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Thursday, Mar 28, 2024

Don’t Rely on Oral Contracts – Better to Get It in Writing

This is one of a series of regular columns where Valley attorney Ira Rosenblatt will answer questions from readers concerning business legal issues. Please e-mail your questions to Business Journal Editor Jason Schaff at [email protected]. Question: Are oral contracts enforceable? Answer: Subject to certain exceptions outlined in the California Corporations Code and commonly referred to as the “statute of frauds,” oral contracts in California are every bit as enforceable as written contracts. In fact, business executives routinely enter into “hand shake deals,” which is fine if everyone lives up to their end of the bargain and has a perpetual, defect-free memory. Unfortunately, life teaches us that either one or both of these assumptions frequently does not hold true. As a result, when executives enter into oral contracts, often their next move is to obtain counsel to reduce the agreement to a comprehensive written contract. There are good reasons why better business practices dictate that agreements be reduced to writing. For one, if you ever have to sue to enforce a contract or seek damages caused by another party’s breach, you will first have the burden of proving that a contract existed. If you cannot satisfy this burden, you will be out of luck. A written contract can also help prevent litigation in the first place by memorializing specifics of an agreement that one party or the other may otherwise claim to “forget” (either innocently or by design) over time. Moreover, they can confer rights and remedies which are often otherwise unavailable (e.g., granting the prevailing party the right to recover his attorney fees.) The bottom line is that although oral contracts are enforceable, there is a good reason you’ve heard the old saying “oral contracts are not worth the paper they are written on.” If a deal is worth making, it is worth papering. Reduce your important business deals to writing. Q: My partners and I have been in business for four years and things are going well. We do business as a partnership. In connection with year-end, I noticed that our partnership agreement does not contain a buy-sell provision. Do you suggest we have a buy-sell agreement drawn up? What benefits would it confer? A: First, I commend you for taking the time to review your core business agreements. It is a good business practice. Business, like life, is a dynamic process and things are consistently changing. It is important to ensure that your core business agreements are still relevant and consistent with your intent and business objectives. To your question, I strongly suggest you take action. You and your partners may either revise your Partnership Agreement to include buy-sell provisions or have a separate Partnership Buy-Sell Agreement prepared. Buy-sell provisions are often a critical part of any business relationship (although your business is a partnership, buy-sell provisions although different in structure are equally important for corporations and limited liability companies). They offer predictability and control in the event that a partner either dies, withdraws, becomes disabled, is expelled, or seeks to sell his or her partnership interest (any one or more of these events are sometimes referred to as “trigger events”). If your business is a service business, what happens in the event of a trigger event may be even more critical than if your business is less dependent on your partner’s direct involvement (e.g., a partnership invested in real estate may not require the active management participation of all partners). In fact, if you don’t act, not only might you find yourself without a partner one day, worse yet, you might find yourself with a partner you had never contemplated (e.g., your partner’s wife or husband in the event your partner should suddenly pass away). As a partnership, you and your partners have a choice. Either you can get together to discuss, agree, and document what you want to occur in the event of a “trigger event,” or the government will decide for you. That’s right. The Uniform Partnership Act of 1994 contains a buy-sell provision that applies by default in the event a general partner “dissociates” from a partnership, unless the partners previously agree otherwise or elect to dissolve the partnership within 90 days of the dissociation event. Do your partners (and business) a service and bring this issue to their attention. Get their approval, and retain a business lawyer to assist you in this process. It will be more economical to engage one lawyer to handle this matter, but understand that absent agreement by you and your partners on a single lawyer (and waiver by each of you of the conflict of interest created by the representation of each partner by a single lawyer), you and your partners have the right to each seek independent counsel. Q: In an effort to minimize the exposure of sexual harassment claims, we are thinking of implementing a policy preventing our managers from dating other employees. What do you think of this policy? Is it enforceable? A: With all the attention sexual harassment is getting these days, it is no surprise that practically all California employers have sexual harassment on-the-brain, so to speak. However, exactly how far employers can go in restricting or prohibiting employees’ off-duty behavior is currently a subject of heated debate at both the state and federal level. Policies that reach too far risk violating individual’s constitutional rights to privacy. Courts consider the precise policy at issue, how clearly the employer publishes its policy, what specific rights the policy seeks to restrict, and how much of those rights are in fact restricted. The policy your question contemplates is commonly referred to as a non-fraternization policy. Recently, the California Supreme Court upheld a California employer’s non-fraternization policy even though the fraternization between the two employees only occurred during nonworking hours. The court noted that employers have a legitimate interest in avoiding sexual harassment claims. Significantly, the court reasoned that since the employer published its policy, the supervisor employee had notice that his conduct violated the company no-dating policy, and thus he had a diminished expectation of privacy. This area of the law continues to evolve. Whether your policy will hold up to judicial scrutiny will turn on the facts and circumstances of the particular case. To increase your odds, your policy should be unambiguously drafted, equally applicable to employees of both sex, published in handbooks and the like, grounded in sound business judgment (e.g., restricting managers from dating subordinates), and enforced in a non-discriminatory fashion avoid double standards such as enforcing the policy as to mid-level managers but not high-level managers. This column contains general information and under no circumstances constitutes legal advice. This information is not provided in the context of an attorney-client relationship and nothing herein creates an attorney-client relationship. Readers should not act upon this general information without first seeking professional advice. Ira Rosenblatt is a business and corporate lawyer and a co-founder and Director of Stone, Rosenblatt & Cha, a business law firm in Warner Center. Rosenblatt has earned Martindale-Hubbell’s highest rating (“AV”) for legal ability and ethics and is listed in Martindale-Hubbell’s National Bar Register of Pre-eminent Lawyers. He can be reached at [email protected].

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