Doing Business on a Handshake, and a Prayer

By Denise Farris, Esq., Oct 22, 2016 | stablemanagement.cmo

For want of a nail, the shoe was lost.
For want of a shoe, the horse was lost.
For want of a horse, the rider was lost.
For want of a rider, the message was lost.
For want of a message, the battle was lost.
For want of a battle, the kingdom was lost.
And all for the want of a nail.[i]

Wise sayings typically remain universally applicable throughout the ages. When tying up dangling ends on equine business transactions, no saying rings more true. The nail and shoe proverb describes circumstances where failure to take timely action at a critical stage leads to logical but unforeseen and potentially disastrous results down the road. No better description exists for that situation where parties in the horse world enter into a verbal agreement without a mindful and deliberate process generating negotiated, written terms and conditions formalizing the transaction.

1. Our Increasingly Complex Industry

Let’s examine why written agreements, and NOT verbal agreements, should be the preferred protocol in equine contracts. First, let’s agree that when referring to today’s equine industry, “That old gray mare, she ain’t what she used to be!” Today’s U.S. horse industry contributes over $39 billion in direct impact to the economy.[ii] When indirect and induced spending factors are included, that impact expands to $102 billion, a value on par with the motion picture industry![iii] Thus equine transactions often begin to resemble the same level of sophistication encountered by executives negotiating deals for Fortune 100 and 500 corporations!

The industry’s increased complexity is also reflected in the value of our horses and the terms and conditions now applied to sales, sales on time, leases, partial leases, multiple ownerships, and donations. Today’s backyard grade horses range in value anywhere from $500 to $5,000, whereas competition and performance horses can sell for anywhere from $5,000 to millions of dollars. Add to these values the added factors of sales and use tax and who is responsible, risk of loss in transit, proof of “ownership” under association breed and competition rules, and you can see a complicated jigsaw of problematic issues emerging.

2. Our Increasingly Complex Terms and Conditions

Next, consider what is potentially “sellable” following recent scientific advancements. Gone are the days when a “horse sale” was simply the sale of a horse. Today, horse sales can include an embryo, a uterus (i.e., for a surrogate dam), sperm or eggs, current progeny, future progeny, performance and breeding rights and/or income rights tied to that horse and/or its progeny’s show winnings, just to name a few factors. It’s not uncommon for the higher-dollar horses to be owned by multiple parties, creating the need for detailed partnership or corporate formality guidelines. Given the extended performance times inherently involved in these contracts, plus all of the issues which arise when a horse is injured or died before a contract is completed and the parties expectations achieved, wouldn’t you want to anticipate and address the respective parties’ right and obligations? Otherwise how do you identify expected benefits, or obligations?

Consider the example of a mare or stallion sale with carryover breeding rights reserved by the Seller in return for a reduced sales price. Yet what occurs when Buyer 1 then sells that horse to an innocent 3rd party Buyer 2 who has no knowledge of these pre-existing breeding agreements? Lacking a written agreement, what serves to protect Seller 1 when attempting to enforce the very agreement that led to a reduced sales price in the first place? Is Buyer 2 even legally obligated to honor a verbal agreement of this nature? (Answer: “No.” See comments on the UCC statutes in Section 3).

Here’s another example. Four friends have agreed to purchase, board, train, compete and sell a horse for a profit. Even lacking a written document, these parties have created a legal partnership merely by verbally agreeing to share profits and losses. If nothing is in writing, who makes the management decisions for the horse? Does everyone have to agree? A majority agree? Who is responsible for the COSTS of those decisions? How are competition winnings distributed, profits and losses determined and allocated if and when that horse is sold? What if the horse is injured and requires surgery? Who is named as the insured party in the event of a covered loss for the injury to, loss of use of, or death of that horse?

3. Our Increasingly Complex Statutes and Laws

Many people remain unaware that the law in certain instances MANDATES the use of written agreements in equine transactions.

A. Uniform Commercial Code Requirements (UCC)

Under the law of all 50 states, a horse is deemed a “commodity” or “good.” Training, breeding, transporting,and similar types of activities are deemed “services” related to that “good.” Under both federal and state Uniform Commercial Code requirements applicable in all 50 states, certain contract rules apply to the sale or provision of “goods” and “services” which are addressed below.[iv]

Statute of Frauds

The Statute of Frauds found under all UCC codes requires that any contract for the sale of “goods or services” which exceeds $500 in value MUST be in writing to be enforceable. Thus the sale of any horse for a value of $501 or more must have a written document or either party can “rescind” the sale. “Rescission” is defined as placing the parties back in the position they occupied before the sale occurred. This means the horse goes back to the seller, the seller refunds all purchase funds paid, and all parties return any related funds of the sales (i.e., pre-purchase exam fees, transportation fees, etc.)

What constitutes writing? Any document that identifies the key terms of the contract agreement will suffice. Key terms of the agreement include:

The parties (i.e. buyer and seller identification)
The date
The subject matter (i.e. sufficient information to specifically identify the horse
The price
Performance time (if applicable)

Under this definition, a cancelled check will satisfy the “writing” requirement so long as the horse has been specifically identified within the memorandum portion of the check.

Executory Contracts

The UCC also requires that any executory (i.e., future performance) contract involving goods and services that cannot be performed within one year must be in writing. Thus contracts are required for: any sale on terms, any agreement to reserve breeding rights, or multiple ownership agreements requiring specific services to be provided beyond a year. Lacking a contract, any party may rescind the agreement.

B. Agent Commission Disclosures

Recently, several states, including California, Florida and Kentucky, enacted statutes requiring mandatory agent commissions in equine sales. While differing from state to state, the statutes typically share the following provisions:

Cover equine sales exceeding a certain dollar amount, for competition and race horses
Applicable to trainers/agents representing buyer and seller in the transaction
Requires Trainer/Agent to disclose and receive written agreement of all parties regarding dual agency and commission
Requires Trainer/Agent to disclose percent and amount of commission
Identifies sanctions if Trainer/Agent fails to comply, including commission forfeiture or treble damages and fraud exposure

Conclusion

Lacking a contract, a judge or jury must “guess” at what the parties intended. This can often be messy, expensive and lead to surprising results for all parties involved. The failure to execute a written contract can lead to the unintentional legal unraveling of the contract by either party to the agreement. Lack of an agency disclosure form in some states can unexpectedly make you liable for fraud. So why take these chances? Contracting formality is time well spent. Don’t forget:

“The Kingdom was lost for want of a nail!”

Denise Farris, Farris Law Firm LLC, can be reached at 913-766 1262 or dfarris@farrislawfirm.com. Denise is a nationally recognized equine and business attorney, “AV” rated with Martindale Hubbell and recipient of numerous business law awards at the local and national level including Equus Magazine “Leaders in Equine Law.” The firm also offers dispute resolution services for the equine and agricultural law industry. www.farrislawfirm.com.

DISCLAIMER
This article provides general coverage of its subject area. It is provided free, with the understanding that the author, publisher and/or publication do not intend this article to be viewed as rendering legal advice or service. If legal advice is sought or required, the services of a competent professional should be sought. The publisher shall not be responsible for any damages resulting from any error, inaccuracy or omission contained in this publication.

undefinedJohn Gower,Confessio Amantisv. 4785–4787 (c. 1390)

[ii] Equine Economic Impact Study (American Horse Council 2005)

[iii]Id.

[iv] Information identifying both federal and state UCC provisions can be located at: https://www.law.cornell.edu/ucc.