Put it in Writing – the Insufficiency of the Handshake Deal and the Praise of the Contract

Have you ever yearned for the good old days where a handshake deal was all you needed? The days where, with that handshake, you could trust that the deal would get done and get done right? Those days of trust are not gone. People are still generally trustworthy. People want to fulfill their obligations. But, those who think the good old days—where handshake deals ruled—are how things should be are perhaps romanticizing the past. A handshake deal is rarely sufficient. It simply does not provide an opportunity to layout and formalize all expectations. And, it’s not the lawyers that have muddied the world of contracts—lawyers are not the people that have caused the problem. Rather, lawyers have reacted to the problems that occur when a contract is absent. They see what happens with the good ol’ handshake deal—even between two good, trustworthy people. 

The returns from the ownership of oil and mineral and gas interests typically come from the lease of those interests to companies that are trying to extract the same from the land. Accordingly, the lease payments are subject the actual content of the land, the ability of the company to extract the contents, and the global market for the contents of the land. 

I like to think, maybe optimistically, that most contract disputes are not the result of shady actors and fraudulent intentions. Instead, contract disputes often arise because of a misunderstanding between the parties. Of course, there are the occasional bad actors working intentionally to defraud others. But, those are the small minority. More often, two parties are trying to faithfully come to an agreement and perform their individual duties. However, we not only have faulty memories, we also have our own viewpoint, our own expectations, our own concepts of “right,” and our own pride in our ability to convey information and expectations (though we are also often critical of others’ ability to convey information). 

Let’s look at a “simple” example. Assume both parties are as honest as the day is long. You hire someone to install a fence for your backyard. You tell the contractor you want a 6-foot cedar fence for $2000. Handshake. Should that really be enough? The “what ifs” are virtually limitless. What if the contractor drops off the wood at the house and it is stolen that night? Who is responsible? What if the owner misunderstood the property line and discovered the problem after installation started? What if the contractor installed Western Red Cedar and you really wanted Northern White Cedar? When is payment due? What if there is a delay in payment? What if halfway through the job (or after the job) wind blows over the fence? Does it matter what speed the wind was blowing?  What is the threshold MPH that would shift liability from the owner to the contractor? What if the contractor makes the fence dog-eared when the owner thought it would be a straight-top? 

A contract is certainly helpful in enforcing a person’s right. But, more importantly, it is vital in setting out the expectations for many variables while also covering the unexpected. And, one can imagine if the contractor (in this hypothetical scenario, the most honest person on the planet) had different verbal agreements on all these matters with 10 different (or 100 different) customers, it would be really hard to keep track of all the terms if they were not in writing. Doesn’t it make sense then to capture all the terms in a written document that each party signs to ensure they both understood and agreed to all the terms? 

In many circumstances, a handshake deal would have been enough. The job gets done to your reasonable satisfaction. No contract needed. No lawyer needed. In many cases, the unexpected never happens and the information conveyed between the parties is clear enough to get the job done to the satisfaction of both parties. But, in a surprising number of cases, something comes up. And, necessarily, that short handshake deal didn’t anticipate all the possible somethings that commonly come up. It is likely that no written contract will cover every conceivable eventuality, but wouldn’t it be better to have a written agreement that covered the most common issues that are likely to pop up rather than just having a handshake? 


 * Licensed, not practicing.

The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual or entity. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. 

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