Friend going back on business deal

[mental_traveller]

A while ago I agreed to back a friend on a small business project he was doing. Not a huge amount of money, but enough that I would prefer not to lose it. Anyway, his project didn't work out, and he rather shame-facedly admitted it to me about 2 months ago. He talked with me about whether to continue it to try to earn back some of my losses, or to just quit. He has another bigger project going too, and suggested that maybe he could give me a small interest in that in return for this one not working out. I told him that I would rather get a small interest in this other project (which IMO is likely to succeed), than for him to work another 3-6 months at a dead-end business, just to make back some of the money i.e. I would rather get back my money in a way that would benefit him too, rather than force him to do dead end work. We then met again a week later, and negotiated a small stake in his business in return for me writing off my initial investment in the first (now failed) project. We clearly agreed the terms, I proposed it as a solid deal and he said "deal" and shook hands on it.

 

A couple of weeks later, I tried to get in touch to formalise our new deal and put it in writing at some point. However, he did not get back to me, and after chasing for a week he finally replied - turned out he had just taken a holiday and was away for 2 weeks with his new girlfriend. Anyway, he said he'd get back to me when he returned. However, I then didn't get much response from him, no reply to email, answerphone message etc. Finally, last week I got an email from him - to cut a long story short, he basically said he was going to go back on the deal and not offer me anything. He said that the original investment in the first project had been made, that I had taken a fair risk and it didn't work out, and that he had not been grossly incompetent and that I should just write it off. He also gave a load of reasons why he had changed his mind, most of them basically boiling down to the fact that he would not do as well if I got some of the business (we are talking about a v small equity slice here though, not like 30% of the business or anywhere near).

 

Now my initial reaction was that even if all his points were correct, a deal is a deal and he has to take the consequences. If Microsoft makes a deal with IBM, then 6 weeks later realises they made a mistake, they can't suddenly change the deal unilaterally and tell IBM to just roll over. I was also very annoyed that after not being in touch for a month or so, he then out of the blue just announces this as though I have no say in the matter. If he had come to me and simply stated his concerns, said he was unhappy with the deal, then I would be open to renegotiate it. However, I had a legitimate reason to ask him to continue working to make back some of the loss, and I let him avoid that on the understanding that he would give me something in return, so even without the agreed deal, I think I would be entitled to expect some kind of compensation. I also considered his work on the first project to be shoddy and in some ways unprofessional. There were several things I warned him about, that he just ignored - for example he did not keep monthly accounts, which we had agreed beforehand, and he changed important aspects of the business plan at the last minute. He also spent way too much at first, when I had repeatedly told him that we needed to build up more cautiously. Anyway, pretty much everything he ignored ended up making the business fail - if he had listened then it would have done much better. So I didn't really agree with his attempts to justify his behaviour either - IMO he make lots of avoidable mistakes, and was hopelessly cavalier about the whole thing.

 

So, I now have to decide what to do about this. There are a couple more details to explain. Firstly, on the first project, I was cautious and made the investment as a loan agreement - both me and my lawyer have a contract with his signature, saying he has to repay me the whole amount in a few months. We had an gentleman's agreement that if the business failed through no fault of his, I would write off this loan and rip up the contract. So, if I want to play hardball, I have a solid loan contract as evidence, and can basically take him to court to pay this money back. Secondly, although the 2nd deal (where I exchanged this loan for a small stake in his 2nd business project) was only done verbally, it was quite clearly an agreed deal - and in fact in his email he mentions this, and refers to all the key clauses in it. So I have written evidence on an email sent by him, that this verbal contract was agreed - under law where I live, this would count as a binding contract. Finally, I've known this guy for about 10 years, he is a good friend, however on occasion I have been a bit suspect about his ethical standards - he occasionally can be a bit hot-headed, or behave in a selfish unprincipled manner if he is angry about something. He's also seemed to get a bit worse in the last couple of years like this, to the point that I was beginning to quesiton his trustworthiness. This was partly why I insisted on a written agreement at first, to protect myself in case he tried to back out. Finally, I found out recently that he did a small deal with another mutual friend, and pulled a similar stunt, albeit for a fairly trivial sum of money.

 

I was wondering then if anyone had any advice on how to handle this? As I said, initially I would have been happy to sit down and work something out as a compromise - I was prepared to be fair. However, I feel that he's crossed the line by high-handedly deciding to back out of an agreed deal - IMO in business your word is your bond, if you shake on a clear verbal deal then that's as good as a written contract (and indeed that's how the law sees it). I feel he's showed a lack of respect by thinking he could just dismiss my concerns out of hand, not even try to negotiate with me at all. Now, if this was a stranger, then I would have no hesitation in going to court, playing hardball, and getting as much as I could out of it. But since he is (or was!) a friend, there are a couple of complications. First, should I go easy on the guy because we had a friendship? Part of me says yes, but another part says I should be even more pissed off. I mean I would expect a hard-nosed stranger to try to out-deal me in business - that's par for the course. However, I am very disappointed that someone I considered a friend, who I've helped out in the past, and was trying to help here, has done this. Secondly, if I take the hard-nosed approach and go via lawyers/courts, then there are potential personal repercussions. I'm prepared to end the friends relationship over this if he continues acting this way, but I am somewhat concerned about potential hassles e.g. him spreading gossip, or just causing trouble somehow. And obviously I would rather he just comes to his senses and we can work something out. However, I am not sure what to say to him. If I decide to enforce the deal, rather than just write off my investment, then I have to think carefully as anything I say or write to him could prejudice my case or be twisted by his lawyer (assuming he gets one).

 

Anyway, I've spoken to a friend in the legal profession, and his opinion was that ethically and legally my friend is totally out of line, and that a court would think so too. In fact he was a bit surprised my friend had tried to pull this stunt. I talked to another friend who works in business, and she had the same opinion. I've been recommended a lawyer who has dealt with contract disputes, and will be speaking to him later this week. So, what do you all think about this, what would you recommend?

[curiousnycgirl]

I think this whole thing stinks and I am sorry you are in this very unfortunate position. There is no doubt you have right on your side - but that is little solace.

 

So what are your options?

 

1. You could just write off the investment (along with the friendship), but that hardly seems right.

 

2. You could reach out to him, suggest that if you must pursue this legally, you will also go after him for the attorney and court costs. Tell him at this point you agree that the second/handshake deal is off - you (and he by default) are going back to the initial deal, where he must reimburse your investment. After all at no time did you agree to completely forgo any opportunity to be made whole. He can either pay you now, or pay even more later.

 

3. Go straight to the attorney and file papers.

 

Personally I would go for #2 - it would cause less of a ruckus and you always have both #'s 1 and 3 to fall back on. In no way would I try to hold him to the new deal, how could you trust that you won't get more of the same?

 

Clearly you NEVER want to do business with him again and frankly I would always question his integrity - how could you even be friendly with him?

 

Good luck to you!