Twin Cities Business Litigation Blog : Minneapolis Business Litigation Lawyer & Attorney : Gavin P. Craig Law Firm : St. Paul, Twin Cities, Minnesota MN

Arbitration is another form of Alternative Dispute Resolution (ADR.) Alternative means as an alternate to the judicial system. It can be faster and less expensive. It can also be more expensive and take longer. So be careful what you agree to, because once you've agreed you are probably stuck with it.

Arbitration is a trial without the rules of evidence, or the judge. I like arbitration when the parties can try their case before a person that has some knowledge of area of the law that governs the dispute. This is usually an advantage to all the parties, and many times much more economical. Today many of our judges are elected or appointed because they were successful prosecutors. Unfortunately, lawyers that are successful prosecutors don't necessary make good civil judges, or understand the basics of business or contract law.

So the trade off is that you have an opportunity to select an arbitrator that will hopefully understand the dispute, and you waive the right to appeal even if the arbitrator makes a serious mistake or ignores evidence. "Final and binding" means final and binding. Absent fraud, there is little the parties can do to overturn a decision of the arbitrator. The American Arbitration Association has excellent procedures and standard agreements to arbitrate. Although, I think that sometime they can be considered a little expensive if they do all the administrative work. (It all depends on the size of the matter to be arbitrated.)

However, the arbitrator's authority is limited by the arbitration agreement. (Please note that I did not say that the arbitrator's power is limited by the law, because as a practical matter the arbitrator can ignore the law and the decision is still final and binding.)

When drafting an arbitration agreement, the parties or the attorney can be creative if they want to be. I have drafted and negotiated arbitration agreements that: limited the amount of time each party would have to present their respective case; establish a range within which the arbitrator had to make an award; added or removed the applicability of the rules of evidence; limited the location of the hearings; limited the number of days that the arbitration could take place; and, otherwise contracted or expanded the remedies available.

What happens when a party signs an arbitration without understanding the ramifications of the decision. The Contracts Prof Blog reports on an interesting arbitration agreement signed by participants of a show called Judge Pirro. Apparently the parties agree to dismiss their respective claims or lawsuits and enter into final and binding arbitration before Jeaninne Pirro. The agreement signed by the participants is egregious in it's over reaching scope. Is such an agreement enforceable? Probably not to the extent the parties are required to waive non-waiverable rights in California. But otherwise, parties are generally free to contract for whatever terms they choose so long as the terms are not illegal. In the agreement in question, there is no governing law - the "Judge" is allowed to apply whatever law she wants - or no law at all. This is a very unusual agreement, but not necessarily unenforceable.

When the parties agree on final and binding arbitration, this agreement removes it from the court unless and until there is a dispute over the enforcement of the arbitration award, or one party tries to get the arbitration award overturned (which is very difficult to say the least.) Additionally, when one party has evidence that is not readily admissible in a court of law - arbitrators will usually at least listen to the evidence.

Most arbitrations, I would guess, occur as a result of pre-dispute arbitration agreements. When the parties contract for what ever their business purpose, they include an agreement to arbitrate any disputes. Frequently in the courts you will see decisions where one party or the other tries to either enforce an arbitration agreement, or defeat a demand to arbitrate. Arbitration is governed by the Uniform Arbitration Actas enacted in the states, and the courts have show a strong preference to enforce arbitration agreement.

Agreements to arbitrate should not be entered into blindly. Arbitration is a very good process in many cases, but tailor the agreement to meet the needs of the parties. You can even designate who will be the arbitrator.

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 In Minnesota, when a judicial vacancy occurs, the Governor appoints a person to the position until the next election when a successor can be elected.  This happened in the Minnesota Supreme Court and the Governor appointed a well-qualified jurist, Lorie Gilda.  The position is now up for election.

 Usually the person appointed runs for the seat to which they were appointed.  Other candidates can and do file to run for these various judgeships.  In the upcoming election a local lawyer, Jill Clark, is also running for the seat currently occupied by Justice Gilda.  Clark has run for a judicial position before, and lost.

Clark apparently thinks that the best election strategy is to try to get the current justice disqualified.  So, as lawyers do, she sued.  Clark filed her case directly with the Minnesota Supreme Court and argued that Lorie Gilda is disqualified to run for the seat because she can’t succeed herself.  To be kind, this argument is at best a very tortured reading of the statute.  Next she argued that Lorie Gilda, the judge currently in the position, could not be designated as the “Incumbent.”  Not surprisingly, when the case was filed in the Minnesota Supreme Court, all of the sitting justices had conflicts, so a panel of retired Minnesota Supreme Court justices was appointed to hear the case and make a decision.   

 Also not surprisingly, Clark lost.  She then filed a motion to have Justice Gilda removed from the ballot pending her appeal to the United States Supreme Court.  This motion was quickly denied.   The Minnesota Lawyer Blog has an interesting series on the ongoing story. Clark has now apparently filed a motion with Justice Alito of the United State Supreme Court asking for an injunction to grant her the same relief that was already denied her by the Minnesota Supreme Court.

I think Clark does have one interesting point:  Sitting judges are a virtual lock for re-election, so the appointment of a judge to a judgeship effectively eliminates open judicial elections.  While this argument may have some merit, it is a question for the legislature, not the courts. 

The Minnesota Lawyer is following this story closely and has good updates.  I’m sure there will more to this story. 

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This why I love business litigation. Maxwell Kennerly provides a detailed report and analysis of a fascinating case involving movie distribution rights. (i.e. the case involves who gets the money.) The case arose from a series of contracts between various parties. Now the parties are litigating over what those agreements actually did. I am sure all of the parties had lawyers drafting and negotiating these agreements; and now lawyers get to fight in court over what the contracts mean. This case is a law professors dream. Take a look at Max's analysis, it is fun reading.

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It's hard to count the number of times a client or potential client has contacted me about receiving letters from business creditors stating that the client is responsible for certain debts of the company he or she used to work for. Why? Because the employee wanted to help out the company and signed a guaranty so the company could lease some piece of equipment or lease some property.

It is certainly not unusual for business owners to guaranty the debts of their business, and these guaranties usually appropriate. But, It is foolish for employees and minority shareholders to guaranty business debts. Why do people do this? They believe that everything will be fine and after all, they are just helping out the company.

I advise people that if you can't control who gets paid, don't guaranty anything. One victim I talked to had purchased computers (on credit) for his employer about 3 weeks before the owner disappeared with all of the assets. Another was stuck dealing with claims from a leasing company after the company went out of business.
 

If your employer can't afford the equipment it needs to operate, how long do you think they will be in business? If the employer needs employees to guaranty debt, what are the long term prospects? Minority shareholders or members of an LLC are in a slightly different situation, but not by much. I represented a party that was a minority shareholder, was fired from the company, and then had to deal with ten's of thousands of dollars in debt he guaranteed after the business first refused to pay, then sold all it's assets and eventually went out of business.
 

Simple Rules of Success. Don't guaranty debts of another person or company (Family Excepted.) If you must - for whatever reason - make sure you have the control necessary to assure that the debt you are guarantying is paid from whatever revenue there is. (Note that controlling who gets paid is no guaranty that the problem will be solved if the company goes out of business.)
 

Another strategy is to insist on receiving personal guaranties from the majority owners of the business. Asking the owners to guaranty payment to the employee in the event of default by the company should be informative. If the majority owners will not sign - why should the employee?
 

Employees and minority shareholder beware!

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An update on my Non-Compete post from last week. The California Supreme Court decision in Edwards invalidated non-competes in the state. The litigation rush is on, and I suspect it is just starting. Paul Freehling has a great post at Trading Secrets that describes the action as it happens. I don't think the ink was dry on the decision before the lastest case was filed. 

This case is complicated a little by a separate case in a different jurisdiction (Texas.) The beat goes on!

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The worst contracts I have ever seen were put together by parties without the aid of a lawyer. They can be poorly written, contain language that is based on unstated assumptions, and many times the contract doesn't even describe the agreement. However, even lawyers don't draft perfect documents.

To save money parties sometimes just get old contracts (probably from colleagues,) add a few things, and “cut and paste” or "copy and paste" from different documents those terms they like. Is it a surprise the contracts are not always consistent. Some contracts are literally jotted down on a napkin at a restaurant, or hand written when parties meet and decide to make a deal.

What happens when the parties decide that they are not the friends they once thought they were, and want to change the arrangement, but the contract does not appear to allow the change.Peter Mahler has reported on an interesting decision relating to problems with poorly thought out contract terms. A court in NY had to decide what to do when the parties enter into an agreement governing the operation of an LLC in the state. Arguably the agreement had inconsistent provisions. The court made an unusual decision that the express terms of the contract didn't count. This is the type of decision that reinforces my concern that many times litigation is a "crap shoot."

In the operating agreement in question all of the members agreed to vote for named members the as the LLC managers. Instead, the members voted to remove one of the member managers from that position. But, the agreement was silent about the rights of the members to remove managers. If you must vote for specified parties as managers, how can you vote to remove the same specified party? Yet another part of the agreement discussed the effects of the expulsion of the manager. As Mahler noted:

"In fact, Section 8 of the contract provided for election of a new manager by majority vote of the members should there be less than three managers due to "the death, retirement, resignation, or insanity of a manager."  (Note the omission of any forced removal.)"

So the parties litigated to rights and duties of the members of the LLC to remove the manager. A lesson for all of us is that if you are going to put together an agreement, make sure it is consistent. And, alway assume that there might be circumstances when the parties will disagree, and make provisions in the beginning for handling the disagreements.

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The California Supreme Court recently ruled that non-compete agreements were void in the state, with three exceptions. The ruling is based on the language of a 1872 statute. In summary, the statute in question declares any contract that restrains a person from practicing their lawful trade or profession void, with some exceptions such as the sale of a business. The court determined that a non-compete agreement did just that - restrained a person from practicing their trade. The agreement in question seemed focused on competition with existing clients.

The court found that the statute didn't require the agreement to prohibit employment to be invalid, but instead ruled that the plain language of the statute makes any agreement to restrain any person from practicing their lawful trade or profession, void. Therefore since all non-competes "restrain" the practice of a profession, they are illegal and unenforceable in California.
 

Most states allow reasonable non competition restrictions that are not over reaching in the length of time or the geographic area of the restraint. Is this California decision a waive of the future? Probably not, but courts have usually balanced the right to contract with key employees for a reasonable restriction on competing, and attempts to impose over reaching restrictions that essentially restrict a person from earning a living at their trade or profession.

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After many years practicing law I am convinced that small business owners - and especially contractors - have no idea how to use a corporation or LLC to avoid personal liability for the debts of the business. For simplicity I will use the corporation as an example. But the same rules apply to any form of business that shields the owners and officers from personal liability.

When a person incorporates their business, it takes more than just filing a form with the Secretary of State. When a business is incorporated, it can't be a secret to those that do business with the new corporation. In other words, the new corporation needs to disclose the fact that the business (the party that is contracting with others) is incorporated on its letterhead, business cards, invoices and checks.

If the business does not disclosed in a meaningful way that it is a corporation, the owners and officers have probably lost the very advantage they tried to create. Several times in the last few years I have represented a client that had a claim against a business that was incorporated, but never disclosed that fact to the contracting party I represented. We sued the owners and officers directly, along with the corporation and an identically named company as an assumed name of the owners. The businesses in question used letterhead that did not disclose their corporate status, and their contracts likewise were silent as to their corporate status.

The legal theory is simple: an officer of a corporation is an agent for the corporation. Agents have two very important obligations with respect to other parties they are dealing with. The agent must disclose that they are an agent, and disclose the identity of the principal. How does the agent do this? By using letterhead and other information that clearly identifies the real contracting party is the corporation. There are a number of cases on point, and the decisions are universally the same. The agent to an undisclosed corporation is responsible for the debt or obligation. By failing to disclose, the agent become the principal to the transaction, and personally responsible.  In a 1985 case the defendants truly got lucky when the court decided that the principal corporation was disclosed because the defendants used some checks with a corporate designation.      

I always hear the argument from the opposing counsel in these cases that the defendant didn't need to disclose because all the plaintiff had to do was check with the secretary of state. Unfortunately, it is not the obligation of the contracting party to figure out who they are contracting with; it is the obligation of the agent to disclose. This has been the law for decades. So until the law changes, business owners better disclose. Don't look for a change anytime soon, this rule has been in the Restatement's for years.   A Cargill Elevator case from the 1920's is a fun example of what can happen.  This case is still good law.     

If the agent doesn't disclose the agency and the identity of the principal, which is often the case with small businesses, the agent is personally liable as a principal in the transaction. This is not rocket science; it is the law. So my advice to small business owners is: disclose, disclose and disclose.

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I confess that I am a big fan of the mediation process. Many times mediation represents the last chance the parties have to make their own decision, and resolve the case. A third party, unrelated to the case or the parties, helps the parties move toward a resolution.

Most Minnesota state courts require the parties in a civil case to participate in some sort of alternative dispute resolution (ADR) process. The "alternative" in ADR mean that the parties try to resolve their dispute (the case) without going through a full trial. The parties agree to one of a variety of ADR methods. While the most common ADR methods are Mediation and Arbitration, there exists many variations of these two basic methods. Mediation can best be described as assisted negotiations.

The bottom line for me is that it is far better for parties to make their own decisions than let a third party (judge, jury or arbitrator) who knows nothing about the parties, and cares nothing about the results, to make the decision for the parties. If the parties can not agree on their own, then mediation is a good alternative. For in the end, the parties get to make the decisions to settle or not to settle.

In a trial a client can have truth and justice on their side, and still end up with a bad result. That is the nature of litigation. You've got a 50-50 chance to win ("It's a crap shoot,") I tell clients. Max Kennerly has an excellent post on this subject.  But in life, when others are allowed to make important decisions for you, sometimes you don't like the result. Does this mean a party should settle every claim against them no matter what? NO! Some cases need to be tried, and the system needs to be trusted.

I think if attorneys were clear with their client's about the litigation process, even more cases would be settled. When a client is "right," and the facts support the client, it is sometimes difficult to negotiate a settlement where the client does not receive everything they think they are entitled to. But being "right" that does not make settlement to wrong business decision.  

Victoria Pynchon's excellent blog, Settle It Now has a very thoughtful article about opponents in a case meeting and negotiating eye-to-eye. In other words, the suggestion is that in a mediation the opposing parties should not be separated. In my experience it is not the lawyers that don't want to meet face to face; it is the clients. I am often asked, "I wont have to see the other side will I?" So, I agree with the thesis of the post, but clients do not alway see the wisdom of this approach.

I will discuss arbitration in a later post.

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      “Can I get my attorney fees from the other side?” Most clients caught in a legal fight want to know the answer to this question as soon as they meet their lawyer. Everyone would like to recover their attorney fees from the other party. I am asked this question frequently, and in Minnesota and most jurisdictions, the answer is usually, “No.” There are only two exceptions: where there is a statute that provides for the recovery of attorney fees; or, the parties have a written contract that provides that the prevailing party (the winner) is entitled to recover their legal fees from the other side. This is the general rule in most states. Whether it should continue to be the rule is a good public policy question.

     Parties to written contracts usually have a choice to make if they want to add a contract provision for legal fees. If the fees are only recoverable by the prevailing party (the prevailing party is usually - but not always - easy to identify) each party must believe that: a) the parties will never have a dispute that requires lawyers to get involved, or b) they will prevail. Attorney fee provisions in contracts are fully enforceable, just like any other provision in a contract. The, “I didn’t read it,” defense is not going to be a winning argument in any action to enforce.

     Many form contracts provide that an out-of-state seller is entitled to recover their attorney fees, and by the way, you agree that they can sue you in some distant jurisdiction. People rarely read these form contracts before they sign them, and they are surprised when they get sued in New Jersey or Texas, or anyplace other than their home state, because the contract they signed said any action will be brought in the distant land. These out of state actions usually result in default judgments that include attorney fees.

     If the dispute is between parties that have no written contract, or no attorney fee provision, the only way to recover attorney fees is when there is a statute that allows the recovery of the fees. There are very few statutes that provide for shifting the burden of fees. (There are some very rare exceptions to this rule, but the general rule is as I stated it above.)

     If you want to have the right to recover attorney fees when the other party breaches your contract, put it in the contract. But the risk is that you might not win the case, if there is one, and you end up paying the other parties fees.

     Only a few states have laws that shift attorney fees. (Usually know as the "English Rule.") Around the world the US is one of the hold outs in instituting a fee shifting system. There is an interesting discussion of this topic here.

     One advantage to a fee shifting contract clause is that it usually encourages the parties to settle to avoid the risk of losing not only the case, but having to pay the other party’s lawyer fees. But, like many things in life, this is not always the case and some parties will continue a case hoping they will win both the case and also recover their fees.

     If you are going to enter into a contractual relationship with another party, and need to write a contract, consult a lawyer. Good examples of contracts where the parties might want to consider an attorney fee provision are home remodeling contracts, construction contracts, contracts for the purchase of a business, or agreements to form a partnership or create a business entity. All of these types of agreements should be in writing, and you might even want to consider a "loser pays" attorney fee provision.

     I always check the contracts of client to see if there is any fee shifting language. For both the plaintiff and the defendant, the "loser pays" attorney fees provision adds risk.

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Usually people enter into contracts because they want something, i.e. goods, services, money etc. What happens when the deal turns out to be unfair? In a recent case from California, the court found that the contract meant what it said. The facts are simple: Jean Simes purchased an annuity from United of Omaha Life Insurance Company and paid a single premium of $321,131. The annuity would pay her $3,000.00 per month for the rest of her life. Less than four months later Jean Simes discovered that she had overran cancer, and died a week later.

Apparently no one notified the defendant because payments continued for another 3 months. Needless to say, the heirs were upset, and they sued for the return of the premium. From the facts of the case it appears that the plaintiff’s filed a complaint alleging every conceivable basis to nullify the contract, asking for recession, alleging fraud, breach of contract, and mistake. From the facts of the case Jean Simes had no idea that she had cancer when she contracted for the annuity. In the end, after motions, the plaintiff’s were down to one argument: The deceased was mistaken because she didn’t know that she had cancer, and therefore the contract should be canceled and the premium returned.

In California, and I think most other states would reach the same conclusion, the court determined that Jean Simes assumed the risk that she would died before she would recover her premium, and the defendant took the risk that Simes would live a long life. That is the very nature of an annuity.

The court concluded that even though the deceased was unaware that she had cancer, that fact alone is not a reason to nullify the contract. She had received everything that she had bargained for: an annuity for the remainder of her life.

When an insurance company sells an annuity, isn’t it betting that the recipient will die sooner rather than later? The sooner the recipient dies the more money the insurance company makes in the end. This is the opposite of the life insurance policy where the insurer is betting that the insured will live a long life.

Despite arguments to the contrary, the failure to know your health condition is not a "mistake" that justifies rescinding a contract to pay a benefit for a lifetime.

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