Business Partners on a Handshake? Write it Down!
By Kluger Kaplan November 19, 2012
By Philippe Lieberman
Recently, I have handled several cases involving disputes between business partners where the terms of the relationship were agreed to with a handshake, without a formal agreement. Now, months or years later, the relationships have soured and the parties are in litigation. The best advice I can give to minimize the risk of a dispute is simple – write it down!
Whether it is a formal partnership, a joint ventures, long-term business agreement with an independent contractor or a sales commission agreement, the same principle should apply – write it down!
By memorializing an agreement in writing, the parties gain a clear understanding of the expectations. When everyone is getting along, those in a business relationship feel as though there is something “unseemly” about a written contract when “we trust each other.” Trust has nothing to do with the fact that the parties simply have different understandings and expectations of the terms of the agreement.
Certain specific areas should be memorialized in writing in order to mitigate a future dispute. For example, it is important to outline ownership interests, voting procedures, buyout processes and mechanisms for avoiding deadlock. It is also a good idea to memorialize job responsibilities in writing so that it is clear which parties will take on certain responsibilities for the business and set forth a process for distribution of salaries, if any, and profits and commissions. It is also critical to address the treatment of capital contributions and partnership loans and prioritize repayment. Putting these key components in writing may not totally eliminate litigation in the event of a dispute but it will help to memorialize the intent of the parties when the relationship is at its best.
While a well-drafted agreement can address all of these potential concerns and set forth procedures for severing the business relationship, without such a document, oftentimes the parties are forced to seek relief in the court system because they cannot agree on provisions for terminating the relationship.
Although it may seem overly simplistic, reminding clients to memorialize their business relationships in writing is good advice because it will minimize their exposure to costly litigation down the road, or, at the very least, make the outcome of a dispute more predictable. So what happens if you didn’t have a written agreement and now you and your business associate are contemplating litigation? Check back next week when I discuss ways to resolve a business dispute where there was no written contract between the parties.