Unsigned Operating Agreement Enforceable
An operating agreement is a contract, or creature of contract, that governs the internal affairs of an LLC. As noted in Florida’s Revised Limited Liability Company Act, basic principles of contract law apply to operating agreements. See Fla. Stat. § 605.0111(1) (“It is the intent of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of operating agreements, including the purposes of ss. 605.0105-605.0107”).
Contracts are usually bilateral in nature, in that the contracting parties bargain for their agreement and come to a meeting of the minds on the terms of their relationship. To that effect, you cannot be said to be a party to the contract without your assent to the same, which may be via your written signature or implied from your conduct.
But operating agreements are peculiar documents, in that by statute assent is not required in order for the contract to apply. In other words, the failure to sign the company operating agreement is of no legal significance.
In Hagstrom v. Co. Fe. Me. USA Marine Exhaust, LLC, a case out of Florida’s Third District Court of Appeal, Hagstrom signed an employment agreement with Marine Exhaust, LLC appointing Hagstrom as its managing member. That same day, Hagstrom, as minority and managing member, signed an operating agreement with CUSA, Marine Exhaust’s majority member, which governed the internal affairs of Marine Exhaust. Both agreements provided that any dispute would be subject to arbitration. Note that Marine Exhaust did not sign the operating agreement.
Marine Exhaust eventually filed a petition for arbitration against Hagstrom, alleging that Hagstrom formed a competitor company and thus breached the non-competition clause of the operating agreement. Hagstrom attempted to enjoin or stay the arbitration by filing a petition for relief in circuit court, arguing as follows: “as a non-signatory, Marine Exhaust cannot enforce the terms of the operating agreement.” And thus the issue became whether operating agreements are enforceable against non-signatories.
The appellate court easily answered this question in the negative, finding that Florida’s Revised Limited Liability Company already addressed the issue:
605.0106 Operating agreement; effect on limited liability company and person becoming member; preformation agreement; other matters involving operating agreement.—
(1) A limited liability company is bound by and may enforce the operating agreement, regardless of whether the company has itself manifested assent to the operating agreement.
605.0106 Operating agreement; effect on limited liability company and person becoming member; preformation agreement; other matters involving operating agreement.—
(2) A person who becomes a member of a limited liability company is deemed to assent to, is bound by, and may enforce the operating agreement, regardless of whether the member executes the operating agreement.
This deceptively simple statutory quirk in the law, which effectively replaces common law contract principles of mutual assent, consideration, and privity, should not be overlooked.
If you are contemplating becoming a member of a limited liability company, it would be wise to inquire into the existence of any past operating agreements, documents, or contracts that govern the internal affairs of the company. It may even be worthwhile to obtain a statement in your buy-sell documents, or membership interest purchase agreement, that no such operating agreement exists, and that you would not have become a member had the existence of a prior document been disclosed to you.
Ultimately, the law is clear that the contractual provisions of operating agreements will apply to you contractually, meaning that by statute it is possible to breach an agreement that you may have never seen, known about, or signed.
Food for thought. If you’re interested in a more scholarly analysis of the topic, or can’t sleep at night, check out The Ties That Bind: LLC Operating Agreements as Binding Commitments.
Author
Ronald C. Iacone Jr., Esq.
Ronald Iacone is the managing and founding partner of Iacone Law. He focuses his practice on asset protection representation, business and international law, and appeals to the interrelatedness of the three to best discuss your issue and solution.