Not So Fast! How Many Signatures Does it Take to Create a Binding Contract?
By: Josh Galante
Attorneys and their clients often refer to a contract becoming enforceable once it has been “fully executed,” but what does that phrase actually mean? Like most legal questions, the short answer is: “It depends.” It depends on several factors, including the type of contract, the parties involved, the course of dealing between those parties, and other facts and circumstances.
A recent story from the world of college football could shed new light on when a specific type of contract becomes enforceable, and is worth a look as a refresher course even for transactional attorneys who are not sports fans.
The background of the story, based on press reports and other public sources, goes like this: The University of Tennessee football team had a historically bad 2017 season, and decided to look for a new head coach to restore the program to its former glory. The school appeared to have decided on a candidate, Greg Schiano, and prepared a “Memorandum of Understanding” (MOU) to memorialize the terms of his employment. Schiano signed the MOU. Tennessee’s athletic director signed it. But just before Tennessee was set to announce Schiano as the program’s new leader, the news leaked and the Volunteer nation (including students, fans, and even state elected officials) revolted. Whether that revolt was due to Schiano’s questionable connection to the Jerry Sandusky abuse scandal while at Penn State, or because Schiano was not regarded as an accomplished enough coach, is debatable. However, the university caved to the pressure and decided Schiano was not the right person for the job.
The fact that makes this case interesting, at least in the context of a business law blog, is that the MOU was not signed by the school’s chancellor. Although such a document typically contains the most important terms of employment, the expectation is that a more complete employment agreement would be prepared in due course. Whether or not that later agreement is actually drafted, the standard practice in the coaching world seems to be that the MOU, when signed, binds both sides as an enforceable, if temporary, contract.
It is worth noting that documents titled “Memorandum of Understanding” can have very different purposes in different contexts. In the business world, as opposed to the sports world, a MOU is more typically a non-binding precursor to a formal agreement (similar to a term sheet or letter of intent) than a definitive agreement by itself, and will often contain language disclaiming any binding effect. Again, circumstances outside of the four corners of the document, including standards in the industry and past practice of the parties, have often been deemed relevant by courts in determining enforceability if the document contains any ambiguity as to whether or not it is binding.
Without the chancellor’s signature, is the MOU an enforceable contract? Does the athletic director alone have actual or apparent authority to bind the school? Did Schiano rely on that authority to his detriment? Assuming Schiano was set to make millions of dollars a year, is he entitled to that money, even though the school changed its mind?
In an article on ESPN.com, one source suggested that “the key to the battle over the contract’s validity might also have to do with whether the final parting of ways was one-sided or mutual.” This statement seems tautological – if the parties agree that the contract isn’t effective, it isn’t effective. Parties to a contract can always agree to change the terms. What happens if they don’t agree?
We will have to let the parties, and possibly the courts, decide whether the Tennessee athletic director’s signature alone is enough to bind the school. In the meantime, anyone else drafting or signing a contract with the goal of creating an enforceable obligation should pay close attention to how the parties to that contract can or are required to indicate their agreement. When the parties are entities, e.g., schools, corporations, investment funds, etc., the answer in part will depend on their governing documents and the authority of the individual or individuals who sign on their behalf. However, such parties should be careful if they do not intend to be bound. Factors including the apparent authority of the signing individual, inclusion of definitive language regarding agreement on all material terms, and other indications of intent can inadvertently and prematurely bind parties who do not intend to be bound.