From Ferguson and Ford to Steve Jobs and Bill Gates, handshake agreements have played a role in business deals. Some would say a big role. However, most of the world’s powerful who placed their faith in handshake deals also followed them with iron-clad contracts that laid down the terms. Clearly, there is good reason why they did this!
Many a businessman entering a new relationship or deal often thinks: “We can seal this on a handshake” or “I surely can trust Fred.” Unfortunately, a handshake deal is a thing of the past, whether we accept it or not. These deals, if not followed up with due diligence and paperwork, often sow the seeds of disputes.
The point to grasp is simple.
It is not merely a matter of whether Fred can be trusted or not. It is also a matter of whether Fred has property understood the arrangement. If not, no matter how trustworthy Fred is, potential problems lurk.
Also, what happens if Fred is replaced in his organisation, becomes sick or dies? If your account is taken over by someone else, will the replacement understand the arrangement? These scenarios will destroy relationships and hurt business.
Negotiation is key
When a person enters into a business relationship, particularly with family members, friends and acquaintances, the use of legal contracts is often perceived as a sign of mistrust. It does not have to be that way. When people choose to work together, especially in business, it is necessary to read one another’s mind and then express the thoughts clearly. This is best achieved by discussions, or negotiations.
When we go through the process of negotiating and entering into a contract, there will often be far greater clarity on each person’s expectations and a better understanding of the arrangement. Also, contract negotiations often lead to a better understanding of the other person, yourself and your business. The process of understanding each other’s expectations, goals, fears, dislikes and motivations often brings the people closer together.
This process is also important to identify personal or business risks or opportunities that might otherwise go unnoticed. These risks can then be mitigated or pursued and if Fred was ever to stop dealing with your business, his replacement will have the benefit of a written contract setting out the deal.
For all the above reasons, business contracts should be perceived as a means of strengthening a business relationship and not as a sign of mistrust. If you still nurse any doubts, the next time you are at your business lawyer’s offices, just ask them how many contract disputes are being worked on!
Joe Kafrouni is a recognised business lawyer based in Brisbane. He leads the business law firm Kafrouni Lawyers and frequently provides legal advice on his blog.