Oral Contracts: Do they carry any weight?

Believe it or not, the old-fashioned "handshake" began as a means for two people to assure one another that neither was carrying a weapon. Over the years, this simple gesture has evolved into a contractual symbol—or a guarantee—for an oral agreement. But in an era of phone-book sized contracts, fine print and legal battles, does time-honored handshake deal still carry any weight?

The answer is yes—as long as you can prove it in court. It's interesting to note that many powerful people have engaged in handshake deals, from Bill Clinton and Newt Gingrich to Bill Gates and Steve Jobs. But more than likely, these handshake deals were followed by large contracts that outlined key deal points and terms. If you are the type of person who prefers informal agreements sealed by a handshake, at the very least, have a few people on hand to witness you "shake on it." A handshake deal is always more binding when there are witnesses to the agreement. In other words, avoid agreeing to anything in a dark alley when no one else is looking.

If you did go ahead and shake on an oral contract with no one to witness it, you should probably get right to work on your half of the bargain. Because putting your words into immediate action is another way to validate your oral agreement. If you begin acting on your agreement with the other party acting in compliance, you create additional evidence that a deal was struck. Of course, the only problem with this strategy is that it requires the other party to immediately begin work on their half of the agreement.

Failing witness testimony or any actions that verify your handshake deal, you can always present supporting materials to strengthen your claim. For example, any correspondence between two parties is admissible in court, particularly if it is sent certified mail. Faxes, emails, letters, memos and receipts all help establish your handshake deal. If you are particularly uncomfortable drawing up a contract—say with a friend—a simple "thank you" letter immediately following a handshake is always a good way to establish the terms of your agreement. The recipient will not think of it as possible "evidence," but simply as a polite gesture.

Of course, none of this is necessary if both parties are happy and everyone lives up to their word. In a very simple deal, chances are slim that anyone is going to wind up having to prove anything in court. But if there is a dispute that lands you in court, the burden is on you to produce evidence of the transaction.

More often than not, handshake deals fall apart over the details of the agreement. Oral contracts are often useful for simple exchanges such as "I will trade you my old air conditioner for your old refrigerator." But for deals with a multitude of finer points such as employment or lease agreements, it's always best to get your deal in writing. For those of you who still feel uncomfortable asking your buddy to sign a piece of paper, remember—it's not so much an issue of trust as it is of clarity. Perhaps Nixon said it best when he quipped, "trust everyone, but cut the cards."