While it's hard for me to believe that there are still oral agreements sealed with a handshake in this day and age, they do still exist.  Of course, if both parties fully understand their deal and neither party ever breaches or terminates the contract, there may not be any cause for concern.  However, the odds of such a perfect situation are rare – even when both parties are benefitting from the contract and making money.  Howard Entertainment's lawsuit against Lisa Kudrow serves as case in point.  So what are the dangers of doing business without a properly “papered” agreement?  Many people mistakenly believe that oral agreements are unenforceable.  That is not the case.  Oral contracts are as enforceable and binding as written agreements.  The danger is that the terms have not been memorialized, so once a court is convinced that a contract exists (or existed) the court will make the final determination as to the terms of that contract.  This is not only true in entertainment disputes. These rules and guidelines will generally apply in any industry.

Background of the Case

Lisa Kudrow began working in the entertainment industry in 1986. In 1991, Scott Howard, a former employee of The William Morris Agency and Kudrow orally agreed that Howard would provide personal management services for Kudrow.  In exchange for his services, Howard would receive a 10 percent commission on Kudrow's income.  In 1992, Kudrow landed the guest-starring role of Ursula Buffay on the popular show “Mad About You.” In 1993, Ursula Buffay became a recurring character and in 1994, Kudrow was cast in her “career-making” role as Phoebe on the hit television series, “Friends.” After a sixteen year run and two modifications of their “contract,” Kudrow terminated Howard's management services in early March 2007.  Howard believed that post termination, he remained entitled to commissions on Kudrow's earnings from work she performed while he was her manager (e.g. her back-end and residual income from Friends).  Howard argued that this type of arrangement is standard industry custom (often referred to legally as “custom and usage”).  Kudrow disagreed, and Howard filed suit in California for breach of contract.  Kudrow asserted that Howard could not establish that she breached the contract because there was no evidence that the parties agreed to post-termination compensation. The trial court ruled in favor of Kudrow's Summary Judgment motion. However the Appeals court reversed, and the case is still ongoing.

Appellate Court Analysis

The California Appeals Court stated that “custom and usage” in the entertainment industry may become part of the oral agreement between the parties to explain whether Howard was entitled to receive post-termination compensation. The court relied on long standing precedent which states:

“[A] reasonable [custom or] usage may supply an omitted term or otherwise supplement an agreement.” (Varni Bros. Corp. v. Wine World, Inc. (1995) 35 Cal.App.4th 880, 889 [quoting 1 Witkin, Summary of California Law (8th ed. 1987) Contracts, § 696, p. 630]; see also Civ. Code, § 1655.)

Custom and usage [should be] considered "in determining the intent of the parties, and are in effect a part of the contract unless the contract manifests a contrary intention." (Miller v. Germain Seed & Plant Co. (1924) 193 Cal. 62, 77 (Miller); accord Civ. Code, § 1655.)

Furthermore the Appeals Court went on to say, “Evidence of custom and usage in the entertainment industry, even if Kudrow was unaware of that custom and usage, may therefore be relevant to explain or disclose an ambiguity in the agreement or provide by implication a missing term (italics added). “[A] party to a contract may be bound by a custom not inconsistent with the terms of the contract, even though he is ignorant of the custom, if that custom is of such general and universal application that he may be conclusively presumed to know of the custom” (Miller, supra, 193 Cal. at p. 69, italics added.)

As a result of this analysis, the Appeals Court vacated the lower Court's decision giving Scott Howard  his day in court. He will largely be relying on industry custom and usage to make his case.

My Legal Insights

There is no way to know if post-termination commissions were ever discussed or even considered by  Kudrow and Howard.  Assuming the subject never came up in 1991 or in the two subsequent “amendments,” you might expect each party to assume that their position on the matter should govern.   It would be reasonable for Kudrow to assume that once she terminated her “contract,” all obligations to Howard would cease.  Likewise, it is reasonable for Howard to believe that since post-termination commissions are so ubiquitous in the industry, this would be a provision in his “contract” with Kudrow. This is the first danger with the unwritten contract.  When terms are not discussed, each party may assume that the unspoken provisions will be applied in their favor.  Therefore, upon a subsequent dispute, the parties may have no opportunity to strike an acceptable compromise on the matter.  For instance, Kudrow renegotiated their contract in 2004 to reduce Howard's commission from 10% to 5%.  Had Howard realized that she had no intention of paying him anything post-termination, he may have been less willing to reduce his commission.  Perhaps he would have negotiated a higher rate in 1991.  Oral contracts, by definition, only set forth terms that the parties discuss.  Without the benefit of a comprehensive contract drafted by a competent lawyer, the parties may never discuss critical terms that only become relevant in specific situations.  Therefore, parties to an oral agreement are not considering the  entirety of the terms in their contract, so they are not fully negotiating their agreement.

The second danger of the oral contract is related to the first.  The court will typically determine the unspoken terms of your contract, based on what is customary  in your industry – even if you are unaware of what those customs are.  This can be  perilous to entrepreneurs trying to launch their first or second company or to film makers trying to produce their first or second film.  If you are across the table from a financier, service provider, or key customer with more knowledge of the industry than you have, you are at great risk.  They can negotiate against you with full knowledge of standard industry provisions in their favor.  Therefore, you might think that you have hammered out a fair deal, without realizing that your agreement is heavily weighted against you.  You may have just shaken hands on a deal that you would never have signed had all the terms been spelled out on paper. 

Conclusion

Simply put, avoid doing business “by handshake” especially if you are new to an industry.  What you don't know can hurt you.  Hire a competent lawyer, with experience in the type of deal you are trying to create.  Only then can you be certain that you are entering an agreement with a full understanding of all relevant terms and how they relate to each other.  If you are pressured to do business by handshake, blame your lawyer to deflect the pressure.  It's your lawyer's job to manage that situation for you.  I should note, this discussion hasn't even considered the dangers inherent in oral agreements when the other party is an unsavory sort.  Neither Kudrow nor Howard has asserted any claims of fraud, misrepresentation or unfair dealing.  In fact, it is doubtful that you would be in business for 16 years with someone you didn't respect and trust.  However, when alleging fraud or other misconduct, the Court's analysis would necessarily been different, and absent a writing, the Court may be powerless to protect your interests.

© Clem Turner, 2010. All rights reserved.