We regularly try to remind business owners and nonprofit directors that they should not do business on a
handshake. Too many problems creep up when the terms of the deal aren’t documented in writing,
especially as time goes on. But a recent case involving text messages illustrates not only when a written
conversation might serve as a binding contract but when the terms of that communication might also be
construed as a personal guarantee by the person sending the message.
In BrewFab, LLC v. 3 Delta, Inc., the court upheld a decision holding a business owner personally liable for paying $365,000 worth of outstanding invoices because of statements the business owner made via text message.
The Facts
3 Delta was formed by George Russo and a group of investors to develop a water-based CBD oil extraction machine for the sports and health product industries. 3 Delta hired BrewFab to develop the concept for the machine without having any formal contract in place. Nothing in the court record indicates that there was any question or concern raised about BrewFab’s work or the equipment BrewFab was developing for 3 Delta. Nevertheless, 3 Delta stopped paying BrewFab’s invoices (though that didn’t stop 3 Delta from demanding that BrewFab continue shipping equipment to 3 Delta).
To resolve this impasse, 3 Delta and BrewFab held a conference call. Unsurprisingly, the parties disagreed over what was discussed on the call. BrewFab asserted that Russo personally promised to pay 3 of Delta’s outstanding and future invoices. For his part, Russo “vehemently denie[d] making such a promise despite a text message from Russo to the contrary: “As per our conversation on Jan 30 th 2020, I, George Russo, from 3 Delta do promise to pay brew fab in full all outstanding bills as of this date and all agreed-upon work done for 3 Delta future forward. I thank you for your patience.”
Relying on the text message, BrewFab continued working and finished the machine it was developing for 3 Delta in March of 2020.
The Court’s Opinion
BrewFab argued that Russo’s text message was an unambiguous and enforceable personal guaranty, and the court agreed. Specifically, the court found that the phrase “I George Russo from 3 Delta” constituted an electronic signature under Florida’s Electronic Signature Act, and the remainder of the message contained all of the terms necessary to be enforceable under Florida’s statute of frauds. While this case was resolved under Florida law, the basic legal concepts at play here apply in almost every state in the country. The Statute of Frauds: When Must a Contract Be in Writing and Signed?
Every state except Louisiana has adopted a statute of frauds which identifies certain types of agreements that must be in writing and signed in order to be enforceable. As the name implies, the idea is to prevent fraud by requiring written evidence of both the existence and the terms of an agreement. The writing must:
- Reasonably identify the subject matter of the contract,
- Include enough information to show the parties intended to enter into a contract,
- Contain the essential terms of the agreement, and
- Be signed by the party against whom enforcement is sought (effectively, the defendant in a breach
of contract case).
The statute of frauds applies to a number of common business contracts, including:
- Personal guarantees
- Contracts related to real estate (including purchase agreements, leases, or anything related to an
interest in real estate) - Any agreement for services that cannot be performed within 1 year
- Contracts for the sale of $500 or more in goods
- Most security agreements
- Equipment leases where the total payments are more than $1,000
What is a valid signature?
A valid signature is generally any symbol a party makes with the intent to authenticate a record or contract. This can include traditional ink signatures but also initials, typed or printed words, stamps, photocopies, etc. And this signature can be located anywhere in the document as long as it evidences an intent to authenticate the document.
What about electronic signatures?
Every state except New York has also adopted The Uniform Electronic Transactions Act (UETA), which
established a national framework for electronic signatures and makes them legally equivalent to traditional ink signatures as long as there was an intent to sign the document. (Some states have more exceptions than others regarding when electronic signatures are acceptable. New York has adopted its own electronic signatures law that accomplishes the same purpose.)
Whether there was an intent to sign will depend on the specific facts in each scenario (particularly the
contents of the message), but courts are increasingly finding legally binding electronic signatures in emails and text messages. Currently, the courts disagree on whether an automatic signature block should count as an electronic signature. And as the case of Mr. Russo and 3 Delta illustrates, some courts have found situations where the contents of a text message should be treated as a valid electronic signature.
Takeaways
1. Stop doing business on a handshake. BrewFab should never have started working without a
signed contract.
2. Don’t do business via text message. It’s generally harder to preserve a clean record of
communications via text, and the communications typically don’t make much sense to outsiders
who were not part of the initial communications. Although here, Russo made it crystal clear, which
brings me to the next takeaway…
3. To paraphrase an old saying, never put anything in writing that you don’t want to see on the cover
of the Washington Post. I’m really surprised that Russo’s blatant lie wasn’t a bigger issue in the
court’s opinion (and perhaps it’s the subject of a separate motion). But if there are emails or text
messages out there that will contradict your testimony, believe me when I say it will eventually
come to light.
4. BrewFab is probably out significant legal fees. The general rule is that each party pays its own
legal fees unless the contract requires otherwise. This is yet another reason to always use a written
contract.
5. A court judgment doesn’t guarantee that BrewFab will actually get paid. Russo is on the hook for 3
Delta’s debts, but despite what appears to be a very open and shut case, Russo has fought this at
both the trial court and on appeal. If Russo and 3 Delta go bankrupt or simply don’t have $365,000,
BrewFab may never see a penny of this judgment. (Procedurally, there are still issues remaining
for trial, further increasing each party’s legal fees before BrewFab ever gets paid, and this case has
been going on for more than 2 years.)
6. If you are having preliminary discussions over email about the terms of an agreement, consider
including a disclaimer in your email (or text message) that such discussions are not a final, binding
agreement, and no contract can be formed without separate writing signed by both parties.
If you have questions about your business contracts, schedule a consultation below.
