Signed, Sealed, Delivered, I’m (Not) Yours: How a Lapse in Record Keeping Can Lead to Non-Binding Contracts
Usually, once a contract is signed, sealed and delivered, it is a binding agreement between the parties. However, a recent Delaware case serves as a reminder that a murky path to a signed agreement and lack of good record-keeping can lead to a finding of non-enforceable contracts.
In Kotler v. Shipman Associates, LLC, C.A. No. 2017-0457-JRC (Del. Ch. Aug. 21, 2019), Stacey Kotler (Kotler) was an independent contractor engaged as a salesperson for Shipman Associates, LLC—then known as Shipman Associates, Inc. (the Company). Ms. Kotler was successful at growing the business and decided to seek equity in the Company, in addition to her agreed-upon sales commissions. The Company eventually proposed to grant her a warrant to purchase shares, rather than an outright grant of equity. Over the course of several months, the parties exchanged drafts of a warrant agreement which would allow Kotler to purchase equity in the company upon certain triggering events.
In negotiating the warrant agreement, a major sticking point for both parties was the non-compete and non-solicitation terms, with the Company demanding a perpetual non-compete and non-solicitation and Kotler countering with less restrictive versions of these terms. Throughout this process, the records of the negotiations were done with extreme patchwork; there was no email record of the negotiations or any notes to fall back on. Even Kotler herself could not recall the name of the attorney who had represented her in the negotiations (and that attorney had never actually directly interacted with the Company, or their counsel White and Case LLP). The court noted that the Company’s record retention was “at best, careless.” The only evidence provided to the court of the negotiations, ten years after they took place, were numerous drafts of the warrant agreement, including a draft provided by Kotler with “wet signatures” from all parties and testimony of the parties involved. Although, both parties believed they had signed an agreement in 2007, because of the manner in which the drafts and signature pages were exchanged, the parties had differing understandings and recollections of what had actually been agreed upon.
Kotler subsequently left the Company to start a business that competed with the Company. When the Company learned of her competing business, it assumed that the warrant was void. However, in 2013, when the Company was considering a sale that would trigger exercise of the warrant, the Company realized that the signed warrant agreement contained changes made by Kotler that had never been seen or approved by the Company. At some point in the exchange of drafts, and after the Company had provided what it thought was the execution copy, she had sent either a revised agreement or just a signature page to the CEO of the Company (by mail, and not electronically) for counter-signature with a return envelope. The CEO signed the signature page and returned it using the return envelope supplied by Kotler. According to her testimony, the CEO did not retain a copy of what she signed, as it had not yet been countersigned by Kotler. However, subsequent to that date, Kotler had a conversation with the Company’s President in which they agreed to change the number of shares subject to the warrant, and Kotler attached the signature page to a later draft that she created, not only including that change, but also eliminating the post-termination non-compete.
When the Company launched a sale process in 2016, it hired a consultant to help prepare the company for sale. The consultant could only find a partially signed version of the agreement in the Company’s files. That version of the agreement contained the higher share number and the post-termination non-compete. The consultant suggested that the Company resolve the warrant matter so that it would not be an issue in any sale. Thereafter, the Company hired an attorney to reach out to Kotler to see if she had a fully signed version. At that point, Kotler produced her fully signed version of the warrant with her changes. A dispute ensued over which version had been agreed to and Kotler filed suit.
To form an enforceable contract, it is well-settled law that there must be a “meeting of the minds” on all essential terms. The court determined the plaintiff, Kotler, had not provided sufficient evidence to prove that the version the Company signed was the version to which they had agreed. There was a lack of evidence that Kotler had made clear to the Company that the version she sent them for signing contained revisions that were favorable to her, including effectively nullifying the non-compete and non-solicitation clauses. As the court stated in its analysis, “even if a purported agreement is executed by both parties, when the parties’ ‘understandings of [a contractual] prohibition or permission are incompatible,’ and where the plaintiff ‘offered no further evidence indicating’ a meeting of the minds, ‘no enforceable agreement [is] created,’” (Kotler at 43, citing Eagle Force Hldgs., LLC v. Campbell, 187 A.3d 1209, 1230 (Del. 2018)).
The important lesson from this case is to be careful in record-keeping, tracking of drafts and using stand-alone signature pages. The lack of any record trail, or “hard evidence,” in this case (other than the various drafts) made it difficult to find clear evidence of a meeting of the minds. More particularly, parties often separate signature pages and the signing process from the finalization of the actual transaction documents. This is often done for expediency to make sure that signature pages can be collected prior to actual finalization of the definitive documents in order to facilitate timely exchange, especially when multiple signatories are involved and may be traveling or located in separate locations. Although this has become common practice, parties to transactions should be mindful of keeping a clear record of negotiations and exchange of documents and ensure that all parties agree on the same version of the document to which signature pages are being attached. Always proofread and confirm that final draft before signing or affixing signature pages and always confirm that the signature page matches up to the document (version, date and other details) and that all counterpart signature pages are identical, as any inconsistent facts could raise red flags. Nowadays when electronic signing and exchange is more commonplace, this should be easier to control but still requires diligence and attention to detail.