As an owner of a small business in New York, your success depends to a large extent on relationships: relationships with customers and clients, relationships with vendors and other businesses, relationships with employees, and relationships with your co-owners (if you have any). This means a lot of partner discussions, business meetings, customer visits, interaction with suppliers, and discussions with your staff and the customers you serve.
These conversations are be congenial and pleasant, but a small business owner can unintentionally create liability for him- or herself by accidentally creating partnerships, contracts, and amendments to contracts by what they say. Moreover, some comments can subject a business owner to legal action, such as defamation, slander, and disparagement.
Small business owners and entrepreneurs frequently rely on a “handshake” or a verbal agreement. Verbal agreements with all the requisite elements of a contract are enforceable in New York–with some exceptions. A contract is simply any verbal or written agreement that creates legally enforceable obligations between two or more parties.
In New York, certain types of contracts must be in writing to be enforceable; this is governed by what is known as the Statute of Frauds.
What is the Statute of Frauds?
The Statute of Frauds requires that the following types of contracts must be in writing or they’re unenforceable (with exceptions):
- Contracts that can’t be completed within one year;
- Example – “I will exclusively purchase materials from you for 5 years in exchange for a 10% discount.”
- Contracts concerning real property;
- Example – “I will buy your house for $500,000.”
- Contracts that assume responsibility for the financial obligations of another person or entity (contracts of suretyship or guarantees); and
- Example – “If my son doesn’t pay his rent, I will take over for him.”
- Contracts for testamentary disposition.
- Example – “When I die, you get the vacation home.”
The Statute of Frauds has a number of narrow exceptions, including an exception for promissory estoppel. In plain English that means a promise is enforceable by law, despite being made without formal consideration when the promisee relies on that promise to his or her detriment. It is also important to understand the one-year contract performance requirement. The Statute of Frauds doesn’t apply if it is even remotely possible that the contract can be completed within one year, and it may not apply if the other party has already performed under the agreement.
Impact of Not Having Written Contracts
Business owners who don’t insist on written contracts take a significant risk that they won’t be able to enforce–or disclaim–their oral agreements. Without a writing memorializing the agreement, there may be questions about the rights and obligations of the parties. Enforcing a verbal contract is often difficult, but it can be done. However, that process is often lengthy and expensive.
We always counsel our clients that if it isn’t in writing, it doesn’t exist. Get into the habit of writing down your agreements, making sure promises made are enforceable, and rely in a business contract attorney for help when needed.
Now, let’s look more closely at other problems with oral commitments.
A partnership can be formed as easily as with a handshake. And that’s not a rare phenomenon. In fact, partnerships are the only business entities that can be formed by a verbal agreement. New York law is well settled that a partnership agreement may be oral, and New York law provides general partnerships with the most liberal rules governing oral agreements. In addition, New York law is very clear on the liabilities that can be ascribed to a partner.
When discussing a potential business venture, entrepreneurs should be careful in describing the nature of the relationship with the other person. We’ve counseled too many clients who have found themselves in a quandary because they formed a partnership with someone on a 50-50 basis, only to discover that the other person isn’t doing what they promised, but still expects half of the profits and an equal say in decision-making.
An oral agreement is subject to misunderstandings and unclear responsibilities. This frequently results in disputes. Disputes can lead to litigation–which is never an inexpensive situation–and can destroy the underlying business. Instead, you must be careful to form a partnership that’s memorialized with a written partnership agreement. Preferably, one that’s drafted and reviewed by an experienced New York business lawyer.
This caution applies equally in businesses that are already in existence. Take, for example, a business where one owner is approaching retirement age and she says to her junior owner, “I think it’s time that you become a full partner.” The junior owner begins relying on that statement, holding herself out as an equal, telling people the plan and making decisions. If that senior owner does not stop the reliance on that statement, it is likely that she will be found to have amended their partnership agreement.
The elements of an enforceable contract in New York are:
- Acceptance of the offer;
- Consideration (i.e., an exchange of value);
- Mutual assent; and
- An intent to be bound.
If one of these elements is missing, there’s no binding agreement. However, if all of these elements are present in an oral agreement, and it doesn’t run afoul of the State of Frauds, it may be enforceable. A verbal statement that sounds like an offer can be legally construed as one, burdening your business with contractual obligations you may never have intended.
Let’s look at a few examples of oral contracts
Your catering company provides food for large gatherings and makes money by the economies of scale in serving lunch for a 500-person wedding reception or a 1,000-plate awards banquet. A potential customer tells you that a competitor can do a 500-person luncheon at $10 per person or $5,000. After some discussion, you suggest that you could do it for $9.00 per person or $4,500. This could be considered an offer, especially if you answered affirmatively, like, “Sure” or “That’s doable.”
Now, say that this customer calls the competitor and cancels his meeting with them. But then you run the numbers and realize that you can't cater the luncheon for $9/person and that your best price is $12.00. The customer may have a legal claim you offered to cater the event for an agreed-upon price of $4,500.
In real life, this most likely wouldn’t all be done just verbally. There will be a text saying, “That might work” or “Sounds great!” And an email saying, “Let’s do it.” Someone will then rely on that text message, cancel another agreement, not pursue an opportunity, or the like, and then suffer loss. The loss leads to a dispute. While the texts or emails aren’t formal contracts, they exist as evidence of the verbal commitments made.
In another example, a Brooklyn court held that a formal writing wasn’t required to enforce such an oral joint venture agreement because the alleged joint venture agreement was capable of being performed within one year. Here two parties agreed to jointly develop a piece of property. Despite the fact that multiple times a formal Memorandum of Understanding was explicitly not signed due to differences between the parties, the court nonetheless found that there was a contract based on the commonalities of what was agreed upon, and the reliance of one of the parties on those promises.
Often business owners think they are “noodling” through ideas with another business partner. But the language used is “when you do X, I will do Y” or “let’s do Z and split the profits” and while you hear it as prospective, the other party hears it as instructive. If they begin relying upon these discussions, you may find yourself with a new business partner.
We caution clients to always tell business partners that while the discussions sound good, they need to reduce the agreement to paper before starting. By developing a pattern and practice of requiring written agreements, the risk of inadvertent oral contracts drops. The same type of caution should be taken in changing or amending a valid contract.
Defamation and Disparagement
So far, we’ve focused on contracts and promises arising out of conversations. Here we look at lawsuits, or the threats of them, arising out of idle talk. What you say to employees, customers, and business partners may have negative consequences.
Defamation is the publication or communication of a false statement of fact about a person to a third party causing harm to that-person’s reputation. Defamation can be either be published or communicated in writing ( “libel”) or verbally (“slander”). While slander can be harder to prove, no business owner wants to spend the time, money, and effort defending a slander lawsuit, regardless of whether it’s ultimately successful.
Another issue to worry about is disparagement. Commercial disparagement, also known as “trade libel,” is when a person makes a derogatory statement that harms the economic interests of a business. Perhaps in our prior example, you want that luncheon catering gig so badly that you make a false comment about your competitor in an effort to win the business. If you say, “JKL Catering is really bad… I mean the County Health Department has cited them for health code violations…” That may be actionable if word gets out, and JKL loses business because of your comment.
In addition, it really doesn’t do your business reputation any good for you to talk down on your competition. Ultimately, this type of “marketing” will backfire – people want to work with businesses who are confident in their own strengths and don’t need to throw shade on others.
Many things can go wrong in business. Opening your mouth shouldn’t be one of them. Don’t make the easy mistake of saying something you shouldn’t and saddling your business with an obligation you don’t want. Get your agreements in writing and – like your mama told you – if you can’t say something nice, don’t say it at all.