Jessica Allain, Partner, Jones Walker LLP.
May 18, 2023

The construction industry has it fair share of “handshake deals”, oral agreements relying on the integrity of the people involved. But when it comes to protecting and enforcing legal rights, it is always a better idea to properly paper the deal and get it in writing. Otherwise, contractors relying on verbal promises may find themselves without any legal remedy should the deal go south. After all, it is not just a matter of trust, but also a way to document that everybody agrees on what the terms of the deal actually are.

For example, a recent case out of New York highlights the dangers of unwritten promises. In Castle Restoration, LLC v. Castle Restoration & Construction, Inc., No. 16349-15 (N.Y. App. Div. 2/9/22), 2022 NY Slip Op 50082(U), 2022 WL 402882, 2022 N.Y. Misc. LEXIS 485, Castle Inc. and Castle LLC entered into a deal for an asset sale to transfer equipment and a client list from Castle Inc. to Castle LLC. While that initial asset sale was properly papered with sale documents and a promissory note, the parties entered into a subsequent handshake/oral agreement where Castle LLC agreed to provide Castle Inc. with labor and materials on construction projects, and those goods and services would offset the payment obligation under the promissory note. But the problem was that the contract for the asset sale had a provision that the agreement could not be changed by oral agreement; rather, any changes had to be made in writing.

The payment dispute between the parties ended up in court. The parties both acknowledged and agreed that there was an oral agreement after the contract for the asset sale was executed, but they disagreed about what the precise terms were. The court threw out the handshake deal entirely on the basis that it was unenforceable. So Castle LLC was out both the labor and materials it provided to Castle Inc. on a construction project and was in trouble due to its failure to pay according to the terms of the written promissory note. Had Castle LLC papered the deal to provide labor and materials to satisfy the payment requirements of the promissory note instead of trusting a handshake deal, the outcome could have been much different.

A recent Louisiana case also demonstrates how a handshake side-deal can leave a developer without any legal remedy when they failed to paper a side deal for the sale and excavation of additional lots. In Hidden Grove, LLC v. Brauns, 21-548 (La. App. 3 Cir. 02/09/22), 2022 La. App. LEXIS 182, 2022 WL 390007, the Brauns purchased a lot with a right of first refusal on two additional lots. The development company and the Brauns made a “handshake” side-deal to allow the Brauns to excavate the two additional lots at their open expense to enhance the privacy on their property. The deal, which was never committed to writing, fell apart when the development company learned the Brauns were not going to build a retaining wall on the additional lots where they excavated. Id. at *3. Hidden Grove filed suit claiming breach of contract, unjust enrichment, and demanding specific performance for the excavation to be completed and a retaining wall be constructed. Id.

The breach of contract claim didn’t hold up in court without a signed writing laying out the terms of the deal. And on appeal, the court threw out the equitable arguments as well, finding that a party’s failure to protect itself by entering into a written contract did not give rise to unjust enrichment. Id. at *11. Had the developer incorporated the agreement about the additional lots, they could have better protected themselves. The dispute over the retaining wall could also have been entirely avoided. By putting an agreement in writing, everybody can acknowledge and agree on what’s required.

In an adjacent space, handshake deals on payment during construction projects can also have unintended consequences. Lien rights under state law often have very strict time requirements, sometimes as short as thirty days in some states. Unfortunately, contractors frequently seek to file a lien and enforce their right of payment, only to quickly determine that they have simply waited too long. For example, contractor and subcontractor are working on a project together. Contractor strings along the sub with promises to pay, and they even shake on the payment term. Maybe there is a soft promise for a lucrative future project. The subcontractor does not want to ruin the business relationship, but eventually, the subcontractor seeks out legal advice because they still have not been paid. However, because the subcontractor waited longer than 60 days to paper the right to payment and file a statement of claim to assert the lien, no special remedies are available and the only choice would be a traditional, unsecured breach of contract claim. Had the subcontractor sought out legal advice within 30 days of the money not being timely paid, it could have had a secured right and a stronger position to get paid sooner.

So the takeaway is that in business, put it in writing. Lay out all of the expectations so the terms are black and white. It is not an issue of trusting the person you are working with, but rather, a lack of trust in how handshake deals may play out in court should a dispute ever arise.

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