Let's Shake On That

Tweet

You can't force one person to pay another's debt, unless the promise to pay is in writing. Fair enough. But you have to be wary even here. Bone International Inc., for instance, had repaired John Brooks's trucks for a long time. Brooks incorporated his business as John C. Brooks Inc., notified all his suppliers that he was now a corporation, and started paying his debts with checks marked "John C. Brooks Inc." The crunch came two years later when Brooks refused to pay a $4,141.84 bill, claiming that Bone hadn't done its work properly. Bone International sued John Brooks personally. The company knew it had been doing business with Brooks's corporation, but it claimed that Brooks had promised he personally would pay his corporation's bills.

The judge wasn't interested. As far as the law is concerned, John C. Brooks Inc. is an entirely different entity from John Brooks.

When a handshake isn't enough, you often can get the kind of written protection you need without spending money on legal fees and without lengthy formal contracts. A receipt, a note scribbled on the back of a check, a telegram, and in some cases even public records may be enough if they cover four essentials areas:

* Name all of the people involved in the transaction and the roles that they play. If you claim that someone has promised to sell you something, for example, a memo of the agreement must show both that the party promised to sell it and that the party promised to sell it specifically to you.

* Describe your transaction in detail. You can use abbreviations or trade jargon -- a formal description isn't necessary -- so long as the information is specific. A judge in Sangamon County, Ill., decided that a disputed contract signed by Alfreda Silvernail was not specific enough, because it described some property for sale to George McDaniel as "the house on R.R. 2 in which he now lives, plus two acres. . . ." Since Silvernail owned 40 acres surrounding the house, and the memo didn't give any indication how the 2 acres should be carved out, the agreement was scotched.

* Specify the value of your deal. While that seems obvious, it is easy to overlook critical details in a complicated transaction. In another property-sale dispute, this time in Michigan, Morris Farrington and his wife, Hazel, agreed in a memo to sell Charles Tucson and his wife, Jean, their farm for $50,000, and, in the same memo, agreed that the Tucsons could pay them in installments. The agreement wasn't binding, however, since it didn't specify the down payment required, when and how often the Tucsons had to make installments, or how much each installment had to be.

In the sale of goods, the price doesn't generally have to be explicitly stated in your memo, so long as anyone could figure it out from something like a published price list or market transactions. The danger of not being explicit, though, is that a jury may end up dictating the price at which you buy or sell.

* Get the signature of the person you're doing business with. The best proof that somebody owes you something is his or her signature on the contract. You can't make any assumptions without it, as Henry Dorman, chairman of the International Board of Industrial Advisors, sadly learned.

After negotiations were completed, Dorman wrote to Robert Cohen, of Hudson County News Co., confirming they had a five-year consulting contract that only Dorman could terminate. He asked Cohen in a second letter to let him know "if that is not our understanding." Six months later, when Cohen refused to pay Dorman, saying he didn't want his services anymore, Dorman sued and pointed to his two letters as evidence that Cohen had agreed to a five-year unbreakable contract. Since Cohen had never signed the second letter, the court ruled that whatever Dorman had understood about the contract, there was no evidence that Cohen shared the understanding. The two did not have an enforceable agreement.

Even if you have a lawyer-written, solid contract, you can't rest on your laurels entirely. If you are like a lot of other people, after you work out the terms and get everything in writing, you file your contract and forget it. But, alas, an outdated contract is about as valid as no contract at all. Just ask business broker E. Ray Koontz.

Koontz's business was retained by Kevin Keane, president of Astronics Corp., in Erie County, N.Y., who was looking for an acquisition. Their written contract of June 1975 specified that if Astronics bought one of Koontz's candidates within a year, Astronics would pay E. R. Koontz & Associates a commission. Koontz proposed United Business Equipment Corp., which negotiated with Astronics for seven months before the deal fell through. In February 1977, Keane and Koontz met again to discuss United Business, and Keane allegedly asked Koontz to get negotiations rolling again. If United Business would accept a lower down payment, he said, they could probably make a deal. Koontz then met with United Business's officers and president several times, and seven months later, Astronics bought United Business. Keane refused to pay Koontz, however, since the contract had expired. Koontz sued for his $71,540 commission, but the courts won't enforce an expired contract.

The outdated contract is not alone in giving a false sense of security. If you have a perfectly valid contract, but agree with a customer, client, or vendor that the contract should be modified, put that in writing as well. If the law requires you to have a written contract for an agreement to be enforceable, any extensions or modifications of that agreement must also be in writing. Otherwise, the courts could care less.

 PREV  1 | 2