshake might feel like a “done deal” but business owners need to ensure certain steps are adhered to
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.

More uncertainty

Unless these details are worked out between you there is the potential for a dispute and the possibility that the contract is unenforceable.

Now, this is clearly an oversimplification, but I hope you understand the point Im trying to make.

If the designer was to use written standard terms and conditions setting out all the details about how he intends to provide the service, these problems would be avoided. We would have the certainty we need and there would be no doubt that a legally binding agreement had been formed.

But if we go back to our example, other than it being rather time consuming, there’s no reason why you and the designer couldnt have sat down and talked through all of the details to ensure there was sufficient certainty to form a legally binding verbal agreement.

However, there’s one more very important point to make. Whilst you will have a legally binding verbal agreement for the designer to provide the service, you won’t actually own the logo when it’s finished. Not even if the designer says you will and shook your hand to confirm it!

As you can imagine, hearing this comes as quite a shock for my clients who have been in this position.

The reason why you won’t own the logo is because transferring intellectual property rights is one of a few specific situations where a verbal agreement won’t be binding even if all five essential elements are present. (Other examples where a contract must be in writing is if you are buying or selling shares in a company or giving a guarantee.)

So, when you’re doing a deal with a client, think of the handshake as being symbolic only. To ensure you have a legally binding agreement, make sure all five essential elements are present and to be on the safe side, you should probably use a written agreement too.

However, this doesnt have to be an onerous task. Most businesses use standard terms and conditions to save time, reduce risks and give certainty to their agreements with clients. We shall take a closer look at terms and conditions in the next article in this series.

Visit each Monday for the next four weeks, when David Walker will be sharing priceless advice on topics ranging from what happens when someone breaches a contract to reducing risks in commercial transactions.

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