Via Edward McNally we learn of Grunstein v. Silva, C.A. 3932-VCN (September 5, 2014), which poses some great questions:
This case presents a number of perplexing factual questions. Why would sophisticated businessmen proceed jointly to acquire a billion dollar company without a written agreement defining their relationship? Why did the participants attempt to document certain aspects of their relationship and not others? How much weight should be accorded to the fact that they attempted to document their rights and obligations based upon their collaboration but ultimately never completed this task? Why did the lawyer transfer legal control of the transaction to the investor if they did not have a partnership agreement? And why did the financier spend months underwriting 275 facilities if he did not have an oral (or written) agreement with the investor to do the HUD financing?
The legal take home is the treatment of how to prove an oral partnership:
As with any contract, an “intention or desire to form a general partnership cannot bring the legal relationship into being . . . [where] [t]he parties were never able to reach a final accord on the essential elements” of a binding contract. The test for determining whether all material terms have been agreed upon is: “[w]hether a reasonable negotiator in the position of one asserting the existence of a contract would have concluded, in that setting, that the agreement reached constituted agreement on all of the terms that the parties themselves regarded as essential and thus that the agreement concluded the negotiations . . . .” Consistent with this objective test, the parties’ “overt manifestations of assent, rather than their subjective desires, control” when assessing whether they intended to be bound.
For better or worse, Delaware’s oral partnership law does not differentiate among the dollar amount involved, the number of terms, or the complexity of the agreement. Thus, an oral partnership agreement could be formed even if the partnership were worth billions of dollars and had dozens of material and complex terms. But as a practical matter, this type of oral agreement is unlikely for obvious reasons. Indeed, a reasonable negotiator could rationally assume that a complex partnership agreement involving an acquisition worth more than a billion dollars would necessarily have to be reduced to writing for all of the essential terms to be fully agreed upon. ...
Here, the evidence does not indicate that Silva or his counsel made an unequivocal statement that a written executed contract was a condition precedent to an agreement. They perhaps came close to making such a statement, but they never did. ...
Within the context of Delaware partnership law, there is substantial evidence showing that the parties had not agreed upon all the essential terms of the alleged partnership in August. If a partnership had been formed, why did the parties make several unsuccessful attempts to modify the original agreement? Why did Troutman propose inconsistent terms concerning control and funding of the initial deposit? Why did Fillmore’s counsel warn Grunstein that he was proceeding at his own risk? And why did Grunstein email Lerner to warn him that they were proceeding “on spec”? The Court’s inability to answer these questions satisfactorily prevents it from finding that a legally enforceable partnership agreement was formed in August. ...
From the perspective of a reasonable negotiator, [the] exchange of documents and proposals is indicative of a negotiation involving offers and counteroffers. ...
However, the events surrounding the Second Amendment present a slightly different picture in which the parties appear to have arrived at certain understandings. The record shows that the foursome had reached an agreement on the sharing of expenses. ...
Of course, an agreement to share expenses does not create a partnership. The $64 question is whether they agreed to share profits, although as is often the case the court also considers factors such as control, sharing of losses, and so on. Indeed, if anything, the court seems to underplay the extent to which sharing of profits creates a prima facie case of partnership, as where it opines that "Some of the critical elements of an enforceable partnership agreement include profits and losses, control, and ownership."
My bottom line? This seems like a case in which the parties would have been served to involve counsel and in which counsel should have advised them to consider a letter of intent to be followed by a written partnership agreement. Much trouble and expense might have been avoided had they done so.
Update: My friend, UCLAW colleague, and co-authir Bill Klein sent along these thoughts:
My guess is that this kind of disregard of the need for working out the terms of the deal is not all that rare, even for a project involving large sums of money. Two successful, up-from-nothing businessmen agree on a project. They are sure it will be a success; they are optimists by nature and their success confirms their thinking. They are excited about the project and want to move quickly. Lawyers, in their thinking, are pettifoggers who will only hold them up. By and large they hold lawyers in disdain, if not contempt. They proceed on the assumption that they can work out all the deal points. Then the project turns sour, their relationship turns sour, and the squabbling begins, along with the legal bills. Are they angry with themselves? Certainly not. They blame the legal system or the lawyers, or anyone else, and their dislike of lawyers intensifies. Maybe law schools should teach the psychology of clients.
