Quick Tip: Sign A Pre-Nup With Your Business Partner

Co-founder disputes are common in the business world, whether in television production, restaurants, real estate,or tech start-ups. With the staggering amount of money that can be at stake in today’s tech companies, founders should exercise caution. The best of friends and the most cohesive of partnerships can end in a bitter legal battle unexpectedly. A recent Los Angeles Times article, titled “Co-founder feuds at L.A .tech start-ups show how handshake deals can blow up,” recounts several telling tales of business start-up angst. The article analyzes recent tech-based businesses that began with a handshake and ended with relationship-ending conflict.

Entrepreneurs should consider entering into a prenuptial (“prenup”) agreement to avoid such a dispute. A prenup establishes the property and financial rights of each spouse in the event of a divorce. Figuring out how to divide property and assets should a company or partnership dissolve may be a smart way to start a business. Consult counsel and think through all the potential issues.

Instant Message Banter or Contract Formation?

Contract formation tends to be misidentified as a tedious process with lots of drafts, exchanging paper and signing of a final deal. However, it’s not as formal as most people think. As a ruling by a federal court in Florida demonstrated you can make or modify a contract with a few words transmitted by instant message (IM).

Because a signed formal document isn’t essential for a legally effective contract parties must be cautious about exchanging promises and the discussions they engage in outside of formal negotiations. Only certain kinds of contracts need to be in writing. Other contracts can be formed orally or through a course of dealing or exchange of forms. Contract formation requires: one party to make an offer, the other party must accept the offer, and consideration (something of value, must be exchanged). That’s it! That combination of requirements can happen orally or in writing. Not to mention, that as technology evolves, the definition of a writing expands to include all forms of communication such as emails, text messages and instant messages.

iChat Crazy

In the case at hand, Smoking Everywhere Inc. sells electronic cigarettes. It contracted with CX Digital Media Inc., in August 2009, for Internet advertising, agreeing to pay $45 for each completed sale it obtained through CX Digital’s Internet ads, for up to 200 sales per day.

One month later, Smoking Everywhere’s vice president for advertising engaged in an instant message conversation, during the course of a full workday, with an account manager at CX Digital. Toward the end of the day, after discussing the testing of new ads and new URLs, these messages were passed back and forth, within a stream of IMs over a two-hour period:

Account manager: We can do 2000 orders/day by Friday if I have your blessing.
Advertising VP: NO LIMIT.
Account manager: awesome!

Following this dialog, CX Digital stopped using the 200 sales/day limit, and began making an average of 1,200 referrals per day. When CX Digital billed Smoking Everywhere for the higher volume, however, Smoking Everywhere refused to pay.

The court held that the IM exchange demonstrated the clear intent to remove the prior daily referral limits, and thereby modified the contract:

A close reading of the instant messages and careful consideration of the behavior of the parties during the conversation indicate clear assent on the part of both parties to stop sending traffic to the ‘old’ ecig link and to begin sending the traffic to the two new URLs.

This two-word contract change resulted in $1,235,655 in damages.

Bottom line: Be careful with all informal communications such as text message, instant message, tweets, Facebook comments, etc. You can easily form a binding contract through the course of conversation.

Written contracts are the currency of business dealings, and although many companies insert clauses that say contracts cannot be modified without a signed writing (signed by authorized representatives). Business representatives increasingly engage in informal communications, in the short time after their conversation, CX acted in reliance of the modification, and as a result Smoking Everywhere ended up in a binding agreement.

Both in your professional and personal life be careful every time you engage in an exchange of “promises.” The last thing you want to do is bind yourself or your employer to an agreement. Employees with positions that are easily perceived to have decision-making power should be especially careful. If you are discussing terms of an existing contract or a potential sale or service be very clear that you are not forming a contract and that you are merely negotiating potential terms.

When have you entered into a contract online?

The internet is tricky when it comes to contract formation. Many of us enter into contracts or think we enter into contracts multiple times a day. Every time we use something or download something the provider is attempting to bind you into a contract…

How do you know if you have successfully entered into a binding contract?  Here are some guidelines:

Notice of the terms and assent or agreement are the key elements to determining if an enforceable contract has been entered. If you are not given notice of terms and the opportunity to easily back out if you do not agree there is likely no contract.  When determining if notice was given courts will consider the following:(1) whether the terms are obvious, (2) the course of dealing between the company and the customer, and (3) industry practices.

Additionally, if you have not agreed to the terms there is likely no contract. Whether “reasonable people in the parties’ positions would understand [the actions] to be assent” is the standard used by courts. Therefore, if a “reasonable person” wouldn’t think that the actions taken would equate to agreement, then there is likely no contract.

What, how, and when terms appear and if your actions can be considered agreement are important if trying to determine if a contract has been formed.  It is common for additional terms to be the start of a new and also binding contract, so be aware that each interaction can form a new contract that you are obligated to uphold.

Main takeaways:

  • Companies must clearly provide notice of additional terms
  • Parties must clearly agree to additional terms
  • Customers should expect additional terms as part of the initial contract formation event. Courts will apply a reasonable person analysis to both the terms of the contract as well as the method used to notify the customer of the additional terms.

Contract formation is a determination made by the court, these are merely guidelines. Read everything you agree to and be aware of the site or company’s policies so you know your potential obligations.