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

The Wall Street Journal has an interesting article in today’s edition - May 24, 2011, by Ashby Jones, about the Texas Legislature and a bill that appears destine to pass, that requires the loser in some cases to pay the attorney fees of the other party. Apparently the proposed law would require the loser to pay when a case is "kicked out of court" at a motion to dismiss stage of the proceedings.

In a very simplistic analysis this seems to be a good idea. A more thoughtful analysis raises a lot of questions. First of all, some cases are dismissed on a motion to dismiss, but many times these cases are dismissed on procedural and pleading grounds, and not the merits of the case. Also, these dismissals are many times without prejudice to allow the plaintiff to refile a new case, to repair some defect in the pleading.

Secondly, Texas will undoubtedly see a great surge in filings of motions to dismiss. The courts will need to deal with a surge in these motions, since the defendant has little to lose in bring the motion (which in most cases will be a frivolous motion). When the Plaintiff wins the motion and the case is not dismissed, does the defendant need to pay the Plaintiff's attorney fees? I am confident that this is not the intent. If a plaintiff wins a judgment against a corporate defendant, will the corporate defendant be responsible to the Plaintiff's fees.

While I think there are times when a loser pays system is appropriate, and sometimes there are frivolous lawsuits filed, I would like to think there is a better way to determine when to make the loser pay. If a claimant has no legal or factual basis for a claim, then the Plaintiff should pay for the Defendants legal costs. Fortunately, most cases are not frivolous.

If Texas would enact a pure loser pays system, then we would be able to see how it works. Maybe enact it for a trial period. Make the system fair and equal for everyone. Sure, it should make people think twice before bring an action - something they should do anyway. However, I expect that corporate America would oppose this proposal.

I will predict that only a small minority of cases will be dismissed on a motion to dismiss. However, some cases will certainly be decided by a summary judgment motion, which is different than a motion to dismiss. A summary judgment is a decision on the merits, where there are no material facts in dispute.

Finally, people who have no money will not care if they are responsible for a defendant's legal fees, since they will likely be judgment proof.

I will be interested to see the law when it is enacted, and to watch to see how it plays out. Laws which try to shift an advantage to one side to the other, are usually doomed to fail. To make it fair the loser pays system should apply to everyone, both plaintiff and defendant.
 

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The Koncise Drafter Blog has an interesting post concerning the interpretation of certain disclaimer contract language. The aggrieved party - a lessee, claimed fraud when the landlord failed to disclose that there was a bad odor in the premises where the lessee planned to operate a restaurant. Clearly this problem would have defeated the objective of using the space for a restaurant. To make things worse, the property manager knew about the problem, but had naturally failed to disclose this issue to the new lessee. (This sounds a lot like a Seinfeld episode.)

The lease language provided that:

14.18 Representations. Tenant acknowledges that neither Landlord nor Landlord’s agents, employees or contractors have made any representations or promises with respect to the Site, the Shopping Center or this Lease except as expressly set forth herein.

14.21 Entire Agreement. This lease constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and no subsequent amendment or agreement shall be binding upon either party unless it is signed by each party. …

Not surprisingly, the lessee sued the landlord for fraud, among other things. The Landlord took the predictable position that the lessee had waived any claims for fraud.

The trial court found for the lessee, the Texas Court of Appeals reversed, and the Texas Supreme Court reversed the Court of Appeals. The question that the court was grappling with is whether the parties effectively disclaimed reliance on the representations by the lessor, thereby negating any claim of fraud. I am sure that when the lease was drafted that was likely the intent, this is very standard language (or some version of this language). The Blog correctly points out that when a drafter clearly states that the other party waives any claims for fraud, it is unlikely that the parties will sign the contract. So the language by necessity needs to be a little more subtle.

I think it is also the case when reviewing commercial lease contracts, most reviewers will probably skim the standard boilerplate language such as the term at issue in this case. After all, what owner wants to pay a lawyer to analyze and research language that is considered standard boilerplate language that has, in one form or another, been around for a long time.

In my career I've only once been presented with a lease for a client where the other party wanted my client to disclaim any claim for fraud. We did not agree to that language.

Another issue is whether the lessor had a duty to inform the lessee of the problem knowing that it would interfere with the lessee's intended use of the building. The lesson is clear, if you want the other party to waive any an all rights against your client, you had better say so.
 

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It is very unusual for a third party to a contract to be able to enforce the terms of a contract. The first hurdle is that the parties must have specifically intended that the third party benefit from the contract. Usually claims of a third-party beneficiary are defeated at this point because there is no language in the contract to show specific intent to benefit the third party.

Claims against the Government are equally as difficult, if not more so. So the recent case of FloorPro Inc. v. United States is unusual. The facts of the case are simple enough. GM&W was awarded a government contract install new floor coatings in some warehouse bays. GM&W sub-contracted with FloorPro and the latter was to be paid about ninety percent of the contract price -- $37,500 out of $42,000. FloorPro completed the work but was not paid. FloorPro complained to the Government contracting officer.

The Government then made an agreement with the parties that provided that a joint check was to be issued to both FloorPro and GM&W. In consideration for the amendment GM&W released the government from any claims. So far so good for FloorPro.

However, the government being the government made a mistake and issued the check to GM&W, who presumable cashed it promptly and of course did not pay FloorPro. FloorPro brought an action against the Government claiming that it was aThird-Party Beneficiary of the contract modification.

The court agreed. The contract modification was specifically intended to benefit FloorPro. While it is unusual to find a successful third party claimant to contract funds, in this case the result is certainly fair and predictable. The parties clearly intended to benefit FloorPro. Since the the law is clear on when a 3rd party can succeed with a claim, and the facts clearly show that FloorPro was the intended beneficiary, why would the government fight the claim instead of negotiating a settlement. This was not a large claim, and the government made the mistake.
 

Thanks to the Contracts Prof Blog for reporting this unusual case. 

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When preparing contract documents for clients I am occasionally asked if we should include a clause to award attorney fees in case the other party breaches the agreement. When a client brings me a contract and wants to bring an action against the other side, that is one of the first things I look for.  That provision change the analysis of the case.
 

In considering this issue, I think there are two things to remember:

First: A provision allowing only one party to recover attorney fees is not usually a good idea since some courts will read these as giving the prevailing party, whichever side this is, the award; and Secondly: Prevailing party attorney fee provisions are an incentive to sue, since the plaintiff always believes that they are right.

One way attorney fee agreements essentially provide that if “Joe,” brings an action to enforce this agreement, the other side must pay his attorney fees. If Joe wants to enforce the agreement because of some perceived breach of contract, he will assume that he will recover all of his attorney fees. So Joe wants to sue without regard to the cost, or in some cases without regard to the actual merits of the case.

California has a statutory scheme in contract actions that in many cases awards fees and costs to the prevailing party.  You only need to read some of the cases to see the significant number of cases and appeals over who was the prevailing party and what the reasonable fees were.

I confess that at one time I thought the opposite was probably true, because of the additional risk an attorney fee provision brought to any action. However, on the positive side I believe that once an action is brought, the risk of attorney fees sometimes bring the parties together for a settlement.

Joe may or may not be able to recover his fees. Most courts will make a determination based on success in the action. Many courts will read the attorney fee provision as a prevailing party attorney fee provision. However, most cases settle, and I have yet to see a settlement that included an agreement to pay the other parties attorney fees. (I am sure it happens, but usually both parties cover their own fees.)

Some cases start out and the possibility of an award of attorney fees keeps a case from settling. If a substantial amount of money has been spent on attorney fees, will parties settle at a price that covers all of the contract damages only?

A provision that provides that each party is responsible for their own attorney fees and costs in the event of a dispute might very well be a better way to go. It is worth considering.
 

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As the commentator in the Contracts Professor noted, the Supreme Court hears a contract case about as often as the Cincinnati Bengals reach the Superbowl. So in an unusual case - the Supreme Court heard arguments in a case that challenged a provision in an arbitration clause in a consumer contract, that waived rights to any class action. California had previously found such waivers unconscionable.

The courts in California had invalidated the provision. Generally, the only time a court can invalidate an arbitration provision is when the basis for the invalidation would be equally applicable to any contract. In other words, if state law would invalidate a contract, then the same rule would apply to an arbitration agreement. You normally don't get to make special rules to invalidate arbitration agreements, although the court in the recent past has made a number or rulings that arguably leave that question open. The petitioner in this case argued that the states don't get to make special rules for arbitration agreements in order to invalidate them. Petitioner argues that, this is exactly what the court did: it applied a lesser standard than it would apply to any other contract. Respondent argued that this was a universal rule and state gets to decide what is unconscionable.

The oral argument is worth reading to just appreciate how the Supreme Court conducts oral arguments. It will be interesting to see the final opinion of the Court.

However, I wonder why the court took this case in the first place. Five justices must have agreed to hear the case, but why? Is the court going to go into the business of reviewing state decisions regarding the enforceability of arbitration agreement provisions? This seems unlikely. I'm just wondering.

Another take on this case comes from Class Action Countermeasures.  I do like the question: (Paraphrased) Is the Supreme Court ging to Tell California what is or is not Unconscionable?  In the end I think the answer will be, "No!" 
 

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Rush Nigut has published an interesting comment on a recent case involving a non-compete agreement. Companies often ask new employees to enter into non-compete agreements to help the employer protect it's intellectual property. In the case at issue, the employee signed a non-solicitation agreement, stating that the employee could not solicit the customers of the employer. These types of agreements are very common.

The issue in the case was whether answering an employment ad and going to work for the customer constituted solicitation. The court said, "No," responding to an employment advertisement is not soliciting. In other words, the agreement did not prohibit customer initiated contacts with the former employee.

This is an odd case, since whatever damage was incurred by the former employer was limited to a single ex-customer. Also, if the customer was advertising to hire someone to do the work, you would assume that the ex-employer had already lost the customer. It was just a matter of time. So why spend the money to sue, which surely would not bring back the customer.

Non-compete agreements are tricky, and one year non-competes really don't do much to stop ex-employees, because by the time the ex-employer finds our about the breach, the year is usually almost over.  The case described by Rush is an example (probably) of an employer cutting and pasting a non-compete agreement without consulting an attorney. I am guessing on this, but it seems logical that an attorney would also includ a provisdion restricting the right of the ex-employee to go to work for a customer an provide the same services that the Ex-employer was providing. 

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This is a really a great story. Sad for the family, but a great contracts story. The Connecticut Law Tribune reports the following story about a contract gone bad. Also see the report in the Contracts Professor.

This is the case of Dana Soderberg, who went to court to force her father to live up to his agreement to pay her tuition at Southern Connecticut State University.

The court agreed that the father had entered into a contract to make the payments. When Howard and Deborah Soderberg divorced, they agreed that Howard would pay all of the education costs of the children.  Dana, a daughter, was smart enough to get a written agreement with her father since, as she knew, her father was not a person to follow through and actually pay for things as promised.

The article in the Tribune reads in part:

As part of the agreement, Dana would make an effort to apply for student loans and Howard Soderberg would pay off those loans. Co-signing the agreement was Howard's sister, Patricia.

Howard delivered on his word through March 24, 2007. But when it came time for Dana to begin her senior year at Southern Connecticut, Howard Soderberg refused to pay the bills. And so Dana got a $20,000 loan to pay for her last year of college, with her mother co-signing.

Dana graduated and sued her father.

The father argued that Dana breached their agreement by not making reasonable efforts to apply for student loans, by failing to attend classes full time and by not providing him with receipts for tuition and other school-related expenses.

Howard Soderberg also filed a counterclaim alleging that his daughter dropped courses and pocketed the refunds. He also said she spent money that was supposed to go toward textbooks on personal items.

Judge Trial Referee William L. Hadden Jr. issued a written opinion earlier this month, ruling that father and daughter had a legitimate contract, that Dana proved to be the more credible party in the lawsuit, and that the father had breached the agreement.

"The plaintiff has proven that she has performed all of her obligations as set forth …" wrote Hadden. "The defendants have failed to prove the claims set forth in their special defenses and in Howard's counterclaim."

Berman said damages totaled around $47,000, including the loan, interest, attorney fees and missed car insurance payments. Berman did not anticipate an appeal.

As I read this report I was wondering what the consideration was, since Dad already had the obligation to pay for the education costs. Perhaps it was the obligation to apply for student loans.

Even without a contract you clearly have what appears to be a good case of promissory estoppel.
The daughters instinct to get a written agreement with her father is probably unusual, but very smart in the circumstances. Good for her. 

This a good lesson in all business arrangements.  Write down your agreements.  Most contracts are preformed without any problem.  But when there is an issue, and the parties have written down their agreement, it is much easier to resolve than it is when the agreements are verbal.  Once there is a dispute over a verbal agreement, the parties will disagree on what the agreement was, or even if there was an agreement.  This case is a good lesson for all.  

Gavin Craig 
 

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Several years ago I represented a company with a claim against another construction corporation. The owner of the defendant told me that neither he nor his company could be held liable for anything. His contracts, he told me, clearly stated that the company was not responsible for anything, and since he operated as a corporation, he could not be held liable.

He was wrong about the contract, but he could have been correct about the corporate shield. However there are exceptions, and the assumption that a corporation always shields the principals is just not the case. There are several exceptions to this rule.

MarcWard posted an interesting Blog about this issue in his Iowa Limited Liability Company Blog. The case he describes could apply equally to the principals of a corporation and an LLC. The case, Allen v. Dackman, 2010 Md. LEXIS 82 (Md. Ct Appls. March 22, 2010) is illustrative of several statutes that impose liability on the principals. In the Allen case, Hard Assets, the company, purchase foreclosed property. It purchased some property sight unseen, and soon afterwords, discovered that there was a tenant living in the building. Hard Assets had the tenant removed. So far so good.

The tenant then sued Hard Assets and Dackman for alleged lead poisoning of her children. Dackman was a member of the LLC and the manager. At this point Hard Assets had only owned the building for several months. In fact, it was only seven months from the purchase to the eviction. So, the tenant sued Hard Assets and Dackman for damages. Unfortunately for Dackman, Statutes and ordinances can change the liability situation. Dackman was deemed to be the person that could effect the property, so he became personally liable for the damages under the Baltimore Housing Code. (See Ward's Blog for more detail.)

The point is, don't assume an LLC - or corporation provides the protection you want.

In Minnesota, a the principal of a franchisor can be held personally liable for damages relating to the breach of a franchise agreement. While this doesn't sound like a major problem, consider this: Under Minnesota Law, and the law in many states, it is very easy to inadvertently create a franchise agreement. Some license agreements are in fact franchise agreement, even though the parties do not intend that result.

In general, a franchise is very easy to create. The basic elements are:

A contract or agreement, either express or implied, whether oral or written, for a definite or indefinite period, between two or more persons:

a. by which a franchisee is granted the right to engage in the business of offering or distributing goods or services using the franchiser's trade name, trademark, service mark, logotype, advertising, or other commercial symbol or related characteristics (you use my name and send me a fee and we will both make money);

b. in which the franchiser and franchisee have a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise (We both make money and I will expand my business);

c. for which the franchisee pays, directly or indirectly, a franchise fee.
 

This is so easy it is not hard to see that parties could easily enter into a franchise agreement without ever knowing it.  The point of this post is to show that there are some circumstances where the corporate or LLC shield does not provide protection to the principals. So beware!

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Once again the Supreme Court has ventured into arbitration agreement interpretation. The question is simple enough, when an arbitration agreement is silent on an issue (in this case the question is whether a class was included in the agreement to arbitrate,) is the Class included in the agreement because it isn't excluded, or out of the agreement because it isn't included.

There was no argument that the subject of a class was not included in the arbitration agreement. In this case the class had no knowledge of the arbitration agreement between the parties.

The Supremes said "No," the class is not included in the agreement.  No arbitration by coercion. However there was a minority opinion that said, "Yes."

The procedural facts are interesting. The arbitrators ruled on the issue and decided that the class was included in the arbitration agreement. So why is the court overturning the decision of the arbitrators? If there is really binding arbitration under the Federal Arbitration Act, how can this be?

The court seems to be overturning the arbitrators decision when the whole purpose of arbitration is to give the arbitrators wide latitude to decide the case, and the decision of the arbitrator(s) is, when the parties agree, final and binding. Based on what I have read, the court was balancing whether parties that were not party to the agreement could be bound by an arbitration agreement, verses whether the arbitrators decision was final and binding. I think they made the wrong choice. If arbitrators decisions can be overturned by the courts, you lose the great value of arbitration. There are numerous cases where an arbitrator misapplied the law, and the court would not overturn the decision. So why now?  Even if the arbitrators were wrong, why is the court overturning their decision? 

Is the court opening the doors to more challenges to arbitrators decisions? I hope not, and it is hard to believe that the court intends this result. The ADR Professor Blog has a similar take of the case.  See also the Contract Professor Blog for more information.

Gavin Craig
 

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Construction Law Today posted a story about a priority case. The facts of the case appear to favor the bank, but as always it is difficult to know exactly what happened. The case is LaSalle Bank v. Cypress Creek 1. Priority cases in mechanic's lien cases are not uncommon, but usually the facts are clear enough to ascertain who has the priority. The interesting cases occur when the bank has not filed it's interest before the contractors file the mechanic's liens. The race to file does not seem to be the issue here.

Construction Law Today has published two posts on the case so far. The first post describes how priority works (until this case that is.) The second post gives some more detail.

However, the courts decision is what makes this remarkable. The court essentially said both the bank and the contractor had priority. If this makes you scratch your head, your not alone. The parties are appealing.

I will be interested to see how this plays out.

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In my many years of practice, I have found only a few rare instances where parties to a dispute have actually read the agreements they sign, or even more commonly, there is no written contract. Many commercial businesses try to have some sort of standardized written agreements, but every time they amend a "standard" agreement, in all likelihood the amended agreement becomes the new standard. This is the curse of word processing. Since the other party is likely the party that insisted on an amendment, when the amended agreements become the new standard, many of the key points or protections are lost.

The courts have a habit of actually reading the written contracts and enforcing the terms of the agreements. I have had parties send demand letters to my clients insisting on a certain performance (usually immediate payment) and threatening legal action if my clients don't comply, when the agreement actually provided for something very different.

In a recent case, the court interpreted an agreement that appears to be very one sided and unfair. However, the parties agreed to the terms.The Contracts Professor brings us this interesting case from the Southern District of New York, titled Tradecomet.com v. Google. In Google's case, I doubt that they ever accept amendments to their standard agreements because they have all the market power. We all know that Google has tremendous leverage to insist on their contract terms, regardless of how outrageous.

The argument by the Plaintiff's that the terms of the contract should not count, was predictably dismissed by the court. In this case the Plaintiff was arguing that a forum and choice of law provision should not apply. Whether or not the Plaintiff knew what the contract terms were when they signed the agreement, their argument that the terms should be ignored by the court is not a winning argument.
 

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Apparently you can. This is undoubtedly an example of all parties believing nothing will ever go wrong and that the parties will always work well together. The following matter was reported in the New York Times, and the case comes to us from California. Also see the Contracts Professor.

For Background, Clive Cussler is a noted fiction writer of adventures, usually involving sunken ships or buried trains, etc. Mr. Cussler entered into a contract with Crusader Entertainment, LLC., giving Crusader the option to produce a movie based on one of Cussler's novels. The dispute involved claims of breach of this contract.

Before the movie was even produced, both parties sued each other, each alleging the other breached their contract. This is not the way to begin a fruitful business relationship.

In summary, Crusader was suppose to begin production within 24 months of exercising the option. However, the film was delayed because the parties argued over the screen play. Reportedly, Cussler consider the screen play, "crap." Cussler insisted that he should write the screen play - Crusader refused to allow him to do so because the actors didn't like his screen play, and he was not a member of the writers guild.

The trial court found in favor of Crusader, and awarded damages of several million dollars based on a finding that Cussler breached the implied contract covenant of good faith and fair dealing.

However, the Court of Appeals found that as a mater of law, the implied covenant of good faith and fair dealing did not apply. The contract provided that Cussler had the right to review and approve the screen play. The Court of Appeals found that Cussler had the contractual right to:

"[R]eject proposed changes to the original Approved Screenplay, "for unreasonable reasons. . . or for no reason at all." (The report is not clear whether this language is in the contract, or it is the courts interpretation of Cussler's contractual rights.) It is hard to believe that Crusader would sign a contract with this specific language, since it invites the very problems they encountered with Cussler.

Crusade argues that the appellate court's interpretation of the contract made the contract illusory, and I think that to some extent that is a good argument. However, the court said that since the contract did not require Cussler to act reasonably, or in good faith, he had no obligation to do so.

The problem with this reasoning is that either there is an implied covenant of good faith and fair dealing, or there isn't. If there isn't, then the courts decision appears logical. If there is, the decision doesn't make sense. Why would parties need to specifically address in a contract an implied obligation that is already deemed part of the contract, unless the parties wanted to specifically exclude the covenant? And who would sign that agreement?
 

These are the type of cases that make you scratch you head and wonder what people were thinking?

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Contracts are funny things. They require an offer, acceptance and consideration. That seems simple enough, except that many people conducting business don't appreciate the necessary formalities. It is rare to see a valid claim of no consideration, but they arise every once in awhile. One client I had received a claim from a company in Texas, for a breach of contract. I looked at the written document and surprisingly, there was no consideration. I pointed out this problem to the Texas attorney, who proceeded to tell me that consideration wasn't required any more. He was wrong.

Marc Ward is reporting on a similar case. The parties agreed on a price for the sale of a franchise. Later the parties apparently amended the agreement to require the Defendant to pay more. Contract amendments require separate consideration, and there was none. When the defendant refused to pay the extra money, the Plaintiff sued. The defendant claimed there was no consideration for the amendment, and the court agreed. Presumably the defendant would be entitled to the return of any payment made in excess of the original purchase price.

One argument would be that the parties didn't really have a contract in the first instance, and the parties were still negotiating. I don't know if the parties argued this point, but sometimes it is hard to tell when the parties have an agreement (contract.)

Consideration doesn't need to be much - anything of value will do.  The important thing to remember is that when negotiating or amending contracts, the parties need to exchange something of value.  The values do not need to be equal, but they must be present - and preferably the consideration is recited in the agreement or amendment. 

Gavin Craig

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Even the dead must honor their contracts. In an unusual case, the Buyer signed an agreement to purchase a NYC Condo for $2,300,000. The agreement is approved. The Buyer dies before the closing, and the estate does not want the condo. But, the estate wants the $230,000 deposit returned.

The Contracts Professor noted the courts reasoning as thus:

The crux of this matter lies in contract paragraph 15.2, which expressly makes the contract binding on the parties' "heirs, personal and legal representatives and successors in interest." The inclusion of this provision indicates that the parties explicitly contemplated, and provided for, the possibility of either party's death before closing, by specifying that the death would not terminate the contract, but that the contract would survive, to be performed by the successors or heirs of the deceased party. This provision makes the contract binding on [the buyer's] estate.

While this is basic contract interpretation and reasoning, the estate would have been responsible in any case. Just because a party to a contract dies does not mean that their estate is not responsible for the contract entered into by the deceased. (Unless it was a personal services contract, which has separate rules for obvious reasons.) The general rule in New York and I will guess all other states, is:

"[w]here the proposed purchaser dies before the closing of title, his executor or administrator may pay the balance of the purchase price and take the deed in his own name holding it in trust for the heirs at law or devisees. It is the duty of the fiduciary for a deceased vendee to complete payments under a contract entered into by such vendee for the purchase of real property" (4-35 Warren's Weed New York Real Property §35.24 [2009] [footnote omitted]; see Di Scipio v. Sullivan, 30 AD3d 660 [2006])."

The court also rejected the arguments of impossibility and frustration of contract purpose. So the Seller gets to keep the deposit, and apparently was able to sell the property for $2,125,000. That is a nice extra profit for the seller.  How to avoid this problem: add a contract clause that the death of a party voids the contract.  It isn't hard to do. 

Thanks to the Contract Prof Blog for this story.
 

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The concept of limitation of liability is one of the hallmarks of a corporation. By becoming a shareholder in a corporation, the shareholder is not personally liable for the corporate liability. There are some exceptions of course. There are always some exceptions. But in normal circumstances a shareholder need not be concerned when the corporation is sued, unless the corporate identity is merely a sham, and the corporate formalities are not followed. The classic example is when the shareholder uses the corporation as a piggy bank and ignores all the corporate requirements.

Marc Ward's Blog, Ward of Iowa Limited Liability Companies has an interesting post discussing a recent court decision in a US District Court in Georgia. The court held that a party that was a minority shareholder when the contract in dispute was executed, and who later became the sole shareholder of the corporation, was bound by a choice of law provision in a contract it did not sign and was not a party to. This is a very troubling case on several fronts. The court found that a supplier to a corporation could have liability because it was a shareholder at the time the contract was formed. This is not the law is almost every jurisdiction. Marc Ward provides some additional thoughts that are worth reading.

I think the thing that troubles me the most is that the court is in essence rewriting a contract, and this the court is not authorized to do! Do rulings like this discourage the formation of corporations, or other entities that provide a limitation of liability to the owners? How is the shareholder to protect its self? Shareholders should not need to buy insurance against liability for corporate obligations.
 

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In an interesting case, a couple sued a bank because someone obtained their passwords, got into their bank accounts, took money out of a line a credit and transferred the money to an overseas bank. The bank defended against the by claiming an agreement signed by the customers waived any (future) claims against the bank.

The customers alleged that the bank was negligent in failing to promptly implement security measures on their on-line access. Admittedly the bank was slow to implement the changes, but the bank claimed that it didn't matter since the customers had already waived any claims against the bank. The agreement stated to customers that it would “have no liability to you for any unauthorized payment or transfer made using your password that occurs before you have notified us of possible unauthorized use and we have had a reasonable opportunity to act on that notice.” The court viewed the case as a case where the written waiver didn't necessary exclude a claim for negligence.

Usually the court will narrowly construe waivers, and apply them to the facts. If the conduct complained about is not specifically included in the waiver, the waiver will not exclude the claim.

TheThreat Level Blog reported on this unusual case as follows (Excerpts):

Court Allows Woman to Sue Bank for Lax Security After $26,000 Stolen by Hacker
By Kim Zetter September 4, 2009

As initially reported by legal blogger, David Johnson, Marsha and Michael Shames-Yeakel sued Citizens Financial Bank in 2007 in the northern district of Illinois on several grounds, including a claim that the bank failed to provide state-of-the-art security measures to protect their account.

U.S. District Judge Rebecca Pallmeyer refused last week to grant a summary judgment in favor of Citizens Financial, stating in her ruling that “assuming that Citizens employed inadequate security measures, a reasonable finder of fact could conclude that the insufficient security caused Plaintiffs’ economic loss.”

The couple, who run a home-based bookkeeping, accounting and computer programming business, have been customers of Citizens Financial, which is based in Illinois, for 30 years. They maintained personal and business checking accounts with the bank as well as a $30,000 home equity line of credit, which was linked to the business checking account.

In February 2007, someone with a different IP address than the couple gained access to Marsha Shames-Yeakel’s online banking account using her user name and password and initiated an electronic transfer of $26,500 from the couple’s home equity line of credit to her business account. The money was then transferred through a bank in Hawaii to a bank in Austria.

The Austrian bank refused to return the money, and Citizens Financial insisted that the couple be liable for the funds and began billing them for it. When they refused to pay, the bank reported them as delinquent to the national credit reporting agencies and threatened to foreclose on their home.

The couple sued the bank, claiming violations of the Electronic Funds Transfer Act and the Fair Credit Reporting Act, claiming, among other things, that the bank reported them as delinquent to credit reporting agencies without telling the agencies that the debt in question was under dispute and was the result of a third-party theft. The couple wrote 19 letters disputing the debt, but began making monthly payments to the bank for the stolen funds in late 2007 following the bank’s foreclosure threats.

In addition to these claims, the plaintiffs also accused the bank of negligence under state law.

Judge Pallmeyer, however, was not convinced. She found court precedents showing that financial institutions have a common law duty to protect their customers’ confidential information against identity theft. Specifically, Indiana courts — where the Shames-Yeakels live — have held that a bank “has a duty not to disclose information concerning one of its customers unless it is to someone who has a legitimate public interest.” The judge therefore concluded in part that, “If this duty not to disclose customer information is to have any weight in the age of online banking, then banks must certainly employ sufficient security measures to protect their customers’ online accounts.”

This is a classic example of the tension between negligence causing a loss, and a contract excluding liability. For any business, the key is to have a clear agreement that covers the intended claim. For the individual, the key is to understand what you are agreeing to when you sign an agreement. One curious thing is that the opinion says that the Plaintiff had been doing business with that bank for 30 years, yet the bank treated them very poorly. That, was a bad business decision. I wonder how much future business they will lose because of their inability to resolve this problem with a long time customer.

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I found a very interesting blog post on the New York Business Divorce Blog, dealing with a problem common everywhere. What happens when a minority shareholder works for the enterprise, and is later fired?

This is a very common issue. For reasons real or imagined, the majority shareholders want the minority shareholder to leave. What now? The minority shareholder rarely has an employment agreement (or at least rarely has a written agreement.) And even if here is a written agreement, I've never seen one where the employee/minority shareholder had a right to keep the job regardless of performance.

When the minority shareholder is fired, there is a usual claim or breach of fiduciary duty and other contractual claims.

The NY Business Divorce Blog notes: The most common allegation of oppression by minority shareholders involves termination of employment by the controlling shareholders.

However, when the employee is an at-will employee, then he/she can be fired without creating a liability to the company absent a violation of any other agreement, such as a buy/sell agreement between shareholders.

It is common for shareholders in a small corporation to eventually have disagreements. Unfortunately, when a business is created there is sometimes little thought given to what happens if someone wants to leave, or the majority wants the minority shareholder to leave. Sometimes the shareholder don't even sign an agreement.

I commend you to the writeup on the NY Business Dissolution Blog concerning this subject. They discuss a case where the company is in litigation with the fired minority shareholder, and the company could not get the claim dismissed on a motion. In the case reported, the majority wanted to pay $125.00 rather than $8,335.00 per share to purchase the minority interest. This is just foolish.
 

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There is an interesting series of comments in theContract Prof Blog, and others, asking whether blackmail is just a form of contract. The odd thing is that blackmail certainly meeting the legal definition of contract, with an offer, acceptance and consideration. But then so would a contract for Murder, but that doesn't make it a contract.

But can the blackmailer sue for damages? The discussion was generated because of the Letterman case, where Letterman accused the alleged blackmailer of demanding money in exchange for withholding information about Letterman's affairs with staff members. While this is an interesting academic discussion, the fact that blackmail is a crime makes this a very different matter.

But the real question is whether there could be a contract, and I think the answer is yes, there could be. In fact, I understand that the defense is just that: there was a contract for a screenplay that disclosed these facts about Letterman. Would there be an enforceable contract if Letterman contracted to purchase all rights to the screenplay, and thereby prevent its publication? This later scenario sounds more like a contract. But it could also be blackmail.

I would think it would be hard to convict someone if there really was a screenplay with the embarrassing information in it. I don't know if there is, but it is still a fun academic exercise.

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How often does an officer of a corporation sign a contract, listing the business as the contracting party, but neglect to indicate that the business is a corporation or an LLC?  Then sign the contract? 

Marc Ward in his Blog discusses a case of, who are the parties to the contract?

Marc writes:

In Builders Kitchen and Supply Co. v. Moyer, N0. 0-655/09-0194 (September 2, 2009) is a deceptively simple case.  On the one hand it represents the folly of not having even run of the mill contracts reviewed by lawyers before they are signed.  And on the other hand, it is a warning to lawyers that things aren't as simple as they appear.

Frank Moyer signed a contract with Builders Kitchen for the purchase and installation of some kitchen cabinets and countertops.  The contract was just two pages long.  On the first page there was a place for the name of the business and a little later a space to indicate the type of entity.  Moyer filled in the name of his business, Crystal Creek Development, but neglected to indicate that it was a corporation.  He signed the contract as "Frank Moyer, Pres." The second signature line, presumably for the guarantor, was left blank.

The question for the court was, is Frank Moyer a party to the contract?  As a simply matter of agency law, the answer has to be “Yes.”  The officer of the corporation is an agent, and the agent has the duty to disclose the existence and name of the principal.  For a lawyer these are fun cases, but I have had numerous attorneys argue with me that filing articles of incorporation are all the notice that the agent (officer) needs to give.  That position, by the way, is not the law. 

In Minnesota there is a famous case where the same thing happened.  Except that in the Minnesota case the defendants were lucky.  They had paid for the goods with checks that clearly showed that the seller was selling to a corporation, and the court found that the checks were sufficient  notice.    See Paynesville v. Ever Ready Oil, 379 NW2d 186 (Minn. App. 1985)

Earlier in my career I had an opposing counsel argue that a person listed as a contracting party and who signed the contract was really not intended to be a party. 

Most people, including especially small business owners, are very informal when signing contracts, and create real problems for the principal of any company.  The lesson is clear.  Have an attorney review the contracts.  Marc is right:  Pay me Now or Pay me Later. 

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In a recent case,All-Ways Logistics v. USA Truck Inc., the court found that USA had breached it's contract with All-Ways. This case is interesting on several levels, because it presents the court with a very common issue: When one party breaches part of an agreement, what is the effect when the other party continues to do business with the breaching party?

The defense of USA was simply this: All-Ways waive the breach of contract by USA! The facts are simple. All-Ways is a freight broker. USA contracted with All-Ways to find business for USA, and USA would pay them a 5% commission. All-Ways found some large customers for USA, and all went well for 2 years. After two years USA told All-Ways they would no longer pay commissions on a large customer, and they solicited the business themselves. All-Ways understandably objected, but continued to solicit business for USA from other customers. After a while, USA terminated the agreement completely.

All-Ways sued for breach of contract and unpaid commissions. All-Ways wanted the commissions for freight hauled during the term of the contract, even if USA solicited the customers directly. USA claimed that All-Ways waived the breach of contract. The jury found that USA had breached the contract and awarded damages of $2,966,880, plus the court awarded prejudgment interest of $583,000, attorney fees of $1,000,000, and costs of $18,000. USA appealed.

Part of the decision concerned the trial courts refusal to give specific jury instructions relating to waiver; the argument being that All-Ways continued to receive the benefits of the contract after USA breached the contract. The trial court refused to give the instructions to the jury. The trial court determined that the commission agreement was a severable agreement, so that the breach of one part is not a breach of the others. In other words, if USA refused to pay commissions on one shipment or from one shipper, All-Ways did not waive the breach by accepting commissions on other shipments.

The circumstances of the parties in this case are common. One party contracts with another, and at some point the party making payments finds another less expensive way to get the same result. Meanwhile, the 1st party is stuck. Do they walk away from a good contract because the other party stole a customer?

This case could have gone the other way, with the court finding that there was a waiver. In my opinion that would have been an unfair result, but it is not difficult to waive your rights under a contract. Any party can waive their rights. The answer is that parties to a contract in this situation need to carefully consider the consequences of their actions. There is no simple answer and each case stands on its own merits. In the present case, it cost USA a lot of money to steal the customers. So Buyers Beware!

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I always enjoy reading the Contracts Professor Blog; probably since contracts is one of my favorite subjects.  Most business disputes involve, in some way, a contract.  And, most non-lawyers don't have a very good concept of what a contract is and what it takes to form a contract.

This week the Contracts Professor discusses a wonderful case that originated here in Minnesota.  Jeremy Telman bemoans the fact that Lefkowitz v. Great Minneapolis Surplus Store is no longer in the casebooks, and I understand why.  When I taught business law at a local university I used the case, and it demonstrates some very basic principles of contract formation.  What is an offer, and what constitutes an acceptance.   

Additionally, the case also holds that you can't refuse to perform a contract on the basis that you had secret qualifications for the acceptance.  (In this case the store took the position that you had to be a woman to accept.)  This is a good case to help understand how contracts are formed; the case is also unusual in that in involves an advertisement, which does not usually constitute an offer to sell. 

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Clearly, parties can elect to negotiate through the litigation process. It happens everyday. But why would any reasonable person elect to use litigation as a negotiation method? Litigation is clearly much more expensive than just sitting across the table and negotiating. The reason parties are litigating is usually because they are already in a relationship. There is either a contract existing between the parties, or some other business relationship that makes one party feel that it has lost something of value by the actions of another party.

I think it is simplistic to just take the position that litigation is just another form of negotiation. I agree that it is, but it is also much more than that. There is an excellent post on the, "Settle It Now Negotiations Blog" that discusses this very point. In negotiations, each party can control the results. Each party can agree or not agree with any proposal. Each party can control whether there is an agreement or not. But once a case is filed in a court, the rules change: the parties lose control of the schedule, and to some extent the cost of the negotiations. If the parties fail to negotiate a settlement, they also lose control of the result.

I recommend the article in the Settle It Now Blog. The suggestion is an excellent one if the parties otherwise trust each other (which is unlikely) and have a desire to continue a business relationship. But, as the old saying goes, "It never hurts to ask!" Sometimes there are surprising results.

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When a contract is ambiguous - and to some extent all contracts are ambiguous or at least inconsistent - how does a court resolve a dispute? Sometimes a contract expresses inconsistent obligations, or - and I think more commonly - the issue is what the parties intended by the use of a particular term. But the ambiguity only rarely results in litigation. So what happens when the parties can't agree on the terms of the contract?

The law of contracts covers just such a situation. Contract interpretation is a question of law. That means that the court (judge) decides what the terms of the contract mean. Whether or not a party breached a contract is a question of fact - and that is the province of the fact finder: the jury - or the judge if there is a bench trial.I recently posted on this blog a comment about a case where the issue was what the parties meant by the term, "cohabit." The term "cohabit" does not in and of itself usually lead to confusion; in this case one party argued that "cohabit" meant that the parties living in the same residence must have a sexual relationship before the cohabit provision would apply.

Adams Drafting has a very interesting article about the use of experts when contract terms are ambiguous. Clearly an expert can not testify as to what the parties intended. But, an expert can testify as to the meaning of certain words or phrases. An expert can not testify as to whether a contract is ambiguous, but can testify as to the technical meaning of the language.

I think that Adams is correct. Some language is not ambiguous on its face. yet the parties could have very different interpretations of the contract: i.e. "cohabit."

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Just a note on an interesting post by the Contracts Prof Blog. Apparently Trump became a tenant in his own building. Signed his own lease, except as the tenant instead as the landlord. The lease is, not surprisingly, very favorable to the landlord. Trump's organization is behind on their rent. Now they are getting evicted.

The lesson is clear. When you draft a contract that is beneficial to you as a party, when circumstances change don't just automatically sign the same contract a take on the obligations of the other party without fully understanding the terms.

I have found that it is unusual for parties to read their contracts until after there is a problem. Sometimes the contract is not what they thought. Thanks to the Contracts Prof for the report!

Sometimes the contract will come back to bite you.

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A recent case from the 8th Circuit reinforces what happens when the parties conduct business without considering the contract. According to the court in Physical Distribution Services, Inc. v. R.R. Donnelley, Physical Distribution (PDS) entered into a contract with Parcel Shippers, a subsidiary of R. R. Donnelley & Sons in 2003. PDS was to provide drivers for Parcel Shippers. Parcel Shippers provided a draft contract to PDS. However, in the end no agreement was ever executed.

The draft contract had a term that provided that neither party could assign the agreement without the written consent of the other party. This is a fairly standard contract provision. Despite the lack of an executed agreement, PDS began supplying drivers to Parcel Shippers, and the payments for the services were made by Donnelley.

In October 2004, Donnelley sold Parcel Shippers to American Package Express. Parcel Shippers notified PDS. In November 2004, American Package began paying the PDS invoices. In February 2005, PDS began addressing the invoices to American Package.

You can guess what happened next. In January 2006, American Package stopped making payments, and in March, 2006 it filed for bankruptcy protection. PDS wanted to find someone to pay the $695,000 in unpaid invoices. PDS looks at the draft, unsigned contract, and finds the anti-assignment clause. So PDS sues Donnelley claiming that Donnelley had violated the contract, and therefore Donnelley owed PDS for the unpaid invoices.

This falls into the, "Nice try, but no cigar," department. The court ignored the question of whether the anti-assignment clause was even part of the contract. After all, the language was only in a draft contract that was never executed. Courts tend to find the simplest issue and use that to affirm or overturn a decision. In this case, the terms of the contract didn't matter. Even assuming that the Plaintiff was correct, and the anti-assignment clause was part of the verbal contract, it still loses. Why? Because the Plaintiff knew about the business sale to American Package, never objected, and continued to do business with the purchasing company. That is called a waiver.

In the law you can almost always waive your own rights. (There are some statutory exceptions, but they don't apply here.) In this case, the court impliedly said that even if the draft contract had been executed, the plaintiff's would lose because they waived their right to enforce the provision.

The lesson from this case is clear. Know what is in your contracts. Anti-Assignment clauses are a prudent provision to place into most contracts. Then, if there is a sale of a contracting party, it is prudent to at least consider whether you want to do business with the successor company. You can't fail to decide, continue to conduct business as usual with the new company, and later decide that you want to look to the old company for recovery.

Most businesses never even look at their contracts until there is problem. In the long term this is not a wise course of action. Just ask PDS.

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The Chicago Business Litigation Lawyer has published a couple articles about avoiding Internet Fraud. The tips come from the FBI, and are very telling. The advise is good, and should make us all more cautious. This list is worth a few minutes to read. It is almost impossible to recover funds stolen through internet fraud. The perpetrators are many times overseas, and you will not even be able to determine which country.

The old saying: If it sounds to good to be true, it isn't! Fraud takes on many forms and the victims range from the sophisticated to the not so sophisticated.

In these days of economic hardship for many people, I think there is a tendency of some people to believe what they perceive as a good deal or a way to make money. The people that invested with Bernard Madoff were very happy that their investments continued to do well while the rest of the market was not doing so well. Here is an interesting article about the lawyers and the litigation started as the investors pick at the bones of the carcass that was Madoff's financial castle. If everything is going well, why look too hard.

Tom Petters' investors believed what was put in front of them. It all sounded good. But it wasn't and in the end the investments were fictions. remember just because it is written down does not make the representations true.

The smartest people can be victims. But we don't have to be.

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The Minnesota legislature is looking into what has become a very big business. In summary, the life insurance companies want to ban the practice, whereby a policy holder/owner sells the right to collect the death benefit for a payment now. The practice is legal and even international in scope. Thanks to the Minneapolis Star tribune for the report. 

In essence, a person can purchase life insurance when elderly, make the initial deposit, and then sell the rights to collect on the policy. The policies then become assets that are bought and sold, bundled with other policies, and traded. The Insurance companies don't like them even though the insurance company gets exactly what it bargains for. The premiums. The insured gets what they bargained for, the policy on their life, and when sold they receive a payment for the buyer. The sellers receive a percentage of the death benefit for cash now instead of the estate or beneficiary receiving the payout when the insured dies.

The buyer pays the premiums until the insured dies. This of course means that the insured will not let a policy lapse after they can't afford it anymore. The insurance company keeps all the premiums it receives, and never has to pay on a lapsed policy. So, the number of large policies lapsing will be reduced: and the profits are reduced.

The insurance policy is a contract, and the policy owner should have the option to sell their right in a contract. It will be interesting to see what the legislature does with this issue, because the market is international, not just in Minnesota. I don't see how the state can regulate a market that they can't control. Also, people should be able to sell there contract rights: it is the American way.
 

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I’ve written about the Petters matter a couple times before, here and here.The latest report raises an interesting question. An investor group is challenging the appointment of a trustee that they say will favor victims instead of creditors. That's an interesting conflict. Who should have priority? If both parties are innocent, who has a priority. 

So, in the abstract the question is interesting. However, in this case the complaining creditor, The Richie Group, reportedly loaned the Petter’s Group money at interest rates of 80% on one loan and 362.1% on another. We should all have such a deal.

At those rates it would not take long to recover the amount of the principal, even though they probably didn't account for the payments as reducing the principal.

The only rational reason that a company would borrow money at rates that high is because they can’t get access to the normal capital markets. That normally means that the borrower is in financial trouble. That also means the lender knew these were high risk loans. So why would they get a priority? The Richie group had a choice whether or not to loan money to a company with a weak balance sheet.

The victims on the other hand were misled. I think the victims have a much better argument for a priority than the Richie Group, or any similarly situated lender.

Who knows how a Trustee will see it, or allocate what assets can be found.  I would guess that the facts of the Richie Group loan will influence the outcome; or I at least hope so.  Greed should not be rewarded. 

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I was recently in a mediation where the parties settled a legal action and signed a handwritten agreement covering all of the aspects of the agreement. There was nothing in the agreement that said the parties could or should transfer the deal points into a more formal agreement. (i.e. not handwritten.)

The next day the counsel representing the other side call to say we needed to draft and sign a "more formal," agreement. I said "No," the agreement is fine as we signed it. There were no missing deal points, and the agreement was complete in all respects.

The opposing party insisted on drafting a agreement that covered all of the deal point correctly, and then added some language. We finally signed a new agreement after I had removed anything in the new agreement that even remotely created a burden on my client that was not covered in the first agreement. Fortunately, in my situation, the other counsel was not trying to re-negotiate the deal, so the process went smoothly. But it was an unnecessary process. It added nothing to the settlement, and the clients received no additional benefit.

Why do attorneys insist on re-writing hand written agreements? I personally think it is a waste of time and effort. If some important point was left out of the agreement, and your client wants to continue negotiating, that is about the only circumstance where continuing the process makes sense. But the risk of the deal or settlement falling apart goes up significantly. Every attorney knows that if the parties reach a settlement, but do not set the agreement down in writing and sign it, once the parties leave the deal is at high risk of falling apart. Rewriting an agreement that is already written can result in disputes, or the renegotiation falls apart and the parties are back to their handwritten agreement that they originally intended to be the final expression of their agreement. And what is gained by rewriting and amending the agreement? It is not likely that the other party will suddenly agree to additional material terms?

Parties can litigate the duties and obligations of a hand written agreement just as much as a, "more formal" agreement. If an agreement is complete, and there are no additional material terms to be negotiated, parties should leave them alone.

On the other side of this are the agreements that, by their terms, are not complete and the parties agree to continue working out terms. These are not contracts - but more like agreements to maybe agree in the future.
 

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Every law student known what it takes to form a contract. First the Offer, then Acceptance, and finally Consideration. Except for the law of Sales under the UCC Article 2, the acceptance of an offer must conform exactly to the terms offered, or it is deemed a counteroffer. (This last sentence is not entirely true, and many times and in many states minor, inconsequential changes do not become counter-offers.) Offer and counter-offer is the very essence of negotiations.

However, if you negotiate long enough, you just might lose the deal.

In a case from the recent past, and reported by the Chicago Business Litigation Lawyer Blog, the parties came to an agreement for the purchase and sale of the stock of the corporation doing business as an auto dealership. According to the decision, the parties reduced the agreement to writing, and the agreement was signed by the parties. The parties then continued to negotiate modifications to the agreement. And negotiate, and negotiate.

The Defendants Counsel sent the Plaintiff's counsel a revised agreement signed by the Defendant, that was represented to included all of the changes agreed by the parties. However, upon inspection, the document had some errors, including the Price in one section. (The price was correct in another part of the contract.) Defendants counsel asked that the document be returned for correction. Plaintiff's counsel did nothing for awhile. (This was a mistake.)

Eight or nine days later the Defendant notified the Plaintiff that he was selling the company to another party. Plaintiff's decided that they want to buy the dealership, so they made the necessary changes to the document, signed it and sent it back. The courts agreed that the changes by the Plaintiffs conformed to the parties intent and furthermore, they were NOT Material. The defendant completed the sale to the third party and naturally the Plaintiff's sued for breach of contract.

In the alternative the Plaintiff's argued that the sale of stock falls under the UCC. Since the UCC specifically excludes the sale of securities this argument was not persuasive.

The trial court's decision, affirmed on appeal, was that the Plaintiff's actions in modifying the document resulted in a counter-offer and no contract was made. This is a fun case, because there are some significant questions apparently not addressed by the court of appeals in their decision affirming the trial court decision.

The decision clearly states that the parties signed an agreement, and then negotiated changes. The court did not discuss why the first executed agreement was not valid. That's a good question, because if the first signed agreement met the requirements of a contract, the failure of the parties to agree on contract modifications does not void the written agreement.

Secondly, if the parties had clearly come to an agreement for the sale of the securities, why does this agreement need to be in writing?

Third, if there was no agreement prior to the execution of the contract by the Plaintiff, once the Plaintiff's learned that the defendant had entered into the another contract with another buyer (and this is not entirely clear) the Plaintiff's can not as a matter of law try to accept an offer to buy a business that they know has already been sold. Moreover, once the Defendant told the Plaintiff he was selling to another party - isn't this the same a withdrawing the offer? 

Finally, there is another lesson to be learned. Parties can negotiate and negotiate until the cows come home. But, if you continue negotiating long enough, the deal will usually fall apart. Eventually parties get tired of negotiating and they want to move on. This case appears to be one where one of the parties decided to move on.

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The Contracts Professor reports on a case between Dow Chemical and the Government of Kuwait. Dow is suing for a mere $2.5 Billion. That is enough to keep a lot of lawyers working until the recession is over.

Forbes and the Times of London report on the case over what DOW calls a break-up fee. Kuwait reportedly drop out of the joint venture just as it was about to start operations.

The case is based upon a contract. The terms of a contract are essentially a question of law. Whether a party breached a contract is a question of fact. So, I would anticipate a summary judgment on any issues concerning the terms of the contract.

Another summary judgment issue may be whether Kuwait has sovereign immunity - always a tricky issue. If it does, (and the issue of sovereign immunity is probably determined by Kuwait) Kuwait probably doesn't care whether they breached the contract or not - since they would never pay.

Contracts with foreign governments are always risky.
 

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I always enjoy reviewing the California Attorney Fees Blog. California has some attorney fee shifting statutes, and they enforce contracts providing for attorney fees. Whether this has helped or hurt the trial court case load is always a subject for debate.

In a recent case, Cardet v. Burlison, Case No. B198625 (2d Dist., Div. 2 Dec. 17, 2008), the court looked at a law firm's retainer agreement for support to award fees. One of the questions before the court was whether the law firm's retainer agreement provided for the recovery of attorney fees against the law firm in the event there was a successful negligence (tort) claim against the firm. It is certainly common for retainer agreements to provide for the recovery of attorney fees expended in recovering past due fees. The provision in question read:

"If legal action is required to enforce this Agreement or to collect any fees or costs earned or advanced pursuant thereto, the prevailing party shall be entitled to recover any and all costs of such action, including, but not limited to, the expenses and court costs of the action [and] a reasonable attorneys fee."

The case goes all the way back to the January 17, 1994, Northridge earthquake in the Los Angeles Area. Cardet was a contractor and was not paid for certain improvements to property. The Plaintiff's attorneys did a very poor job prosecuting a mechanic's lien, including their failure to name the property owners of the improved or repaired property.

Cardet ultimately won a malpractice claim against the defendant law firm for a net amount of $500,577.30. In February 2007, Cardet filed a memorandum of costs, seeking, inter alia, $272,492.50 in attorney fees. The court ultimately granted $269,492.50 in attorney fees.

What is the basis for awarding attorney fees? The retainer agreement!

California Civil Code section 1717 provides, in relevant part:

(a) In any action on a contract, where the contract specifically provides that attorneys fees and costs, which are incurred to enforce that contract, shall be awarded . . . to the prevailing party, then the party who is determined to be the party prevailing on the contract . . . shall be entitled to reasonable attorneys fees in addition to other costs. . . (b)(1) . . . [T]he party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract.

The court held the the retainer agreement contract language providing for attorney fees, "[i]f legal action is required to enforce this Agreement," was broad enough to cover both Tort and Contract claims.

I would guess that there are a lot of legal retainer agreements that have exactly the same language in them. A word to the wise: Check the language in your retainer agreements. Would the result have been the same if the agreement had specifically stated that the attorney fee provision only applied to fees incurred to collect legal fees?

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One of the many things that the unwary businessperson can do on occasion is unintentionally create a franchise. The obvious reason is the failure to consult an attorney. Every state has its own franchise laws, and some are better than others depending upon whether you are representing the franchiser or the franchisee.

In general, a franchise is very easy to create, and thereby subject the creator to state franchise laws and regulations. The basic elements are:

1. A contract or agreement, either express or implied, whether oral or written, for a definite or indefinite period, between two or more persons:

a. by which a franchisee is granted the right to engage in the business of offering or distributing goods or services using the franchiser's trade name, trademark, service mark, logotype, advertising, or other commercial symbol or related characteristics (you use my name and send me a fee and we will both make money);

b. in which the franchiser and franchisee have a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise (We both make money and I will expand my business);

c. for which the franchisee pays, directly or indirectly, a franchise fee.

Pretty easy. The owner makes a verbal agreement to allow someone to use his trade name for a fee would pretty much satisfy the requirements. Much of the franchise litigation is over the issue of whether the payments amounted to a fee. If they didn't - there is no franchise. But then, the problem is that the unintended franchiser must litigate whether the business arrangement was a franchise or not. So the unintended franchiser agrees to allow someone to use its trade name to conduct business, all for a small fee per transaction. Franchises are securities, and as such they must be registered.

In my experience, many business owners wanting to expand their businesses come up with plans that look a lot like a franchise. They have no idea that the proposed business arrangement might created a franchise or a security. If there is a franchise, most states carefully regulate the franchise and require filings and approvals. Franchise law is a world unto its self. The failure to comply with the relevant states franchise laws create serious potential liability for the unintentional franchiser.

Another great thing about a franchise is that, in many states, the franchisee is entitled to costs and attorney fees if the franchiser is in violation of the franchise agreement and the franchisee incurred real damages. This is especially interesting when the alleged franchise agreement is verbal.

Franchise laws are intended to protect the public. The smart business owner will talk to his or her counsel BEFORE entering into any agreement that allows others to use their trade name(s) or trade mark(s).

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State and US District Courts use a legal analysis to determine whether the state or District Court has jurisdiction over a defendant located in another state. In a real stretch of logic, Delaware Court held that a law firm, by sending a document to CT Corporation (CSC in Delaware) in Delaware for filing with the Delaware Secretary of State for a Delaware Corporation conducted business in the state of Delaware. The court concluded that the courts in Delaware had jurisdiction over the law firm. Did the out of state law firm intend to conduct business in Delaware? No!

Would the result be the same if the law firm had served CT Corporation in Ohio, for delivery to CSC in Delaware? Would that action constitute transacting business in Delaware?

The law firm's client was already subject to jurisdiction in the courts in Delaware by virtue of their status as a Delaware Corporation. Thanks to Ward of Ward on Iowa Limited Liability Companies for the Reference.

Compare this result to the courts findings in the Pope and Bellisio cases discussed below on November 11th. Once again the courts find a single transaction sufficient to establish jurisdiction. One interesting question is whether the law firm, acting as agent for the Delaware principal, was really doing business in Delaware. The court decided, "yes."

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How many partners believe that it is a crime to steal from the partnership? Almost all of them I would guess. In a very unusual case reported by The Unincorporated Business Professor Blog, a partner was charged with larceny of partnership property. The court reasoned, using Massachusetts law, that since a partner is the co-owner of the partnership property, the taking can't be larceny.

The reasoning in this ruling is logical, but also contrary to the normal and usual understanding of the character of property belonging to a partnership. The report specifies that Massachusetts uses the UPA and not the RUPA. The ruling doesn't mention what civil responsibility the bad partners might be subjected to, and at a minimum the bad partner violated his fiduciary duty to the other partners and the partnership.

Do partners normally believe that the "theft" of the assets from the partnership would be a crime? Or, do partners believe the opposite? Clearly this is another good reason to avoid partnerships, at least in Massachusetts. If you take this decision to a logical conclusion, joint ventures are a form of partnership. When two corporates combine for a joint venture, can one take all the joint venture property without criminal sanction? It would appear so.
 

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Jurisdiction is one of those areas of the law that is frequently litigated, not understood by the clients, and fun for the lawyers. What happens when Company A makes a one time sale of its products to a single buyer in Minnesota. When a dispute arises, does a Minnesota court have jurisdiction over the out- of-state seller?

We have two new cases decided by the US District Court in Minnesota, which arguably come to opposite conclusions. I want to point out that both of these decision are very well reasoned.

The first case is Pope v. GMBH. The case involves a single sale into Minnesota, a repair agreement that was performed in Germany, and an order for parts. That was it. The seller had no employees or sales offices in Minnesota, no repair facilities in the states, and all work and repairs were done elsewhere. The primary question before the court was: did the seller intentionally avail itself of the privilege of doing business in Minnesota; and, could the defendant reasonably anticipate being haled into Minnesota courts from these contacts with the state. The court went through the minimum contacts analysis, and determined that yes, the buyer had established the minimum contacts to afford Minnesota courts jurisdiction over a dispute relating to the sale.

The second case, Bellisio Foods v. Prodo Pak Corp, came to the opposite conclusion and found that the defendant had not established the minimum contacts. The facts of the Bellisio case are a little different. Again we have as single sale into Minnesota. Again there is a dispute. Apparently in the Bellisio case the seller entered into a contract without knowing where the equipment was to be delivered. In other words the court found that the buyer had never expressly advised the seller where the equipment was to be delivered, leaving the seller with the choice of breaching the contract or delivering into Minnesota. While it seems odd that a seller would contract for a sale without knowing where the products were to be delivered, that is exactly what happened. The court found that leaving the seller with the choice of breach or delivery into the state was not the same as a seller intentionally availing itself of the privilege of doing business in Minnesota.

Minnesota has been quite open to finding jurisdiction over out-of-state parties in the last decade. I find it doubtful that Bellisio's management even thought about the jurisdiction issue when they learned of the delivery site. The court did not mention any objections from Bellisio.

These are fun issues for lawyers, and no so good for clients because they are expensive to fight. What was the advantage to Minnesota law in the Bellisio case? Prodio was incorporated in Delaware and located in New Jersey. Is there a significant difference in the law or perhaps a statute of limitations?

In the Pope case it is more clear cut. No one wants to go to a foreign country to litigate a contract dispute. In addition to the costs, US companies are generally unfamiliar with the laws of foreign jurisdictions.

In any case these are two cases the raise interesting issues and both could have been decided a different way, depending on how you interpret the facts and apply some of the legal factors important to establishing jurisdiction.

 

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I spent as fair part of my career as an in-house corporate counsel for several large corporations. I don't regret that experience at all, and I watched as corporate executives made many (sometimes costly) errors in judgment despite counsel to do something different.

But when the need for outside counsel arose (usually to defend a lawsuit, but sometimes to get specialized advice about certain areas of the law) the business almost always hired a major law firm. Why? Larger law firms are expensive, and some have a tendency to load up cases with lawyers. (Assigning multiple lawyers to a case - thereby giving all the lawyers a case where they can charge their time. )

I once called a large (I wont mention the name) firm in Washington DC to ask if they had anyone in the firm that could handle a specialized international law question. I talked to a senior partner and he set up a telephone conference with some other senior people at the firm so I could ask them about their capabilities. We had a telephone conference that lasted about 45 minutes where I asked a number of questions.

We had not even made the decision about who to hire as counsel when, within a week, they sent me a bill for $3,500.00 for the telephone call. Their theory must have been that my company should pay for the time they took to convenience me that they could handle the matter I inquired about. I told them what they could do with their invoice, but the larger lesson is that large firms need to generate fees to stay alive. So they charge everything - regardless of how inappropriate it is. I probably don't even need to mention that we elected to give the work to another (smaller) firm.

Does the corporate client get more for their money? Do they get a better result that is worth the extra money? I truly doubt it. That is not to say that larger firms always overcharge or that teams of lawyers are never appropriate. There are some issues where, because of the complexity, there is a need to get several lawyers involved, or the resources of large firms are sometimes needed.

When I set up my practice I was able to handle both large and small cases. When necessary I teamed up with other lawyers. I enjoy cases where the opposing party hires a large law firm, because they generate lots of motions and bill for every minute. The opposing party sometimes gets real sticker shock when the first legal bills arrive. I try to wait until I am sure that the other party has received bills from the law firm before I will suggest settlement discussions.

The point of this post is not that all larger law firms are bad, but in my experience they are not a bargain for the corporate client either. I once saw a $6,000,000 problem resolved by another large DC firm and the legal bills were - yes, you guessed it - a little over $6,000,000.

I handle a lot of business and commercial disputes. Usually the client is a smaller firm or an individual. I think that I bill fairly for the work I do, and I don't need to feed a large overhead. Business owners should think about the cost of legal services and at least investigate other possibilities. My recommendation - interview different firms or lawyers and ask a lot of questions. It rarely pays to get the most expensive legal services when the matter does not justify the expense. It never hurts to ask a law firm how they bill and what can the client expect for the cost! And, it can be costly to react and not ask! It is also costly to assume that the larger the firm is better at handling the matter at hand. Big does not equate to better.
 

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For those of us that like to give advice - here is a great question from Emeritus Professor David Slawson of USC's Gould School of Law. This one is worth pondering. I will watch for your answers.
 

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Who would have thought that the term "Cohabit," was ambiguous. That's what the New York Court of Appeals held. The argument was essentially - does a couple have to "do it" to be cohabiting, or is just living together sufficient.

The decision determines whether the ex-wife is entitled to $11,000 a month from her ex. Certainly enough to argue about. Ex-wife claims that the term "cohabit" means that the couple is sexually active, and since she is not, there is no cohabitation. The ex-husband argues that sex has nothing to do with the term in the contract that allows him to stop payments if his ex-wife cohabits with another person for 60 consecutive days.  The Contracts Professor has more.    

Not surprisingly there was a vigorous dissent. No contract is perfect and parties usually believe that they understand the terms when they contract. But watch out when there is a significant economic incentive to challenge a contract term, or find a way to avoid an obligation. What will attorneys in New York do now when drafting separation or divorce agreements? I'm sure attorneys will find a way around this; it is just more contract language to define what they really meant in the first place.  Continue if your are interested in the decision. 
 

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To recap this fascinating case, Citigroup offered to purchase a substantial portion of Wachovia Corp. for the equivalent of $1 per share. The Board of Director of Wachovia approved the sale and a letter agreement was signed.

Wells Fargo arrives on the scene and offers the equivalent of about $7 per share. Wachovia wants to accept the new deal, except that the agreement with Citigroup clearly states that they can't. Wachovia has an exclusive deal with Citigroup. Citigroup sues to enforce the agreement, Wachovia sues to have the restriction voided. Citigroup withdraws and instead sues Wachovia for damages estimated by Citigroup at $60 Billion. A tidy sum to say the least.

Meanwhile the Federal Government enacts the bailout plan and it is signed into law on October 3rd. Part of the new law has a provision that seems to interfere with Citigroup's rights under the contract.

Section §126(c) of the Congressional bailout package, the Emergency Economic Stabilization Act (EESA), basically voids or renders unenforceable any agreement that purports to restrict the sale of a lending institution where the Federal Deposit Insurance Corporation has stepped in to confront "systematic risk" in the mortgage market. Citigroup contends that the provision doesn't apply - Wachovia takes the position that it does. The New York Law Journal has an interesting write up on this case.

This case is a law professor's dream case. (Many of us still remember the Pennzoil-Texaco case involving similar contractual dealings without the overlay of the Federal interference with contracts.) The Contracts Prof Blog has some additional details and thoughts. 

Can the Federal Government Interfere with Lawful Contracts Between Private Parties?

Under what constitutional authority? And if so, under what circumstances?

If Wells Fargo's offer does not include any requirement for government support, does the provision in the law even apply?

Did the FDCI step in to confront "systematic risk" as it applies to Wachovia? It isn't clear to me that they did, but we will get an answer to this question in time.

Wachovia's is also taking the odd position that if they are forced to comply with the Citigroup contract - and apparently no one is arguing that it was not a contract - the Wachovia Board of Directors would be prevented from fulfilling their fiduciary responsibilities to shareholders.

How persuasive is this argument considering that the Board already approved the agreement with Citigroup in the first instance? Not very! Did anything prevent them from fulfilling their fiduciary responsibilities before they approved the Citigroup offer?

This case will not go away soon unless someone gets a summary judgment ruling that the EESA effectively voided any rights that Citigroup had to enforce the agreement.
 

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TheWSJ and the WSJ Law Blog report that Citigroup picked up it's toys and decided to leave the game. According to the report there is an obscure provision in the bailout package, section 126(c), that says, in essence, that there shall be no liability against a third party for having acquired a target that otherwise was in an exclusivity agreement with someone else.  Would this provision protect Board Members from shareholder suits? 

In other words, there can be no liability for interfering with another's contract. Now I can understand a provision like that if it interfered with the Governments attempts to buy equity in a financial institution. But between private parties?

What a way to run the railroad: Contracts don't matter! This is a very odd public policy decision. I sure we will hear more about this matter at a later time. 

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"Why?" is the question? I have been guilty of the same kind of drafting in a former life, but then it is unusual for the parties to fight over the court - the courts usually can sort this out. But not all is well when the parties have choices. When the parties have choices and they are in a dispute they will usually agree on nothing.

In the current dispute between Citigroup and Wells Fargo about who gets the spoils of Wachovia, the parties are fighting over which court should oversee the case. Meanwhile two courts are involved. Max Kennerly has an interesting post about this unusual situation. 

Contracts give some certainty to a deal, but they also restrict the parties ability to make other decision when they deem some change to be in their best interest. Wachovia had a deal with Citigroup. Part of the contract said that Wachovia could not consider offers from other buyers. Well, Wachovia now wants to consider a better offer from Wells Fargo. Citigroup sues in NY state court to ask the judge to order Wachovia to perform the contract (Specific Performance.) Meanwhile Wachovia asks the Federal court to release it from the contract provision preventing it from considering other offers.

Now the parties have slightly different but completely related matters going in both state and Federal court. Since the contract is governed by New York law and the primary question involves interpretation of the contract, it seems logical that the state courts would have the primary jurisdiction to apply New York law and rule on the contract.

Why Does Wachovia Want to be in the Federal Court?

I don't know the answer to this one. Clearly they think there is some advantage to the Federal Court system. However, the Federal Courts are going to apply New York law just like the New York state courts. Clearly the lawyers will do well in this dispute.

Meanwhile the Board of Directors of Wachovia must figure out how to avoid the inevitable lawsuits that will be filed against them if the shareholders see the company forced to continue with a less favorable deal. You can see the arguments now. "Why didn't you wait?" and, "What did you do to try to find other buyers?" Whatever the answers the shareholder will not be satisfied.

For another interesting take on this see Pennsylvania Fiduciary Blog.

If the court allows Wachovia to ignore part of the contract - what does that say about the enforceability of contracts in the state of New York?
 

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It didn't take long for the lawsuits to get filed after allegations of fraud were leveled against Petters and some of his companies. At least two so far: in the Federal District Court, Southern District of New York, and in the District of Minnesota. While we have not seen the results of the investigations or what the agents found while searching the various properties, the affidavit describing the allegations and the basis for the requested search warrants are stunning in their magnitude.

The Affidavit in support of the search warrant is here. There are going to be a significant number of Defendants if there is evidence supporting the allegations in the affidavits. Don't be surprised to see charges of tax fraud added on to the list.

If the allegations are correct, you need to wonder if there is any real money is to satisfy the claims of the plaintiffs.

More to come.

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In the already interesting case of the now deceased Dr. Ivins, accused by the FBI of being the anthrax killer, it is now reported that Dr. Ivins left an unusual will.  In essence, the will provided gifts, subject to proof that his family disposed of his remains in accordance with his wishes.  If not, most of the assets go to Planned Parenthood.  

Is This a Contract? Or a Will?

According to a New York Times story, both following his instructions about disposing of his ashes and giving money to Planned Parenthood conflict with his wife's religious beliefs.  So she has a choice. This looks a lot like a unilateral contract.  If you will do X, I will pay you Y.  

Can the wife "breach the Will" and still take the money?  Apparently not!  Is the bequest unconscionable?  Doubtful!  What happens if the wife dissipates all the assets paying legal fees to try to clear her husband?

Which choice will the widow make?  I'm sure there will be more on this unusual story. 

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Normally when a person is induced by material misrepresentation to enter into a contract, the deceived party has the ability to cancel (rescind) the agreement. In other words, if a person lies about material facts, the deceived person can escape the responsibility of performing. If a person selling a car represents that the car is new - when it has actually been in a crash and put back together, the "new" representation is material if the buyer relied on it in making the purchase decision.

But what if you are selling yourself? What if you lie on a resume? What if you claim to have graduated from Harvard with an MBA and in fact you only spent one year at a community college? If the employer hires you based on the fabricated resume, they can cancel the agreement to hire you - or can they?

Who has the burden of proof, or perhaps it should be called the burden of truth? Does the prospective employee have the burden of honesty, or is the responsibility of the employer to investigate the claims of achievements and glory in the resume? Can an employee be fired for puffing in a resume? Can the employer fire the employee and rescind the employment contract?

A recent NY case puts an odd twist on the normal rule. Josepha Fallarino made serious misrepresentations on his resume. (He lied.) National Medical Health Card, Inc. (“NMHC”), the employer didn't check the representations and hired Fallarino. NMHC wanted the employment agreement rescinded because Fallarino lied on his resume. Seems straight forward. "Not so fast!" the court said (I am paraphrasing.) NMHC had the ability to check out the truth or falsity of the resume - they didn't, so they can't rescind. Don't most defrauded people or companies have the ability to investigate at least some part of a representation? Or at least hire an investigator?

Apparently the courts of the state of NY are prepared to hold that if the defrauded party enters into a contract with the deceiver, the defrauded party will apparently need to show that they at least tried to ascertain the truth before they entered into the contract. In NY you can't trust anyone - and if you do - you do so at your own risk! This is a strange holding.

You need to wonder - how much investigation would be reasonable? An Internet search, or must the employer hire an investigator?

On the other side of the world - in Texas - the state Supremes held that if the contract between the parties stated that the parties did not rely upon the representations of the other party, that the defrauded party could not sue for fraud because they had already agreed that they had no right to rely on the fraudulent representations. So, you could conclude that doing business in New York or Texas can be hazardous to your pocketbook.

The basic lesson in Texas is that you need to read the contracts, and if a party wants a provision that says you can't rely on any representations, the obvious question is, "Why can't I rely? What representations are false?"

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I am one of those strange attorneys that thinks cases involving agency are interesting. An agent is a person (including a company) that acts for another. Simple, right! An officer is usually - not always - an agent for the company. What does it mean to be an agent? I am glad you asked.

                                                                   What is an Agent?

The agency is created by contract - written or verbal. The contract determines the scope of the agency. If an agent has the power to bind the principal to a specific contract to purchase, the agency could be limited to that one agreement. Or the agency could be open ended. The officer of an LLC at least has the appearance of having the authority to enter into any contract as agent for the LLC. Agency is one of the simplest legal principles; the principle is based on contract law, and yet there are numerous disputes every year.

                         But He Didn't Have the Authority! He was No Longer the Agent!

The Delaware Business Litigation Report blog discusses a recent case that has many of the issues relating to Agency. In this case, the Plaintiff contracted with a Virginia LLC to provide certain services. Burden was the general manager of the LLC. Two days before the LLC signed the contract (by Burton) with the Plaintiff, the LLC amended its Operating Agreement to remove Burton as the general manager. The reason for the change was not related to the contract with the Plaintiff. When the Plaintiff was not paid, it sued. The LLC's defense was that Burton did not have the authority to bind the LLC. In other words, the Burton was no long an agent for the LLC when he signed the contract!

                                                      Defense Problems!

The defense has a several serious problems with this defense. First, since Burton was dealing with the Plaintiff as the general manager, how would the Plaintiff know that Burton no longer had the authority to bind the LLC? Burton apparently never mentioned it. Moreover, Burton continued to act as though he were still the general manager.

An agent can act for a principal when the agent has express authority (Contract,) Implied authority (as an officer of the corporation or LLC, a partner, or by the actions of the principal,) or apparent authority (when the agent holds himself out as having the authority and the principal allows the representation.) I am summarizing and these points are a little more complicated that I have outlined.

In this case, Burton had the authority before the contract was signed, and Burton continued to hold himself out as having the authority, with the knowledge of the principal, even after the authority was removed. So Burton appeared to have the authority to bind the LLC to contracts as an agent with either express or apparent authority.

                                              What about the Ex-Agent?

One funny thing that the case does not mention is that the LLC, owned in part by Burton, is effectively arguing a position that Burton is personally liable as a principal to the contract. The case does not appear to address this point.

I discussed a similar legal point in an earlier post where I urged owners of corporations to disclose that the contracting entity is a corporation. Failure to disclose that you are an agent for a principal (the LLC or the Corporation,) or the failure to disclose that a prior agent can not longer bind the company can lead to unfortunate results.

                                            Verbal Contracts and Agency!

This leads me to my final point. Verbal contracts are perfectly valid, and enforceable so long as they do not violate the Statute of Frauds. A verbal contract with an agent would not violate the Statute of Frauds. However, the always interesting Rush Nigut's Blog has an interesting post on the verbal agreements - with the simple but good advise: Don't do it!

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Here is an interesting article about Big Oil winning one for the shareholders. But, not to worry, the taxpayers get to pay. I wonder if the dividends will get a needed boost. 

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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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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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      “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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