Sign Those Agreements!
I’m a business lawyer in Delaware. I’ve seen all kinds of disputes between partners and business associates. In this Delaware Business Lawyer Blog, I’ve written about the Statute of Frauds. Unfortunately, even the most sophisticated business owners sometimes find themselves in Court fighting over millions of dollars because a contract that wasn’t signed is unenforceable because of the Statute of Frauds.
Just last month, the Delaware Court of Chancery issued an opinion that was based on the Statute of Frauds. As a result, the plaintiff lost out on the chance to receive hundreds of millions of dollars in retirement payments. That’s right - hundreds of millions of dollars!
The lawsuit was brought by Brian Olson, one of the founders of a hedge fund who was removed from his position by his co-founders. Olson claimed that he was entitled to substantial payments under the terms of their LLC operating agreement. The problem was that the operating agreement had never been signed. Olson claimed that the unsigned operating agreement reflected what had been orally agreed upon, and that oral agreements are enforceable. His co-founders claimed that they had never reached a final agreement on the terms.
The Court was faced with deciding whether an oral LLC operating agreement was enforceable. First, the Court recognized that oral operating agreements are permitted under Delaware’s LLC statute. Next, the Court reviewed the statute of frauds which states that an agreement that can’t be performed within one year has to be in writing and signed in order for it to be enforced. On the other hand, if the oral contract may by any possibility be performed within a year, then the contract is enforceable.
The Court then pointed out that few LLC operating agreements contain any provision that can’t be performed with one year, and so the statute of frauds wouldn’t limit the enforcement of that agreement. So far, so good for Olson. On the other hand, if the LLC operating agreement contains a provision that cannot possibly be performed within one year, then that provision is unenforceable.
Unfortunately for Mr. Olson, the Court ruled that the obligation in the operating agreement to make retirement payments to Olson could not possibly be performed in one year. As a result, Olson lost the case.
