What it means
In a formal contract, each side's duties are written down and a court can order compensation if one side fails to deliver. A gentleman's agreement has none of that backing, so it holds only as long as both sides choose to keep their word.
Whether a court would ever recognise it depends on the country and on the facts. Such agreements are common in long-standing relationships.
A supplier may agree to hold a price for a loyal customer, or two partners may agree how to split an opportunity before the paperwork is ready. The speed and flexibility are attractive, particularly when the relationship is built on years of trust.
The risks are equally clear. Memories differ, people change jobs, and without a record it is hard to prove what was promised.
Auditors and finance teams also dislike informal arrangements because they leave no evidence of an obligation, a discount or a commitment that should be recorded in the accounts. The phrase has a darker history as well.
It has been used for informal arrangements that excluded people unfairly, and some regulators treat informal understandings between competitors, such as an unwritten agreement not to compete on price, as illegal collusion. Informal does not mean exempt from the law.
A sensible approach is to use a gentleman's agreement only for low-value matters, and to confirm anything important afterwards in writing. A short email summarising what was agreed turns a spoken promise into a record at almost no cost.
For finance teams, the practical question is whether an informal promise creates a commitment that should appear in the accounts. A verbal pledge to pay a bonus, honour a discount or guarantee a debt can become a real liability once the other side relies on it.
Asking the business what has been promised, and writing it down, is part of ordinary good control.
In practice
Real-world examples.
Example
A building contractor and a long-standing timber supplier agree over lunch that the supplier will hold prices steady for the next quarter. The contractor sends a short email recording the agreement, so there is evidence if the price rises. The email takes two minutes to write and could protect a materials budget of $150,000.
Example
Two founders agree before incorporation that one will receive a larger share of the business if she works full time. Their lawyer later insists on recording the arrangement in a shareholders' agreement, because informal promises about ownership are a common cause of disputes.
Example
A group of local fuel retailers informally agree not to undercut each other's prices. A competition regulator treats this as illegal collusion, and the owners face fines despite never having signed anything. Their lawyer notes that the absence of a written record did not help them, because the regulator relied on witness statements and messages.
Case study
Seen in the real world.
Oakridge Fabrics is an illustrative, fictional textile merchant that had traded for ten years with a yarn supplier on a handshake basis. The supplier verbally promised to reserve 20,000 metres of yarn each quarter at a fixed price, and Oakridge planned its production on that basis.
When the supplier was bought by a larger group, the new management ignored the promise and raised the price by 15%. With nothing in writing, Oakridge had no claim, and its finance director calculated that the higher price would cost an extra $42,000 over the year.
Oakridge afterwards put every supply arrangement above $10,000 into a short written contract. The illustrative lesson is that trust is valuable but needs to be backed by a record when the relationship changes hands. The new contracts ran to two pages each, which the company felt was a small price for protecting a purchasing budget of several hundred thousand dollars a year.
Watch out
Common mistakes.
- Assuming that a spoken promise is automatically enforceable, when courts often require evidence and may not recognise it at all.
- Relying on an informal agreement for a high-value or long-term commitment that belongs in a signed contract.
- Believing informal understandings between competitors are harmless, when they can amount to illegal price fixing.
Questions
People also ask.
Is a gentleman's agreement legally binding?
Usually not in the way a written contract is, although some oral agreements can be enforced depending on the law of the country and the proof available.
How can I make one safer?
Follow it with a short written confirmation by email, setting out what was agreed, by whom and when.
Does a gentleman's agreement affect the accounts?
It can, if it creates a real obligation or commitment, so finance should be told about it and should assess whether it needs disclosing.
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