By: Gabe Rosen

Throughout the process of building their businesses, entrepreneurs will find themselves making deals with a wide array of other parties. Whether it is hiring new employees, selecting a Board of Directors, or partnering with distributors, there are many deals to be struck in the life-cycle of a start-up. Sometimes entrepreneurs make such deals by simply calling a personal connection over the phone. Especially if the person on the other line is a close friend, the entrepreneur might be hesitant to send over a written contract. After all, entrepreneurs can surely trust their friends to keep their word, right?

Even if the answer to that question is “yes,” legal disputes can still emerge over unwritten agreements.[1] If they meet certain conditions, these kinds of “oral contracts” can be legally enforceable.[2] An entrepreneur reading this post would not be wrong to view the enforcement of oral understandings as potentially beneficial. The ability to seek such enforcement can give entrepreneurs the ability to seek legal remedies in case a deal falls through.[3] However, especially if an oral understanding had been reached years earlier, how would an entrepreneur be expected to answer the question: “What exactly were the terms of your deal?”

For an oral agreement, there would not be a formal legal document containing the terms of the arrangement.[4] Even if an entrepreneur wrote down their own thoughts about the deal, those thoughts might not match up with the other party’s understanding.[5] Those understandings could also have been accurate in the past, but things may have changed in the intervening years. Even if the understandings still matched, what happens when some of the agreement’s terms still lack definitions?[6] Or, what if the agreement itself failed to include certain terms?[7] To resolve these issues in court, an entrepreneur would likely only be left with their word against the word of the other party.

This type of “your word against theirs” situation is not merely an academic one.[8] Even people making deals worth millions of dollars end up facing such situations. For instance, famous musician Kelly Clarkson was recently sued by her management company, who accused her of breaching an oral contract.[9] Clarkson had allegedly struck the original deal in 2007 and never put it down to paper.[10] Now, over a decade later, she is dealing with a lawsuit where a court has to determine what the terms of the purported deal were.[11] Possibly millions of dollars are now at stake, apparently over the content of decade-old conversations.[12]

While written agreements might not prevent lawsuits, they may still provide many advantages over oral agreements. For one thing, the existence of a written document can be useful in proving that a deal even exists.[13] While there may be exceptions, people could be expected to have difficulties arguing that a document they signed did not even exist. Relatedly, written agreements spell out the terms ostensibly as they were understood by the parties involved.[14] An entrepreneur could be asked: “Did you actually agree to exchange a certain amount of equity in your company for certain kinds of labor?” With a written agreement, the entrepreneur could respond by pointing to a specific section of the document. Even with written agreements, disagreements over the interpretation of terms can still happen; however, having tangible evidence of the actual word used can go a long way toward resolving disputes.[15] Additionally, the very process of writing down terms may help parties uncover issues that could have led to disputes later on.[16] This is especially important when entrepreneurs have to deal with processes involving many opportunities for custom terms, such as entity formation.

As discussed in earlier posts on this blog, there are many considerations for entrepreneurs to take into account when forming a business entity.[17] For this post, it is important to note that there are certain forms of business entity that can be formed in the absence of any written agreements, namely general partnerships.[18] There are situations where entrepreneurs can inadvertently enter into such a partnership with someone else, merely through a course of conduct.[19] Without a written agreement laying out the exact details governing such a partnership, entrepreneurs could find themselves subject to default terms that impose a wide array of liabilities.[20] Why run such risks?

If you are an entrepreneur about to cut a deal with another party, it may be advisable to consult legal counsel. They can potentially put their expertise to use on your behalf by drafting up documents capturing your intentions going into any given arrangement. There are many ways to find suitable attorneys to hire, including by consulting a State Bar Lawyer Referral Service.[21] If there is one thing to take away from this post, there could be advantages to getting such an agreement in writing!

[1] https://www.nisarlaw.com/blog/2015/november/oral-partnership-agreements-can-lead-to-problems/

[2] https://www.upcounsel.com/oral-contracts

[3] Id.

[4] https://www.upcounsel.com/breach-of-verbal-contract

[5] https://www.olenderfeldman.com/articles/oral-contracts/

[6] Id.

[7] Id.

[8] https://www.fosterswift.com/communications-Written-Business-Agreements.html

[9] https://variety.com/2020/music/news/kelly-clarkson-sued-management-1234786434/

[10] Id.

[11] Id.

[12] Id.

[13] https://www.olenderfeldman.com/articles/oral-contracts/

[14] https://www.jdsupra.com/legalnews/stuff-happens-so-get-your-contract-in-33710/

[15] Id.

[16] https://www.fosterswift.com/communications-Written-Business-Agreements.html

[17] See, e.g., https://entrepreneurship.law.umich.edu/entity-formation-part-1-of-3-when-should-you-form-an-entity-for-your-business/

[18] https://www.nisarlaw.com/blog/2015/november/oral-partnership-agreements-can-lead-to-problems/

[19] Shawn Bayern, Three Problems (And Two Solutions) in the Law of Partnership Formation, 49 U. Mich. J. L. Reform 605, 608 (2016).

[20] https://www.faupel.com/blog/2015/08/11/partnership-agreements-can-be-verbal-if-you-want-to-court-disaster/

[21] https://lrs.michbar.org/LRS-Info/Lawyer-Referral-Service