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Business Mediation: Is There a Place For Verbal Business Agreements?

Partnership mediation

Commercial mediation helps manage the difficult communication issues that normally develop when business ventures are formed. A new business venture is in fact a new type relationship. Exciting at the start, even more exciting when rewarding, and can turn sour very quickly when they incur losses. Over 50% of small business partners report that at least some part of their partnership agreement is verbal. We can explain this report in various ways: a) either they do not have a business partnership agreement in place at all or b) it is incomplete and they shook hands about several other aspects of their partnership. In the legal realm, and the government as well, it is an oft-debated topic whether verbal agreements should even be allowed to stand. However, as of today, most states permit the verbal agreements in businesses and partnerships. This is where mediation can step in transition over the inevitable rough spots, reduce conflicts and help keep the business functioning smoothly.

In addition to having a place, verbal agreements actually have some advantages. Take, for instance, the fact that verbal agreements are flexible and adjustable. When first starting a business, partners often cannot see terribly far down the road. They might even find it hard to foresee what kinds of issues they might run into in six months, let alone six years, or what shape the business will take. Good commercial mediators know and help plan for future strategic issues, problems and opportunities.

Partners often establish one business and quickly realize the opportunity is somewhere slightly to the left or right of where they started. In some cases, they might even realize that their real place is in a totally different field and might completely change course. Take a company that we recently worked with, for example. They began as a nanotube manufacturer, transitioned to a business process outsourcing services, and eventually ended up providing patent support services for attorneys. At this point, they are highly profitable, however, there is no way they could have anticipated such a dynamic shift. Given the fact that business by nature is so fluid and unpredictable, especially in its infancy, it is arguable that the initial partnership agreement should be fluid to accommodate modifications as well. Business mediation is a flexible process that can mirror and complement the development process. 

On the flip side, written agreements tend to be much more rigid. Independent researchers have established that the very act of writing agreements down on paper and signing one's signature has a great impact on the extent to which the partners accept the terms of the agreement. The exact same clauses, when verbally accepted, tend to be reshaped over time, whereas written agreements experience fewer alterations. Based on this research, verbal agreements could be a solid alternative in the early stages of a business's life cycle.

Does it seem almost premature or unprofessional to make verbal agreements, especially with the knowledge that the reason for the verbal agreement is the stipulation that it is in place to allow for change! This paradox certainly can be tricky, and most governments, as well as law professionals recommend written agreements even for start-ups to protect the rights of those involved. The reason for this commitment to the written word is quite straightforward. Make a written agreement and agree to alter it completely or to modify with amendments and addenda on a periodic basis during these early years of a business. Permit a clause that calls for business mediation as the first step required prior to any litigation. Consider including an arbitration clause as an alternative to court. These are far better approaches than going paperless. Or without a legitimate agreement at all. 

In our business mediation practice, we have resolved  many cases of partnerships have gone sour, where business partners agreed to verbal terms that fail to materialize, thus derailing an otherwise excellent business plan. The only thing certain about change is that it will happen. Plan for it and be diligent about keeping your agreements and contracts in alignment with the realities of your business's movements. We call it best practice to ensure that your contracts remain valid and disputes remain minimal by employing a business mediator to assist you in resolving your disagreements without the process of litigation.