Is a Handshake a Legally Binding Contract?
You’re a software developer. You have an awesome product. But your potential client is having trouble with some of the terms: maybe payment; maybe the form of deliverable; or the timing of production. You go back and forth. Phone calls. Meetings. And, emails. You both really want this deal. Finally, the last piece of the puzzle falls into place. An oral “understanding” is reached, and everyone thinks “huzzah!”
Then the problems start … your own upper management rejects or wants to modify the deal. The client’s other source of revenue fell through. The Service License Agreement hasn’t even yet been inked, and already there is trouble in Paradise. Finally, you - or the client - has “buyer’s remorse” and wants out of the deal. But was there ever one? And, if so, is it enforceable, or is this oral agreement “as good as the paper it’s written on?”
This is a very fact intensive area of law. And in New York State, several different statutes come into play, including the General Obligations Law and the Technology Law. However, there are some good guideposts to keep you out of trouble:
Disclaimer: The following information does NOT constitute legal advice and is only for general educational purposes. Each situation is different and specific legal issues usually require additional research and investigation, so do not rely on this article to address a particular legal issue; use it as a starting point to gain a general understanding.
1. Make It Clear: No Contract = No Deal
While you may be excited about retaining that client, and want to put out positive “deal-making” vibes, always be clear in your verbal conversations - and especially in all writings, including emails - that there is no deal until there is a SIGNED • WRITTEN • AGREEMENT. In New York State, oral agreements may very well be enforceable, depending on the circumstances.
Courts can examine many factors in determining whether a “handshake deal” actually was made or merely was an “agreement to agree” on a finalized contract later on - the difference between an enforceable agreement and not. In the absence of any or conclusive writings, courts may consider a variety of factors including “whether there has been an express reservation of the right not to be bound in the absence of a signed writing.” [1]
At the end of every email where you discuss details of your deal, I would encourage you to politely but firmly say something along the lines of, "please note, until we both sign a written contract there is no binding agreement here.” You should also follow-up significant oral conversations with a similar email confirming that *no* binding agreement has been made until both parties sign a written agreement. By doing so, you can save yourself a lot of heartache, and possibly a good deal of money.
2. Do not partially perform
any work before a contract is signed
Courts also will look to whether parties have performed any work on the project. If you did, the court may find a contract, and fill in any missing terms. A little bit of prior work is not necessarily going to guarantee the court will find a contract, because you can still attempt to argue that the work you performed was not related to the agreement your client alleges was created. [2]
But, why not avoid this possibility of entanglement altogether? Just refrain from doing any work prior to a signed contract. If you must do some work (for instance, to create a free demo, or to test your client’s system for viability), make it clear (in a signed writing; or even better, in a signed agreement) that the work you will perform is not indicative of a final deal but is related only to that portion.
3. Do not accept payment before a contract is signed
Similarly, a good argument can be made that the parties intended a deal if your client already began payment which you accepted.[3] Few folks are going to lay down hard money for something that “might happen” and courts will tend to see that payment as proof that there was some kind of deal already made. Again, you still could try to wriggle out of it by arguing that payment was for a small amount of X and not the entire Y, but tempting though it may be, just wait for payment until you have a completed signed contract.
4. Include a “Merger Clause” in your standard contract
A Merger Clause (also sometimes called an Integration Clause) is fancy legalese talk for saying that all prior discussions, emails, correspondence, etc. are considered “merged” into the final contract, and that the final (usually signed) contract supersedes and overrides any previous or “soft” prior understandings. While such clauses are not always binding or determinative, they are often considered presumptive evidence that parties intended prior discussions to be discarded and ignored.
Why is this important if the other party didn’t even sign your agreement yet? Because if a Merger Clause is present in your standard contract (or perhaps the contract you gave your client, but which your client did not yet sign) the court may regard its presence as a good indication that you did not intend to give prior negotiations any binding legal effect, including prior conversations and emails.[4]
5. If possible, be consistent with industry
standards; if there is a reason not to be
consistent,be clear about what you intend to do
One of the other factors that courts will look to is “whether the agreement at issue is the type of contract that is usually committed to writing."[5] In one legal case, a news provider firm sued a software company, claiming they had an oral contract, and the software company was able to defeat the lawsuit, in part, by demonstrating that it was industry standard to sign a Software License Agreement before any deal became enforceable.[6]
*If* for some reason, in your corner of the universe of what you do, oral contracts and handshake work *is* considered a deal, and if you want protection from being committed orally, it is even more important to follow the instructions above, and include in every verbal conversation and every email, an indication that whatever you are discussing is just preliminary, and nothing is finalized until all parties sign a written contract.
Final Thought
Software development is a complicated field. There are so many deliverables, moving parts, and things that can go wrong. You are better off putting as many things in writing up-front, so that you and your client have realistic, clear, and if necessary, legally enforceable expectations and rights. And the above advice applies to other industries as well. So, help yourself. Help your client. Hash out the terms beforehand, while both of you are still excited, and prior to encountering project-altering problems. Take advantage of that mutual goodwill to work out a fair deal, memorialized in writing, and you may avoid the future unpleasantness that can lead to lengthy protracted and costly court battles.
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[1] Ciaramella v Reader's Digest Ass'n, Inc., 131 F3d 320, 322 (2nd Cir 1997); see also Municipal Consultants & Publishers, Inc. v Town of Ramapo, 47 NY2d 144, 149 (1979), "if the parties intend not to be bound until the agreement is set forth in writing and signed, they will not be bound until then."
[2] Winston v Mediafare Entertainment Corp, 777 F2d 78, 80 (1985).
[3] Al-Bawaba.com, Inc., v. NStein Technologies Corp., 2009 NY Slip Op 52591(U), pgs. 8 and 12, Docket #45550/07.
[4] Ciaramella v Reader's Digest Ass'n, Inc., 131 F3d 320, 324 (2nd Cir. 1997) ("The presence of a merger clause is persuasive evidence that the parties did not intend to be bound prior to the execution of a written agreement").
[5] Ciaramella v Reader's Digest Ass'n, Inc., 131 F3d 320, 323 (2nd Cir. 1997).
[6] Al-Bawaba.com, Inc., v. NStein Technologies Corp., 2009 NY Slip Op 52591(U), pg. 8-9, Docket #45550/07.
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