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The Mistake of a Business Owner Regarding Oral Contracts

Most oral agreements are binding. However, oral agreements should be avoided. If there is an oral agreement, the first issue that is generally litigated is the terms of the agreement. Once the terms are determined, then what is litigated next is whether there was a breach of an agreement. If there was a breach, then what is litigated next are the damages. There are several types of oral agreements that are not enforceable. The following hypotheticals includes some examples of oral agreements that are not enforceable.

Hypothetical: George owns George’s, LLC. His friend Sam approaches him because he wants to be involved in the business as a “silent partner.” They have an oral agreement in which Sam is a 40% silent partner and George is a 60% partner. George and Sam have a falling out. Sam claims that he is a 50% partner and not a silent partner.

Analysis: If the LLC does not have an operating agreement in writing that states what George claims is the ownership percentage, George and Sam are 50/50 equal partners. If you are an LLC in Minnesota and do not have a written operating agreement, the default is equal ownership for all owners. If you do not have a written operating agreement, it is imperative to have a written operating agreement.

Hypothetical: Susie owns Susie’s Car Services, Inc. She is the sole owner of the business and has been for 25 years. She has five employees, including her daughter, Sabrina. Susie tells Sabrina that she will inherit the business when Susie dies. Susie passes away. Unbeknownst to Sabrina, six months prior, Susie and a key employee, Chris, signed a buy-sell agreement. Chris owned 50% of Susie’s shares and he was able to purchase Susie’s remaining 50% upon her death for a discounted price. As is common in a buy-sell agreement, Chris had life insurance on Susie to cover the cost of the remaining 50% of the shares.

Analysis: Susie’s “promise” to her daughter is not enforceable. While Sabrina could bring a claim against Susie’s estate, the cost of litigation will be expensive with the possibility that she could end up with nothing. It is important for business owners to have estate planning completed, including business succession planning that takes into consideration familial relationships and any “promises.”

Hypothetical: Tom and Gerry are getting married. Tom owns a very successful commercial real estate business. Gerry tells Tom that she does not want any part of his business if the relationship does not work out. So, Tom decides not to have them sign a prenuptial agreement. After being married for ten years, the marriage ends. Gerry demands one-half of Tom’s business since the date that they got married.

Analysis: Since there was not a prenuptial agreement, Gerry’s “promise” isn’t enforceable.

Spangler and de Stefano, PLLP assists business owners with prenuptial agreements, estate planning and business succession planning.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.