Ousted Partner Gets Burned: No Breach of Contract Liability Where Parties Failed to Agree on Material Terms

Considering the rights of parties involved in a soured business relationship, Judge Kaplan reiterated that a binding contract requires an agreement on the material terms and an intent to be bound. A term sheet that does not represent an attempt to formalize an already established agreement is not an enforceable contract.

The parties in Burns v. Taylor—plaintiff Christopher Burns and defendants Hugh Taylor and Lisa Franks—formed an investment advisory firm in early 2014. Taylor contributed all of the capital necessary to start the firm, was the principal source of clients, and—because he is considerably older than Burns and Franks—anticipated eventually transitioning the business to them. The parties filed a certificate of organization (which listed Taylor as the manager and resident agent but did not mention either Burns or Franks). Throughout 2014, their attorney circulated various drafts of a term sheet that was marked “For Discussion Purposes Only.” The drafts gave Taylor an 80% stake and Burns and Franks each a 10% stake. The drafts also contained provisions for Franks and Burns to eventually buy out Taylor’s stake.

Burns, though, dragged his feet in providing feedback on the drafts. Taylor and Franks got nervous that Burns was not committed to reaching an agreement. Franks directed the firm’s attorney to draft two versions of the next iteration of the term sheet, one of which included Burns and the other of which did not. Taylor shortly thereafter asked Burns to leave the firm and proposed a severance agreement. Burns at first refused but left after the firm cut off his phone and computer access. He then sued for breach of contract, breach of the covenant of good faith and fair dealing, and breach of fiduciary duty.

Taylor and Franks moved for summary judgment on all counts. The court granted summary judgment in their favor on the claims for breach of contract and breach of the covenant of good faith and fair dealing on the ground that the parties never entered a binding contract. Material terms, including the buyout provisions, were unresolved, so the draft term sheets were not attempts to formalize an established oral agreement. “Because there was never a meeting of the minds with respect to all of the material terms of the proposed limited liability agreement, the parties never formed an enforceable contract,” Judge Kaplan wrote.

Judge Kaplan denied summary judgment on the breach of fiduciary duty counts, though, because there were disputes of material fact as to whether the parties entered a partnership as defined by the Uniform Partnership Act and, if so, whether Taylor and Franks breached their fiduciary duties to Burns.

Christopher E. Burns vs. Hugh R. Taylor and Lisa Franks

February 8, 2017

Full decision here.

Blog Editors

Recent Posts

Back to Page