An Oral Contract Is Not Worth The Paper It Is (Not) Written On

An Oral Contract Is Not Worth The Paper It Is (Not) Written On

In a decision rendered in February of this year by a New York Court, there was again illuminated the rule that oral contracts are typically not worth the paper they are (not) written upon. In this instance, a shareholder asserted that a side oral agreement would permit him to significantly increase his holdings in the corporation. On the basis of the other agreements, they being written, precluded an oral contract, this assertion was rejected. Blobel v. Kopfli, 2018 NY Slip Op  30298(U), 2018 WL 984847 (N.Y. Sup. Feb. 20, 2018).

Dr. Günter Blobel, a recipient of the Nobel Prize in medicine, was the cofounder of Chromocell, a biotechnology company based substantially upon technology code invented by Dr. Blobel. The other founders of Chromocell were Dr. Shekdar, Dr. Blobel’s research assistant, and Christian Kopfli, an attorney. Once formed, Kopfli served as the CEO of Chromocell and Dr. Shekdar served as its chief science officer.

At the time of Chromocell’s formation, Dr. Blobel was employed by the Rockefeller University Laboratory of Cell Biology and as well held the position of Investigator at the Howard Hughes Medical Institute (HHMI). HHMI’s rules limited Dr. Blobel to owning “more than a 5% ownership interest in a company.” In light of this limitation, Dr. Blobel agreed to accept a 3.9% equity interest in Chromocell, with the balance being split equally between Dr. Shekdar and Kopfli. In connection with the organization of Chromocell, the parties, including Dr. Blobel, entered into a variety of agreements including a stock agreement and an independent contractor services agreement. Dr. Blobel would assert that there was a unwritten agreement that, to the extent that the rules of the HHMI would allow him to subsequently hold a greater ownership interest in the company, his allocation of shares would be adjusted accordingly

In 2012, HHMI revised its rules, allowing persons such as Dr. Blobel to own “less than a controlling interest” in a company. Upon this change in HHMI rules, Blobel believed that the alleged oral agreement should allow him to increase his share ownership to one-third of Chronocell, thereby rendering himself, Kopfli and Dr. Shekdar equal shareholders. After exchanging numerous emails on the point and as well a dinner, it was clear that neither Kopfli nor Dr. Shekdar would agree to increase Blobel’s ownership in the company; they even offered to buy out his interest in the company for $10,000,000. Refusing those offers, Blobel filed suit seeking, amongst other relief, specific performance on the alleged oral reallocation agreement.

Responding to the complaint, the defendants filed a motion to dismiss on the basis that there were no grounds for relief. In this decision, that motion for relief would be granted.

Each of the stock and the consulting agreements signed by Blobel, the former otherwise providing for his 3.9% ownership interest, were “fully integrated agreements.” Being fully integrated, the “merger clause thereof indicated that the agreement ‘establishes the parties’ intent to finalize all negotiated terms in the agreement.” With respect to the consulting agreement, it provided that “it constitutes the ‘entire understanding between the parties and supersedes, replaces and takes precedence over any prior or contemporaneous understanding or oral or written agreement.’” With respect to the stock agreement, it provided that “there have existed or exist no agreements or understandings, written or oral, between the company and [Dr. Blobel] or entered into by [Dr. Blobel] for the benefit of the company.” The court found that these agreements “constitute a concerted effort by the parties to finalize the terms of their agreement.”

Ultimately, the court would find:

Additionally, by executing the Agreement, Dr. Blobel sought to be bound by each Agreement’s merger clause, which expressly repudiated all prior agreements. Dr. Blobel’s argument requires the court to accept that, despite agreeing to reject all prior agreements on the issue, Dr. Blobel nevertheless believed the Allocation Agreement was exempt from those clauses’ controlling reach, even if it misrepresents the Agreements’ stated terms. This the court declines to do, particularly, when enforcing the Allocation Agreement would uproot each written Agreement’s merger clause and recital of Dr. Blow Blobel’s 3.9% equity ownership.

Additional arguments based upon, for example, unjust enrichment and equitable estoppel were rejected on the basis that they were inconsistent with the express written agreements.

Once again, the rule is clear; if you want your contract to be enforceable, it needs to be in writing.