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In commercial litigation, it is not at all unusual for courts to be called upon to determine whether an unsigned agreement is binding.  The federal courts have a long line of cases dealing with this very issue, and perhaps the seminal one in this area is the Second Circuit’s decision in Winston v Mediafare Enter. Corp., a case considering whether an unsigned settlement agreement was enforceable.  The court there identified several factors to be considered in determining whether an agreement — in that case, a settlement — is binding:  “(1) whether there has been an express reservation of the right not to be bound in the absence of a writing; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to writing.”

New York courts take a similar approach.  They have long recognized that a binding agreement may be found, even though a contract was not signed, so long as it is not proscribed by New York’s statute of frauds, NY Gen. Obligs. L. 5-701.  In  Brown Bros. Elec. Contrs. v Beam Constr. Corp., for example, the Court of Appeals held that “[i]n determining whether the parties entered into a contractual agreement and what were its terms, it is necessary to look . . . to the objective manifestations of the intent of the parties as gathered by their expressed words and deeds.” See also Flores v. The Lower East Side Service Center, Inc.  Not exactly a recipe suitable for summary judgment.

Recently, in 223 Sam, LLC v. 223 15th Street, LLC, the Appellate Division, Second Department affirmed the trial court’s order denying defendants’ motion for summary judgment seeking to dismiss breach of contract claim.  The case arose out of plaintiff’s claim for breach of contract based upon an unexecuted amendment to an operating agreement.  The amendment added plaintiff as a 50% member of defendants, and also acknowledged plaintiff as a co-manager.  The damages sought reflect the management fees allegedly earned.

Defendants argument, made in the context of a motion for summary judgment was simple:  the amendment was never executed by the parties, and therefore is not binding.

In rejecting defendants’ argument, the court first noted that New York has long recognized the rule that parties will not be bound if  they state their intent not to be bound unless and until the agreement is signed by all.  However, if the parties reach agreement on “all the substantial terms” and nothing material is left for the future, then even if the parties intended to reduce the agreement but did not, this may nevertheless create a binding agreement between them.  Express reservation is the key.  The ultimate question of whether the parties intended to be bound is a question of fact.

In denying defendants’ motion, the court referred to emails exchanged between the parties which simply “failed to eliminate triable issues of fact as to whether the parties had agreed upon the major terms of the agreement and whether the parties began to perform . . . .”

The hard lesson:  be careful in exchanging drafts, revisions and amendments (1) without expressly reserving the right not to be bound unless and until signed by all, and (2) partially performing before the agreement is signed.  Otherwise, once all material terms are agreed upon, you may indeed have a binding agreement.

 

 

 

Ian Pai was an early participant in the Blue Man Group (“BMG”).  Between 1989 and 1991, he met and began collaborating with the founders of BMG, namely, Chris Wink, Phillip Stanton and Matt Goldman.  Pai claims to have made significant contributions to BMG’s creative and musical aspects over the decades-long relationship he had with the group, having ultimately assumed the duties of Music Director and Conductor.   In 2014, Pai’s royalty checks were abruptly cut in half without explanation.  Ultimately, Pai filed a  complaint against BMG and its founders, claiming breach of fiduciary duty, breach of contract, accounting, quantum meruit and unjust enrichment.  Following discovery, defendants moved for summary judgment on all counts.  Justice Barry Ostrager denied the motion in part, but granted summary judgment dismissing the two counts premised upon the existence of a fiduciary duty:  breach of fiduciary duty and accounting.  The remaining claims survived the motion, and trial is now scheduled for April 9, 2018.

Pai concedes that his fiduciary duty and accounting claims are not based upon a “formal” fiduciary relationship, but rather on his decades-old personal relationship with the three founders, and the founders’ alleged representations that they would “take care” of him.   In sum, his fiduciary duty claims were based solely upon the close relationship they developed over the years.  The defendants denied a fiduciary relationship ever existed, but did admit they had a long close-knit relationship with Pai.

So, can a mere close personal relationship create a fiduciary duty?   Maybe!  Indeed, as the Court recognized, citing Kohan v. Nehmadi, a fiduciary relationship can be found to exist between close friends under certain circumstances.   Here, the Court considered that “Pai’s age, lack of financial experience, and trust in the Individual Defendants to look out for him” may very well have given rise to a fiduciary relationship.  However, fatal to Pai’s claims was applicable six-year statute of limitations which barred any claims he may have had in the 1990s.  The Court reasoned that since 2009, Pai has been represented by counsel, negotiating agreements between Pai and BMG, all at arms-length.  The result is that the contract-based claims survive for trial, but the fiduciary relationship-based do not.

The concept of a close personal relationship giving rise to fiduciary duty is not new.    Whether a fiduciary relationship exists is, of course, a very fact-intensive inquiry.  The Court in the Pai case recognized this and, in the end, did not have to decide whether the early relationship in fact gave rise to a fiduciary one since it was time barred.  A good overview of this very issue — how New York courts determine the existence of a fiduciary duty — is found in an EDNY case, St. John’s Univ. v. Bolton (Garaufis, J., 2010) (“a fiduciary relationship embraces not only those the law has long adopted . . . but also more informal relationships where it can be readily seen that one party reasonably trusted another”).  The starting point (and maybe the ending one too) is whether there is an agreement between the parties governing their rights and obligations.  In the absence of such, a close personal relationship intertwined with a business one can very well create at least issues of fact whether a fiduciary relationship exists between them.