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The Importance of Written Contracts: Avoiding Vague and Uncertain Terms
Any good business lawyer will counsel a business owner on the need for written contracts. One important reason for reducing your agreements to writing is to avoid vague and uncertain terms that will not or cannot be enforced in a court of law.
A recent California Appellate Court case provides a good example of a situation in which a new management employee should have gotten the alleged promise in writing.
Case Example: Nollette v. LRICO Services, LLC
In general, to form an enforceable contract, there must be what is called a “meeting of the minds.” If there is no meeting of the minds about the essential terms of the contract, then the contract will be deemed by the courts to NOT have been formed and the supposed promises contained therein will not be enforced.
An example of this is found in the case of Nollette v. LRICO Services, Inc., Case No. A143223, (Cal.App. 4th Dist. Sept. 14, 2017). The plaintiff in that case, Nollette, worked for California wine subsidiary called Distillery No. 209 (“Distillery 209”). Nollette began working for Distillery 209 in 2010 and was fired in 2012. In her lawsuit, Nollette claimed that she had been promised equity/ownership in Distillery 209 and that said promise induced her to leave her previous, higher paying job. When she was not given equity/ownership in Distillery 209, she complained and, allegedly, was fired in retaliation.
With respect to the breach of contract claim, Nollette claimed that a contract had been formed with a combination of oral discussion and follow up letters. Orally, Nollette stated that she “asked for ownership or equity interest in the company” at her interview and that her future boss said “I like the idea.” Nollette admitted the “technicalities” were not discussed but that her future boss promised that “the terms would be . . . outlined in an offer letter.” The offer letter came in May 2010 and it contained the following language:
“In addition, it is anticipated that you will share in a meaningful manner in a liquidity event incentive program that will align you with the owner in building and capturing equity value. Details of this program are being finalized and will be provided to you as soon as possible and no later than your start date.”
An additional letter came after she began working in July 2010 wherein Nollette’s employer made these statements:
“I am confirming our recent discussion that you are now a participant in a liquidity event incentive program based on your role and expected contributions at Distillery 209 … This program has been designed to align key contributors with ownership and reward participants with a one-time cash bonus … we currently expect such [a liquidity] event will most likely occur many years down the road … we want you to appropriately participate in the company’s financial success if/when that occurs. … Although the intention of the program design is simple in that it aligns you and other participants with ownership and long-term value creation, I realize the specific details may appear a bit complex…. I want you to think and act like an owner as you work to grow the business and its profitability. I’m very pleased you will now be financially aligned/rewarded in that manner!”
When Nollette failed to receive an ownership interest in Distillery 209, she sued the company.
Both the trial court and the appellate court denied Nollette’s claim for breach of contract. The court stated that neither the verbal discussions nor the subsequent letters formed a legal contract. The verbal discussion was deemed “too uncertain to be enforceable. The court said that the words “I like the idea” were not specific enough to be an enforceable promise.
Moreover, the verbal discussion and the letters did not provide any details on what type of ownership was to be provided and how much ownership was promised. The 5% listed in the second letter was clearly tied to bonus payments. No other possible details can be discerned from the letters. The court said that to enforce the supposed promise of ownership would mean that the court would have to decide what “ownership” meant, how much ownership was promised, etc., and that would “impose on the court the burden of making financial and management decisions better left to the parties.”
For these reasons, the court dismissed Nollette’s claim for breach of contract.
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The Nollette case is a good illustration of why all contracts should be in writing. Ms. Nollette claimed that this promise of ownership induced her to leave her high-paying job at Morgan Stanley, but she quit her Morgan Stanley job before having a solidly written and enforceable contract. With due respect to Ms. Nollette, she should have consulted an attorney before making the leap. She did not receive the benefit of the bargain that she thought she was making. It is advisable that every key contract be put down in writing to ensure that the parties are getting the benefits for which they think they have bargained. In fact, as we discussed here, some contracts MUST be in writing.
If you would like to discuss getting your agreement(s) put down in writing, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has been named a “Rising Star” for 2016 by SuperLawyers.com. Mr. Leonard can review your business contracts and he has the experience and knowledge to ensure that all of your written contracts avoid vagueness and uncertainty and are enforceable in the California courts. Mr. Leonard can be reached at (858) 483-9200 or via email.
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