Get it in Writing: A Contract Story Gone Bad

By Fredrick P. Niemann, Esq. a Contract attorney

Two executives held a meeting; the agenda was about forming a new business together.  The discussion later transformed into a one of an offer of employment to one of the executives.
 
For two men in the upper tiers of New Jersey businesses, they chose a decidedly low-tech way to memorialize their agreement. The end result, however, shows how substance can sometimes triumph over form in the law of New Jersey contracts formation.

At the end of their meeting, the executives simply wrote out the agreement by hand on two notebook pages, and both men
signed it. The writing included specifics as to how the newly hired executive would be compensated, the terms on which he could quit if he became unhappy, and what would happen if intellectual property involved in the deal could not be transferred to the telecommunications firm. It also included the statement that “[t]he parties will complete formal contracts as soon as possible but this is binding.” This would turn out to be pivotal language in the litigation that followed.

Unfortunately, the new arrangement quickly went downhill.  After
about six months the new employee was fired. The “formal contracts” envisioned from the beginning were never drafted and signed. When the former employee sued for breach of contract and other claims, over six years of litigation in the New Jersey Courts ensued, with two trials and two appeals.

Much of the case focused on whether the handwritten agreement that started everything was a valid, binding contract. The telecommunications company argued that it was merely an “agreement to agree.”

However, a jury eventually ruled that the agreement was valid, and that the employer had breached the terms of the contract represented by the two notebook pages.

Four factors are usually considered in determining whether a New Jersey “preliminary agreement” is binding. In this case, the first two clearly favored the fired executive:  There was no explicit reservation of a right not to be bound (in fact, the handwritten agreement said the opposite) and the executive had partially performed the contract. The third factor was about whether all of the terms of the alleged contract were agreed upon. On that point, the agreement, although it may have lacked some details, addressed all of the essentials for a binding contract.

The final factor is whether the agreement was a type of contract that is usually committed to writing in a formal manner. When millions are at stake, as was the case here, it may be unusual to seal the deal with a handwritten document, in outline form, and drafted on the spot by one of the principals without benefit of legal counsel.  The agreement was not much to look at, barely surpassing in formality the proverbial agreement scribbled on a cocktail napkin. Still, that it was unorthodox did not mean that the method was unprecedented. In the end, this factor, balanced against the other three, was not enough to discard the agreement and deprive the departed executive of the benefits of his bargain.

Written contracts, regardless of length, will be enforced in New Jersey provided sufficient detail is recited.  If you have a contract issue that needs review and analysis, contact Fredrick P. Niemann, Esq. toll-free at (888) 800-7442 or e-mail him at fniemann@hnlawfirm.com/.  He has prepared, reviewed and advised clients on hundreds if not thousands of New Jersey and Interstate contracts.  For further information, go to http://www.youtube.com/user/NJBusinessLaw#p/search/0/zQRtR4wnmHA to learn more.

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