A verbal contract isn’t worth the paper it’s written on. -Samuel Goldwyn
You may win in court even though you failed to reduce your agreement to writing. Even so, the best practice is to reduce your agreement to writing. In most situations, written agreements do an excellent job of clarifying what everyone’s duties are. In my case, a written agreement would have been more valuable to evidence what my duties were not.1
No Agreement to Write Down
It started when a friend asked me to help him with a start-up. I had a lot of experience in what not to do with start-ups in that some of mine had made millions and others were epic failures. All of that was in my past and I was happy running my law practice and my little farm and I had no interest in managing anything else. I agreed to be a co-originator of a limited liability company with a minority membership interest. The company never launched so there was no operating agreement.
For about a year we discussed a multitude of ways to launch the company but it never got off the ground. If the company had gotten some traction, I suspect that we would have drafted a written agreement of some kind but it never did.
My involvement in the company ended in the first year of its existence and my friend told me that the funding for the company was never secured. I never put any money into the company nor did I ever take any money from the company. My friend presented me with a document that transferred my minority interest back to the company which I signed.
Do Friends Even Need a Written Agreement?
Had this been a potential venture been with a stranger, I may have handled it more formally. At a minimum, a letter of intent may have clarified the intention behind the venture and what our expectation were. Since no money was ever raised and no fees were ever earned, I believed that the liability was very little, if any. After all, the promoter was my friend and friends don’t expose their friends to huge liablity without at least telling them, right?
What I didn’t know was that, without telling me, my friend was raising millions of dollars in the company name and pocketing the money. Several years later, a group of investors sued me for mismanagement of the company up to and including misappropriating over $2 million dollars that had been invested in the company. The lawsuit also claimed that my law firm, law partner and I owed a heightened duty to overlook the company’s activities and we allowed the company funds to be misdirected or had converted them. Nonetheless, the promoter (who had actually stolen the money) no longer had a working telephone number and the investors were motivated to recover their millions.
If Ifs and Ands Were Pots and Pans…
The good news was that the investors did not have a written agreement supporting any of their claims. The bad news was that I did not have a written agreement refuting any of the investors concocted claims.
If I had agreed to represent the company, an engagement letter would have detailed my representation.
If I had actually invested money in the company, the investment documents might have detailed my relationship.
If I was actually a manager, an operating agreement might have detailed my management duties.
If I had agreed to act as a trustee of the investors funds, a trust agreement would have detailed my trustee duties.
There was no written agreement of any kind. So, the only way to establish that there I had no duties (and therefore had not violated any duties) was through expensive litigation.
A Hollow Victory
After several months, the court found in my favor on all counts on summary judgment. Even so, the cost of months of litigation, diminished reputation and sleepless nights were significant. So, I ended up spending a lot of money, a lot of time and a lot of stress. On the other hand, I never made anything out of the venture and never had a reasonable expectation that I would make anything. All down side, no upside.
So here is how you can avoid this happening to you. Even when it seems silly to do so, make a written agreement. Certainly the agreement can be as simple or as complex as the deal, but have a written agreement.
In my case, a simple letter of intent would have clarified my what my role was and when the lawsuit came it may have been easily resolved. In fact, I might have avoided it all together.
### Brandon L. Blankenship
- Good Smart Promising or Best Practice? - February 23, 2016
- A Written Agreement – Most of What You Are is What You Aren’t - February 18, 2016
- Hire an Accounting Superhero and Get Saved - February 8, 2016
- ©2016 Brandon L. Blankenship, Image Credit: Sohn Simm Progress Night 4 pseudanonymous CC flickr 17FEB2016. ↩