Assumptions in Business Partnerships

Assumptions in Business Partnerships

A couple of days ago, I settled a litigation that got to the core of two business partnership topics that aren’t talked about enough. One of the things that I constantly preach to clients is that if you are going into business with somebody, it cannot be based upon a series of assumptions or what you think you know. This is regardless of whether you’ve known your business partner two days or twenty years.

The case that I settled had a very loose, vague contract (just one page and double-spaced) with an enormous number of assumptions lying at the heart of the document. There was a lot of factual and legal proof problems, as well as years of miscommunication between the partners. The operative facts of the case aren’t necessarily needed to understand the point here.

The two people that went into the business had a prior relationship. Their relationship was both professional and personal. There was a great deal of urgency on one side, and an emotions-based perspective on the other side, which made judgement and sound decision making by both parties difficult. Both parties made assumptions over the years about what this particular one-page document had to say and what it meant.

When you are going into business with somebody, you cannot count on your assumptions. To reiterate, that means for people you’ve just met, or someone who is a close companion. Assumptions kill contractual relationships. If you have a contract with assumption-based knowledge or understanding, it is a recipe for disaster.

The assumption that party A makes about a particular condition or obligation within a contract may very well be the exact opposite of what party B believes. Complicating matters, the terms that are chosen to be put into the contract may actually have a third meaning attached to them. When a court is called upon to decipher the meaning of a contract, they start with the words on the page. If the words on the page are not subject to different interpretations of the language, the court is not going to think about the assumptions that the parties had. The court will simply say what the contract reads, and then make decisions about the facts.

Do not allow your assumptions to cloud your judgement when it comes to having a contract. Going into business with somebody, whether you’re forming a business or just conducting a single transaction, should not be based upon assumptions. It should be based upon facts that are irrefutable.

Because I am something of a movie nerd, I am reminded of two quotes. First, from Raiders of the Lost Ark where Indiana Jones is talking about archeology as the search for facts. If you want the truth, he said, you have to go see the philosophy professor down the hall. The great Obi-Wan Kenobi said, “Truth depends greatly on our point of view.” Your assumptions and your perceptions create your own truth. The facts and how you perceive the facts create a truth.

But, in a contract, you need to have facts. Both parties must agree on the facts — not their individual perceptions (or their truth) — of the situation. If you need to have statements made about lingering assumptions, then they should definitely be included in the contact. You do not want to have any misunderstandings later based on those assumptions.

Let’s take an example. Perhaps party A has an option to do something in two years. There has to be an explicit discussion about how that option will be exercised, how notice will be given to the other party that the option has surfaced, and what other limitations on time, function, and limitation of the operation will be. Party A cannot assume that it will be able to exercise the option without discussion with Party B.

To sum it up, when you are going into business with somebody, do not assume facts. Verify facts, state the facts, lay out any assumptions, and be explicit about what you are thinking and what you are doing.

The contract dispute that was settled cost both parties upwards of $30,000 each in attorney’s fees. Ultimately, it resulted in a settlement when neither party fully got what they wanted (which is the norm in settlement cases).

Moral of the story” The whole matter could have been avoided with a lot more clarity in the contract.