What Is a Gentlemen's Agreement?

A gentlemen's agreement is an informal, often unwritten agreement or transaction backed only by the integrity of the counterparty to actually abide by its terms. An agreement such as this is generally informal, made orally, and is not legally binding.

Despite their informal nature, the violation of a gentlemen's agreement one could have a negative effect on business relationships if one party decides to renege on their promise. A gentlemen's agreement may also be called a "gentleman's agreement," and may or may not be consummated by a handshake.

Understanding Gentlemen's Agreements

A gentleman's agreement, being more of a point of honor and etiquette, relies on the forbearance of two or more parties for the fulfillment of spoken or unspoken obligations. Unlike a binding contract or legal agreement, there is no court-administered redress if a gentlemen's agreement is broken.

Gentlemen's agreements have been commonly made in international trade and relations, as well as most industries. Gentlemen's agreements were especially prevalent at the birth of the industrial age and well into the first half of the 1900s, as regulation often lagged new business practices. Such agreements were found to be in use to control prices and limit competition in the steel, iron, water, and tobacco industries, among others.

Limitations of a Gentlemen's Agreement

At its worst, a gentlemen's agreement may be made to engage in anti-competitive practices, such as price fixing or trade quotas. Since a gentlemen's agreement is tacit—not committed to paper as a legal, binding contract—it may be used to create and impose rules that are illegal.

The end result, in many cases, may be higher costs or lower quality products for consumers. Worse yet, a gentlemen's agreement may be used as a means to promote discriminatory practices, such as in an "old boy's network."

Gentlemen's agreements, because they are informal and often not written down, do not have the same legal and regulatory protections in place that a formal contract has, and thus are more difficult to enforce.

Key Takeaways

  • Gentlemen's agreements are informal, unwritten agreements between two parties to undertake a transaction or other commitment.
  • These agreements are not legally binding but are instead backed by the integrity, social norms, and peer pressure of those involved and their social networks.
  • Despite their informal status, gentlemen's agreements have been common in business and trade dating back centuries.

History and Examples of Gentlemen's Agreements

Gentlemen's agreements between industry and the U.S. government were common in the 1800s and early 1900s. The Bureau of Corporations, a predecessor to the Federal Trade Commission, was formed in 1903 to investigate monopolistic practices.

What resulted, in some cases, were gentlemen's agreements in which Wall Street financiers, such as J.P. Morgan and his "House of Morgan," would meet with the bureau to receive prior clearance on mergers and takeovers. One such example was the gentlemen's agreement that had regulators and the President overlook the Sherman Antitrust Act to allow United States Steel Corp. to become the world's first billion dollar company.

The U.S. government placed a prohibition on gentlemen's agreements in trade and commercial relations between nations in 1890.

In 1907, a stock market panic that hit several big investment banks led to a financial crisis. The panic led to President Theodore Roosevelt to working closely with J.P. Morgan to consolidate banks under the argument that doing so would stave off a larger crisis.

Similarly, in 1907 Morgan again worked with Roosevelt to create a gentlemen's agreement that allows U.S. Steel to acquire its largest competitor, Tennessee Coal and Iron, in an unwritten and unstated rule that violated the Sherman Act.

Gentlemen's agreements may also be found in trade treaties and international relations. One example is the Gentlemen's Agreement of 1907 that saw the United States and the Empire of Japan address immigration from Japan and the poor treatment of Japanese immigrants already in America. The agreement, never ratified by Congress, saw Japan agree to no longer issue passports to individuals seeking to immigrate to America for work. The United States, in turn, would no longer allow discrimination and segregation of Japanese citizens residing in America.