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Authored - NJ Contract Law Update - When is a Signed, Written Contract Not a Contract At All?
AUGUST 08, 2012 | Windels Marx - Commercial Litigation

Fabrau, L.L.C. v. Shah

Fabrau, L.L.C. v. Shah, 2012 WL2813011 (N.J.App.Div. July 11, 2012), presents the anomaly of a complex, signed written agreement among reasonably sophisticated parties being deemed a nullity well after the fact. An even greater anomaly is that the signatures on the agreement were excused (and, in effect, voided), even though the reason given for nullifying the signatures (a reason accepted as sufficient and appropriate by the Appellate Division) was that "the partial execution of the...agreement...was a sham, designed to mislead [a specific third party]...into believing that his economic interests would be protected if he were to proceed to enter into a business relationship with the parties signing the agreement."

The upshot was that even though an operating agreement has been signed in the name of the plaintiff, Fabrau, L.L.C.--and had also been signed by not only the two members causing Fabrau to sue but also one of the defendants ostensibly violating that LLC's Operating Agreement--the Agreement was deemed binding neither on that defendant signatory (Mr. Shah) nor his co-defendant non-signatory (Mr. Nallamotu). Nallomotu had not signed, although he had arguably acknowledged "form[ing]...a company"--which potentially could have been equated with agreeing to the LLC's Operating Agreement.

This brings us to the divide between (1) what the trial court believed to be true as a factual matter, including credibility determinations, and (2) the question of what a court is willing to enforce when there is a collusive purpose to impose a hoax upon a third party, as the court found. In terms of what actually occurred, the trial court found as follows (and the appellate court upheld these findings): first, that execution of the agreement was a sham, entered into for the reasons noted above; and second (in the words of the appellate court, though conceptually applicable as well to the core of the trial court's holding) that, in their subsequent conduct, "the parties failed to manifest an intent to be bound by their agreement."

Simply stated, disputed issues of fact abounded as to: personal or LLC ownership of the software regarding question; the purpose for Shah physically signing the agreement; levels of participation (vel non) in the venture as it went forward; whether any party deemed the Agreement in effect; ostensible abandonment of the venture (not focused on as an issue by the courts, but perhaps a better fit than saying an agreement was never made in the first place1); and another unexpressed question as to whether the software was a "work for hire", even potentially on behalf of what was (at that moment) an arguable joint venture rather than a documented entity (a highly complex question well beyond the scope of this article).

We thus have the rarity of a complex commercial document, signed but not enforceable. The result calls to mind a little-known case, Chera v. The Shores, 145 N.J.Super 19 (App.Div. 1976); in which a signed Promissory Note was held to have been delivered for a specific conditional purpose, and thus unenforceable, although fully executed.

Morals of the Story

Although these cases are rare, obviously they are not unique. There are several morals to stories such as this:

  1. Just because it's signed it doesn't mean it's enforceable.
  2. A more formal type of execution would be best.
  3. The Court's Opinion gives no clue as to recitals in the document, or whether better recitals would have helped.
  4. Actions ostensibly undertaken without counsel (as appear likely in many of these cases) are more likely to fail.
  5. Every letter, fact or email sent will be examined as to what was intended; so protect yourself accordingly, at all stages, from the earliest point in the relationship.
  6. Confidentiality agreements and partially-binding letters of intent referencing (inter alia) ownership of intellectual property should be signed at the earliest stages, even if the remainder of the documentation is not signed; so that sharing in the fruits of such endeavors is assured.
  7. "Works for hire" should be clearly so specified in writing, even if there are reported cases implying that it is not absolutely essential; Fabrau tells us that it may nonetheless be invaluable.

Contact & Legal Disclaimer

Clark Alpert is the author of Guide to New Jersey Contract Law, published by the New Jersey Institute for Continuing Legal Education, originally published in 2007 and updated in November 2011. His updates on New Jersey contract law are based in recent issues and practical methods for addressing similar situations in your practice or business. They are not intended to serve as legal advice. Clark welcomes your questions and comments.


1Although the intent to abandon must be clearly expressed. See Alpert, Guide to New Jersey Contract Law 272-278 (2d ed. 2011).

 

 




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