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No one makes a deal on a handshake these days!

Wednesday, April 13, 2011
posted by Douglas Keene

We’ve done a lot of work in oil and gas industry cases where the handshake deal is alive and well. There are complex reasons for a handshake deal over multi-million dollar agreements but jurors find this foolish.

No one does that anymore. It used to be a man’s [sic] word was his bond but that isn’t the case anymore.

You expect me to believe there is only a verbal agreement? That’s ridiculous. If it isn’t written down, it never happened.

Even when very credible witnesses agree that the deal was a handshake deal (not to mention that if you renege on a deal you won’t survive in that industry) jurors do not quite believe it.

That’s really not very smart the way the world is today. Why would they bet their money on someone’s word?

They need to change how they do business. This is just asking for trouble.

There is a very real risk in these cases that jurors will be so focused on the ‘handshake deal’ that they lose sight of the real questions and issues in the case. So we always spend time underscoring the validity of that ‘handshake deal’.

When I saw Dan Ariely’s post on the handshake deal, I was reminded of our work in these cases. His post is a wonderful way to explain and make sense of a ‘handshake deal’ even in today’s world.

Initially, he mirrors the thoughts of our mock jurors:

“You have two options: You can ask me to collaborate, with a handshake promise that if things work out, you’ll make it worth my while. Or you can prepare a contract that details my obligations and compensation, specifies who will own the resulting intellectual property, and so on.

For most of you, the decision is obvious. The second approach, the complete contract, is the way to go. But should it be?

The idea of making a deal with a handshake–what we generally call an incomplete contract–makes most of us uncomfortable. A handshake is fine between friends, but when it comes to vendors, partners, advisers, employees, or customers, we believe that incomplete contracts are a reckless way to do business.”

And then he gives an example of the attorney use of a handshake deal:

“Even lawyers see the risks of complete contracts. As part of my research, I asked the dean of Duke’s law school, David Levi, if I could take a look at the school’s honor code.

Expecting a detailed contract written by lawyers for lawyers, I was shocked to find that the code went something like this: If a student does anything the faculty doesn’t approve of, the student won’t be allowed to take the bar exam. It was, in essence, a handshake agreement!

“Imagine that a student decides to deal drugs and raise chickens in his apartment,” Levi said. “Now suppose that our code of conduct bans many activities but doesn’t address pot or chickens. The student has honored the code. But does Duke really want that student to become a lawyer?”

Complete contracts are inevitably imperfect. So what’s better: a complete contract that mutates goodwill into legal trickery, or an incomplete contract that rests on the understanding we share of appropriate and inappropriate behavior?”

His readers fire back—much like our mock jurors—with expressions of disbelief and disagreement:

Rachel says:

If you’re a member of a non-dominant group, a handshake agreement with members of the dominant group can be a disaster.
If each culture defines decency and honor in different ways, guess who prevails?
And if the dominant group decides that I’m not worthy of honorable treatment, I’m screwed no matter how much effort I expend to keep the agreement.
For example, I would have a hard time trusting a handshake honor code from an institution like Duke that as late as 1956, allowed publication of a paper entitled “A Critical Analysis of the Wetback Problem,” and supported the Chinese Exclusion Act.

Leigh says:

I’d like to say a handshake is good enough but I’ve been around enough to get burnt. Handshakes only work when people feel socially responsible and when they feel like you are equals — if you don’t have money or cultural capital handshakes will not work. Get it in writing.

JC says:

In the diamond industry, people seal their deals with a phrase: “I give you Mazal”They say it and agreement is solid. I am not in the industry, so i can’t speak to when things go sour, but I think “giving someone Mazal” is what we want from a handshake.

Edo A. Elan says:

A handshake is an agreement sanctioned by one’s social circle. Historically, paper agreements became popular and lengthy because of the weakness and geographical fragmentation of circles. That said, it would be very interesting if under “risk management” business and law schools would teach how to take risks in the right way, instead of how to avoid them. I would like to be taught the art of agreement through handshake by a master – perhaps from the diamond industry where I hear it’s 100% binding.

Being told by an expert that a ‘handshake deal’ can be a good thing is no guarantee of listener agreement. It’s intriguing to hear everyday (and bright) folks who read Dan’s blog having essentially the same discussion we have learned must happen before our mock jurors can hear the essential elements of a story.

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