Approximately one month ago, on May 7, 2015, Governor Jay Inslee signed into law SSB 5305, which makes major changes to Washington’s statutes on Limited Liability Companies. This was the most significant change in Washington LLC law since the 1990’s. MDK Law founding attorney Mark Kimball recently presented at an NBI CLE held at the Washington State Convention Center, and discussed some of the changes. Many practitioners are not yet aware of the new laws, which take effect January 1, 2016.
Although there were several significant changes, perhaps the most important and consequential change is that LLC Member or Operating Agreements no longer have to be in writing.
Under the former code, LLC Member Agreements or Operating Agreements had to be in writing:
RCW 25.15.005(5) – “Limited liability company agreement” means any written agreement of the members, or any written statement of the sole member, as to the affairs of a limited liability company and the conduct of its business which is binding upon the member or members.
Under the new statute, “oral, implied, in a record, or in any combination…” are allowed:
Sec. 1 (Presumably RCW 25.15.005(7)) – “Limited liability company agreement” means the agreement, including the agreement as amended or restated, whether oral, implied, in a record, or in any combination, of the member or members of a limited liability company concerning the affairs of the limited liability company and the conduct of its business.
Although court construction of disputes involving oral LLC Member Agreements or Operating Agreements under the new law do not exist, uncertainty appears possible in light of the way that Courts in Washington have construed other issues involving the effect of oral agreements that alter written contracts. More specifically, under common law, a contract clause prohibiting oral modifications is essentially unenforceable because the clause itself is subject to oral modification. Pac. Nw. Grp. A v. Pizza Blends, Inc., 90 Wash. App. 273, 951 P.2d 826 (1998). Additionally, existing case on similar possible issues raises many questions, as extrinsic evidence cannot be used to add to, subtract from, modify, or contradict the terms of a fully integrated written contract, i.e., one which is intended as a final expression of the terms of the agreement. DePhillips v. Zolt Const. Co. Inc., 136 Wn.2d 26, 32, 959 P.2d 1104 (1998) (citing Berg v. Hudesman, 115 Wn.2d 657, 667, 801 P.2d 222 (1990)). However, the terms of a contract providing for modification having to be in writing can be waived by subsequent oral agreement and it is effective if executed. Consol. Elec. Distrib., Inc. v. Gier, 24 Wn.App. 671, 679, 602 P.2d 1206 (1979).
Mutual modification of a contract requires a meeting of the minds and additional consideration. Mutual assent is the modern expression for the concept of ‘meeting of the minds.’ Mutual assent generally requires a valid offer and acceptance. Saluteen–Maschersky v. Countrywide Funding Corp., 105 Wn.App. 846, 22 P.3d 804 (2001) (citing Ebling v. Gove’s Cove, Inc., 34 Wn.App. 495, 663 P.2d 132 (1983); Swanson v. Holmquist, 13 Wn.App. 939, 539 P.2d 104 (1975)). In Washington, however, a contract clause prohibiting oral modification is essentially unenforceable because the clause itself is subject to oral modification. Buchanan Grp., Inc. v. Bonomi, 109 Wash. App. 1016 (2001). Accordingly, Washington courts have consistently held no-oral-modification clauses unenforceable. TBF Fin., LLC v. Petrenko, 171 Wash. App. 1018 (2012)
Parties may orally modify even agreements that prohibit oral modification…The common law rule permitting oral modification has been consistently followed in Washington. DeFelice v. State, No. 32382-0-III, 2015 WL 3372219, at *11 (Wash. Ct. App. May 26, 2015)
The Courts have previously held that the intent of the LLC statutes in Washington is provide maximum flexibility in managing and operating a limited liability company. “It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.” Wakefield v. Seattle Chocolate Co., LLC, 136 Wash. App. 1006 (2006). The questions now for attorneys, accountants, judges and business owners include how to prepare for implementation of the new laws on future transactions and whether LLC Member or Operating Agreements will be construed the same way as other written and oral contracts.