Not every deal starts with a contract. Sometimes, people assume that a shared understanding is enough, that a written agreement isn’t necessary, or that they’ll document it later. Sometimes that works. Informal arrangements are fine when things are going well. But when a business relationship breaks down, the lack of a legal contract can cause significant problems.
A recent case I litigated in Colorado illustrated how this plays out. The parties agreed that there was a partnership. But the litigants disputed the identities of the partners to the agreement and to the terms of their complex arrangement.
Cases like this are common and can be incredibly difficult and expensive to prove in court. In this one, following years of discovery, the court examined evidence of what the parties said and did when the relationship was formed. Emails, text messages, conduct, and credibility all factored into the analysis, with the court ultimately finding that a binding agreement did exist in the manner my client had contended and entering a $3.1 million judgment in my client’s favor. And the court found that the other side had tried to use the informality of the arrangement to avoid its obligations to pay under their agreement.
Handshake Agreements Can Be Enforceable
One of the most common misconceptions is that an agreement isn’t binding unless it’s in writing. The outcome in this case demonstrates that isn’t true.
Although the opposing party argued that the partnership existed not with us but with some other (uncollectible) entity, we utilized emails, text messages and character witnesses to show what the parties actually did and said, demonstrating how the relationship functioned in practice. The court ultimately concluded that a business partnership did, in fact, exist. If there is clear evidence, oral agreements can be enforced.
The Burdens of Proving an Informal Agreement
However, just because a handshake deal can be enforced, that doesn’t mean it’s easy to do so. Without a written contract, disputes often come down to competing versions of events. The court must determine what exactly the parties agreed to, under what terms and who said what.
In this case, proving the agreement required reconstructing a business relationship involving more than $4 million in assets by building and presenting a thorough timeline of events and communications using emails and other records.
Answering those questions can take years and cost hundreds of thousands of dollars in legal fees, and for many businesses and individuals, it is not practical or doable to pursue a case of this nature.
Communications Become the Contract
When there is no formal agreement, communication between the parties becomes the most important evidence. Courts will look at emails, texts, and other contemporaneous records to determine intent. Casual messages sent quickly and without much thought can end up carrying significant weight.
In our case, we addressed a common issue: the destruction of text messages. Of course, documents can get lost, not every mistake is punished, and ill intent isn’t ascribed to every deleted message.
However, the court ultimately found that the opposing party had destroyed key messages in bad faith. Courts take intentional destruction of evidence very seriously. If a dispute is even a possibility (and it always is with an informal agreement), preserving communications along the way is critical.
The Cost of Getting a Resolution
Many strong cases never make it to trial because of cost. Litigation is expensive, and even if the monetary value at stake is significant, not everyone has the resources to see it through.
In this matter, I represented my client on a contingency basis, which enabled him to proceed to trial, where we secured a multimillion-dollar financial resolution in his favor. However, it’s important to know that experienced litigation attorneys are typically very selective about the types of contingency cases they will take, so assuming that you can pursue a case on contingency if needed is not an option people are well-advised to rely on.
What Business Owners Should Know
There are two main takeaways from this case.
First, informal agreements can still be legally enforced when the facts support them.
Second, handshake deals are risky and expensive cases to prove in court. If you currently have an informal agreement with another party, work with an attorney to put it in writing now. It’s never too late. If that’s not possible, be sure to preserve all related communications and records related to the agreement.
The simplest way to avoid legal risk is to document agreements with experienced legal counsel, ensuring they are tailored to your specific situation and will hold up in court someday if needed.
