Why Written Agreements Are Essential In Business

I get a lot of calls from people who are owed money, but the person who owes won’t pay up. Most of the time they need to collect a payment from a customer, but sometimes they want to collect a promised bonus or get a loan repaid. They call a lawyer after they asked for payment, but the other person refused, or said they didn’t owe anything.

I am continually surprised at how often people do business on a handshake. Entrepreneurs, contractors, employees, and partners alike feel they can trust each other, or they don’t want to take the time or pay a lawyer to write up an elaborate agreement. Or a subcontractor doesn’t have time to prepare written change orders, so relies on the project manager’s word that he can submit the change orders later. In today’s world, you could get lucky, but I get called when things don’t go as expected, and I get called a lot. In my experience oral agreements are a high-risk practice. When people just shake hands on a deal, they run the risk that the other party to the deal will deny there was an agreement, or, more often, doesn’t recall the terms of agreement in the same way. Even with the best of intentions, over time memories fade, with the result that each side remembers things differently. Frequently, each side based their agreement on unspoken assumptions, which might or might not have been shared by the other party. Or the person they dealt with left the company, and no one there knows anything about it.

The ordinary way of getting paid when voluntary efforts fail is to file a lawsuit for breach of contract. The lack of a written agreement signed by all the parties poses a unique problem. The person who starts a lawsuit has the burden of proving his or her case by the preponderance of the evidence. This means they have to prove that it is more likely than not that there was an agreement, and what the terms were. So, anyone trying to collect payment from someone else must prove in court, at the very minimum, that they had an agreement that contained the following essential terms: (1) an offer to deliver or do something for the other person, and the price to be paid for it,(2) an unconditional acceptance of the offer, and (3) the exchange of consideration, which means either that the delivery or service was made or the price was paid.

Typically, the person wanting to get paid (the plaintiff) could testify they had an agreement and what the terms were. But, the other person might testify differently. What happens if the other side disagrees about what was to be provided, whether it was provided, what the price was, when payment was due, or other terms, or even that there was an agreement to pay? To enforce the agreement, the parties must have had a “meeting of the minds” on all of the essential terms. If there is disagreement about the terms, the court might conclude that the minds did not meet on the terms of the agreement, and so no contract was formed that could be enforced.

Often the person who calls me expects the other party to pay interest and attorney’s fees to compensate for the delay and difficulty of collection. These remedies also are a matter of contract. If those terms were not part of the handshake agreement, or the person owing the money disagrees that he had agreed to pay interest or attorney’s fees, and the plaintiff doesn’t have a witness or some other evidence to prove he did, the plaintiff won’t meet his burden of proof, and so won’t collect interest or attorney’s fees.

When a plaintiff’s testimony is not enough, you can still meet your burden of proof if there was a witness to the handshake agreement who is willing to be a witness for you, or there was an exchange of emails discussing the terms of the deal and showing the parties agreed on the essential terms. You also might be able to gather up receipts, photographs, or some other documentary evidence that corroborates the existence and terms of the agreement.

The bottom line is, it is far easier and simpler to collect what is owed if there is a signed written agreement stating who will pay how much, what the other party must do to get paid, and the other terms agreed to. You can trust that things will work out for you, but my experience shows that this doesn’t always happen.

For that reason, business owners who want to make sure they get paid for their product or service should write down the terms of their agreement and make sure the writing is signed by every party to the agreement. Then, they should keep the signed agreement in a safe place where it can be found when and if a problem does develop down the road.