Download Oral Contracts Versus the old

Contracts versus the old-fashioned Handshake
Case Written by MBA student
MBA 8111 Business, Government, and Society
November 15, 2006
Oral Contracts Versus the old-fashioned Handshake
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Introduction
The nation is at odds in numerous ways; right versus left, capitalism versus
socialism and creationist versus evolutionist; the list can go on, but the point is that in
such a world of dueling should we be so quick to trust. Can we build our business on a
grip and a grin, or should we be binding our deals with two inch thick documents that
outline all the details of what we have discussed. Can we trust the memory of the person
we just spoke with, can we trust they heard the same thing the same way that you
understood it and if not where do they stand ethically.
What about the fact that over 75% of American’s considers themselves a
Christian. Can’t that figure stand on its own, giving a handshake just as much clout as a
sign on the line sort of business? Can’t we all just play by the same rules, can’t business
ethics be trusted enough in people to allow for a handshake deal to stand its own.
We will be exploring these two premises in the business realm. We will look at
both sides of the issue to draw out why the handshake is still around, and when it works,
compared to when a contract is utilized, and when that might not be necessary. Does the
businesses world still do business on the old fashioned handshake, or has that gone to the
wayside like the rotary phone.
Ethical Behavior
We first need to explore what is ethical behavior. “Let the buyer beware”, is the
concept that lies behind much of the free market philosophy which assumes that both
sides have the same access to information regarding price, quality and comparative
markets (Tamari). Yet, we know that this is not necessarily the case, in fact it is usually
Oral Contracts Versus the old-fashioned Handshake
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the seller that has greater knowledge. Therefore, ethical behavior lies in the culture of an
organization.
As Gebler observed at Working Values, “A solid understanding of what motivates
employees and managers to do the right thing is the foundation for developing a truly
effective ethics and compliance program.” He continues on by stating that senior
leadership does not create and roll out ethical culture, but that it is the sum of all
employee values and behaviors be it the employees, managers, or leaders. Some even
believe that people do not just act upon their values at work, but learn them at work
(Koehn).
Let us now break down and review ethics at the personal level for an individual.
Weiland theorizes that individual values can be broken down into value ethics in a role,
management ethics in a function and the moral values which he categorizes as
governance ethics. An organization’s goal is to utilize its culture to support the
independent thinking employees and managers utilize when making decisions so they are
consistent with the organization’s values (Gebler).
The Handshake
We could look at the history of the “handshake” which began as a means for two
people to assure one another that neither was carrying a weapon (Hartline). Over the
years, it has evolved into a contractual symbol for an oral agreement. Classical Greeks
figured that the right hand was connected to the heart, and that denoted trust (Boyles).
Nowadays the handshake is more of a friendship gesture or in business an introduction
acknowledgement.
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History is littered with handshake deals, from the United States Presidents to
small business owners. However, the gentlemen’s agreement of a handshake would most
often be followed up now days with corporate lawyers $200 an hour deal binder in the
form of a rather complicated contract. However, there can still be instances where a
handshake deal works and is preferred; outlined below are instances, according to Boyles
a Men’s Health Magazine editor.

A handshake deal is made man to man. One guy looks another guy right in the
eye and says, “Deal”. Then they shake. That’s because in business, ultimately,
every transaction is a one-to-one handshake.

It’s flexible. A handshake signifies an agreement on major issues, but can be
shifted to suit circumstances, without much stress.

It’s a matter of principle. A handshake is the gestured equivalent of a promise.
Nobody can do business with a liar, so standing up and making a promise is an
assertion of what you believe -- its about the value of your word as a man.

Reveal all. If hidden reports, secret side deals, or huge liabilities emerge after the
handshake, then there’s trouble.

Be willing to trust. If you assume you’re the only one working toward that goal
in complete good faith, then you aren’t negotiating in good faith. You have to
assume that the other guy is just as interested in working out an equitable
agreement as you are.

Know what your word is worth. Never promise more than you can deliver.

Be pleased the other guy got a good deal. Agreements work only if they work
both ways.
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He continues his discussion on the topic by stating that documents such as faxes, e-mails,
and memo’s are not a bad idea when there are no witnesses, and then action must happen
to make them successful.
Contracts
Basically a handshake is a form of an oral contract. A promise you make is
considered to be a contract if the other’s party relies on your promise states the Asset
Protection Law Center. Because an oral agreement has no visible trail, these cases come
down to one person’s word against the other. In fact the courts will enforce the statement
or promise as if it were a completed contract (FindLaw). More often than not, oral
contracts fall apart over the details of the agreement. Oral contracts are useful for simple
exchanges such as “I will trade you my old car for your old snowmobile” (Hartline).
A contract is an enforceable agreement between two or more people. Contracts
for the sale of land and certain other contracts have to be in writing to be enforceable.
However, most other contracts are totally legal and enforceable even if there is no writing
(Dressen, Moses & Rossitto). This may surprise some business people.
In fact, with the proliferation of e-mail, many binding contracts are being formed
through email, either deliberately or inadvertently (All Business). With this type of
contract there is an actual trail of documents to uphold the agreement in the court of law.
For small web sites this can be a convenient way to do business, such agreements are
little more than handshake deal (Attard). Cross-promoting of web sites is one example of
such deals being done via e-mail; however this could be best done through a contract,
when the details get to be significant.
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Implied and Express Contracts
We should cover the various types of contracts, the Encyclopedia of Everyday
Law states that express contracts consist of agreements in which the terms are stated by
the parties. The terms may be stated orally or in writing. Implied contract are inferred
from the facts and circumstances of the case or the conduct of the parties; such contracts
are not formally or explicitly stated in words.
This sounds like legal wording that can get a bit sticky, but basically this would
mean that an implied warranty extends to the ultimate customer absent direct contact
between those two parties could be imposed upon a product manufacturer (Hart).
Whereas the express warranty must have the intention to extend the specific terms of the
warranty to third parties and the third party must be aware of the specific terms of the
express warranty (Hart).
The Case
Marvin Windows:
A small Minnesota manufacturing firm, Marvin Windows, is a family ran
business that prides itself on informality and trust. Their motto is a handshake is as good
as a signature; and, this policy has been put to the test.
The CEO at Marvin was good friends with a sales representative from PPG, with
whom he did a lot of business. One weekend morning, in a front-lawn conversation, he
agreed to buy quantities, some $2 million worth, of a PPG wood preservative product
(Todd). The handshake deal was done, and the order was processed.
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After selling many of the windows, they began to rot, since there was only a oneyear warranty on its products, Marvin could have simply washed its hands of most of the
complaints, as nearly all came in after the warranty expired. But that would have been
considered a betrayal by the end users, who expect the company whose name is on the
product to stand behind it (Guido).
Marvin began calling PPG to discuss the matter; they wanted reimbursement for
the product purchased from PPG. Several calls went on answered, before Marvin
Windows sued PPG for fraud over the preservative that didn’t protect the wood and it
began rotting. Marvin used their products between the years of 1985 and 1989 promoting
the quality its windows with a one year warranty (Hart).
The court ruled that with no written agreement binding the deal, the case would
be dismissed. However, Marvin appealed, even though the judge stated “experienced
merchants should use contracts to outline who’s responsible for what if the product they
are buying doesn’t work properly” (Todd). The original suit was filed in 1994, the judge
dismissed the case in 1999.
The circuit court of appeal confirmed the dismissal of 12 of the 13 claims under
the appealed case, but allowed Marvin to move forward with a jury trial on a breach of
warranty. The case was finalized in 2002.
In fact, Marvin even got the state laws changed so businesses can sue
other businesses for fraud in disputed transactions under Minnesota’s Uniform
Commercial code (Kare 11 News). Marvin went through much and learned much, but the
current CEO states they still do business on trust.
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Further, even after they thought that all had been settled a Pennsylvania couple
filed a lawsuit against Marvin in 2000, two years after Marvin quit replacing the rotting
windows (Class Action Reporter). The ripple effect of such cases can continue long after
all the dust has settled in the court room.
PPG Industry, Inc
PPG stands behind its product, they maintain that its wood preservative product at
the heart of the suit is not defective, noting that it has been in use for 20 years (Pioneer
Press). Marvin switched to utilizing PPG product in 1985. PPG told Marvin that its
preservative was effective in preventing wood rot for at least 26 years and that its
preservative would out last the preservative Marvin was then using (Hart).
The sales transaction went through, and PPG product was utilized by Marvin on
their windows. However, Marvin filed a lawsuit against PPG stating their product was
not protecting the windows as agreed. PPG asked for dismissal of the claim because there
was no written contract. The trial court dismissed the case (Jennings).
The PPG attorney explained, “Experienced merchants should use contracts to
outline who’s responsible for what if the product they are buying doesn’t work properly.
Marvin didn’t do that.”
It was obvious to PPG that it had to be in Marvin’s application of the product.
How can Marvin be so quick to come after PPG for the money that they had reimbursed
to its customers? The lack of contract detail made this a tough call for PPG, but through
their attorney directive PPG felt confident in the outcome.
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A residential customer also tried to go after PPG as a single court case. They
charged breach of express warranty against the manufacturer of the wood preservative
used in the windows. The plaintiffs’ class failed when they could not show that they
actually received an express warranty from the preservative manufacturer (Hart).
PPG upheld their side of the deal, and they feel strongly that their product was not
to blame. PPG felt that the court made its ruling and that there was no restitution due on
their behalf of the deal.
Summary
It has been proven that social and environmental responsibility does go hand in
hand with superior financial performance (Kelly). Which company in this case will be the
winner and the loser of the disagreement? The real factor that needs to be considered is
did PPG uphold its side of the handshake or did Marvin not comply or misapply their
side. Who should be responsible for the financial burden?
Another question is did PPG get hit by this lawsuit due to their employee lying to
a customer, misrepresentation of the features or risk of the products. While PPG wants
employees to maximize products where did PPG go wrong in this deal?
Or does Marvin need to stop being so trusting to believe that a handshake will
protect their legal rights, or spell out the possible issues. We want to live in a world
where you look a person in the eye, shake on it, and make good if something goes wrong
(Todd). Yet, is it realistic to do business in such a competitive market with that much
trust in your fellowman. Where do the details come from when disagreement arises?
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So, what do you think is the best way to do business, with complete protection
through the contract, or through the loyalty of the handshake when completing a business
transaction? These are two completely different ways of doing business; which do you
choose and which do you believe in?
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References
All Business, Inc. (2006). “Can an E-mail Agreement be a Binding
Contract?”. http://www.allbusiness.com/print/2378-1-3471218.html
Asset Protection Law Center. (2006). “Dangerous Oral Contracts”.
http://www.rjmintz.com/oral-contracts.html
Associated Content. (2006). “When Oral Contracts Are Acceptable?”.
http://www.associatedcontent.com/pop_print
Attard, Janet. (2005). “How deal go down”. Internet Business.
http://techdeals.bixfindlaw.com
Bakken, Ryan. (2005). Marvin Windows shares a Windfall. Twin Cities
Pioneer Press.
Boyles, Denis. (2004). “Shake on it – gentlemen’s agreement and
handshaking – includes related article”. Gale Group.
http://findarticles.com/p/articles/mi_m3514/is_n9_v44/ai_20001580/prin
t
Class Action Reporter. (2000). “Marvin Windows: Allegedly Rotting
Doors and Windows Lead to Lawsuit”.
http://bankrupt.com/CAR_public/001010.MBX
Dessen, Mosels & Rossitto. (2006). Information About Contracts.
http://www.dms-lawyer.com/area/contract.shtml
Enotes.com llc. (2006). Encyclopedia of Everyday Law: Contracts.
http://law.enotes.com/everyday-law-encyclopedia/contracts/print
Find Law. (2006). “When Will a Promise or Statement Be considered a
Binding Contract?. http://smallbusiness.findlaw.com
Gebler, David. (2005). “Is Your Culture a Risk Factor?”.
Working Values, Ltd. www.workingvalues.com
Guido Walker, Daniel. (2002). “How Manufacturers Handle Defects”.
Source: BUILDER Magazine.
Oral Contracts Versus the old-fashioned Handshake
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Hart, Daniels J. (2005). “Warranty Defense Reaffirmed”. Defense
Digest.
http://www.marshalldennehey.com/CM/DefenseDigest/DefenseDigest26
8.asp
Hartline, Karen T.. (2004). “Oral Contracts: Do they carry any
weight?”. Legal Zoom.
http://www.legalzoom.com/articles/articles_content/article13630.html
Jennings. (2004). Product Advertising and Liability.
http://swlearning.com/blaw/jennings/
Kare 11 News. (2006). Senate Passes Marvin Windows Bill.
http://www.kare11.com/news/news_article.aspz?storyid=12011
Koehn, Daryl. (1998). “Business Ethics goes beyond contradiction in
terms”. Houston Business Journal.
Kelly, Marjorie. (2005). “Holy Grail Found: absolute, definitive proof
that responsible companies perform better financially”. Business Ethics
Magazine. http://www.business-ethics.com/
Tamari, Meir. (2006). “Honesty in Business Dealings”. The Jerusalem
College of Technology.
Todd, Richard. (2004). “Let’s Shake on It”. Inc Magazine. 98-101.
Wieland, Josef. (2001). Taking Sides Clashing Views in Business Ethics
and Society. The Ethics of Governance. Pg 49. McGraw-Hill.
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Questions
1) What do you think was the outcome of appealed case pursued by Marvin
Windows?
2) Why do you think they still hold true to their motto?
3) How do you feel about the power of the handshake deal?
4) Do you think that in today’s society we can still trust people enough to do
business through a handshake? Would you do business like that?
5) Do you think that an individual or the corporate culture is to blame for the case
brought to trial?
6) Was the contract required to be in writing?
7) What warranty was breached? Whose warranty was it?
8) Do you believe that a person should be held accountable for promises made
verbally?
9) What do you believe should be the outcome for the couple suing several years
after the case was over?
10) Does this case sway your opinion of Marvin Windows’s business ethics in one
way or another?
Outcome
The jury awarded Marvin Windows $135.8 million in the preservative case from
PPG industries based upon breach of the express warranty. Their moral code is such that
when Marvin Window’s received the $156 million settlement; 3,573 employees received
$50.3 million bonus (Bakken). Now that is a culture with high ethics!