Business Law & Contracts

Success in the Business world requires attention to detail. If it is worth doing, it is worth the effort to memorialize it in a written contract. Only the naive rely upon a “handshake deal.” Furthermore, the wise business proprietor knows when he or she must have outside support. Mirowski & Associates can assist you in creating comprehensive contracts for your business and assist you in protecting your interests. Mirowski & Associates specializes in providing a full range of civil legal services for small to medium size businesses and corporations in San Diego and throughout Southern California. Our services include: Corporations, L.L.C.s and Partnership Formation & Maintenance; Business Negotiation & Contract Drafting; Labor and Employment Matters, Business Strategy Counseling, Intellectual Property Matters Including Trademarks, Copyrights & Trade Secrets; Liability and Asset Protection, Employer-Employee Law, Civil Litigation & Arbitration (Both Plaintiff and Defendant); Tort and Unfair Competition Litigation, Winery Law and Licensing and Governmental Liaison.

CONTRACTS PRIMER: WHY WRITTEN CONTRACTS ARE ESSENTIAL (From “Protecting Information in the Computer & Hi-Tech Industries” by Paul J. Mirowski)

“For the memory of men slips and flows away, and the life of man is short, and that which is not written is soon forgotten.” – The Scholar Beaumanoir in 1283
“A verbal contract isn’t worth the paper it’s written on.” Samuel Goldwyn

The above quotes suggest a couple reasons why any contract worth having is worth reducing to a writing. Even though verbal contracts are valid and enforceable (sometimes), people’s memory of the details will change over time, normally in their favor. The fact is, the cost of litigating verbal contracts will normally exceed the possible recovery. The law of contracts tends to be remedial. That is, it merely puts you back in the position of where you should have been and seldom imposes any requirement that the parties “do the right thing.” You do not recover the costs of getting there! Quite simply, this means that without the right provisions, the recovery you will receive will not compensate you for the legal and other costs. So, the question comes down to should you invest a little up front to make sure everything is clear and you have built-in protections or, hope for the best and be willing to accept the damage that occurs when you are disappointed. The old saying “penny wise and pound foolish” is something that one should always keep in mind.

A written contract forms an enforceable relationship between two parties. If it is well written – it will define the expectations of that relationship and avoid conflict. The terms of a contract are normally limited only by the general rule that it’s terms may not require “illegal” actions (i.e., a societal wrong). On the other hand, society has an interest in parties ordering their affairs and keeping the peace and therefore the “law” will enforce extensive self-imposed obligations called for by a valid contract. Therefore, a contract can be used to provide expansive protection of the parties, their businesses and may also be used to regulate and protect intellectual property and even ideas. In some cases, a written contract is the only effective tool available to control use or transfer of proprietary information (intellectual property). This is especially true in the hi-technology industries.

Central to any contract is the assumption that it must be laid out in writing at a point where it will be of some use. In essence, this means that it must be drafted BEFORE the parties have begun their work. Anyone who has attempted to draft a contract after the first dollar has been invested or any significant amount of time/effort has been spent by one of the parties will understand how quickly the excitement and comity of a new venture will devolve into mistrust and bad feelings.

Many people complain that they dislike the “formality” of a written contract. They consider a written contract too adversarial and after all, “we’re friends.” This emotional reaction usually turns to regret when the same parties are faced with a failure of their relationship to live up to their (unwritten) expectations. If an agreement is important enough to be made, and you want to keep your relationship in tact, there is no reason to NOT write it down.

Besides providing an objective record of the intent of the parties (at a time they can find agreement), a well-written contract:

Clarifies the parties’ goals, defining the issues and expectations before the parties have invested time and money into a project.
Minimizes the chance of conflict and disputes between parties because the agreement is available for review and to refresh their memories at any time.
Avoids the delays and confusion inherent in joint ventures by providing a clear assignment of responsibility.
Provides a mechanism for resolution of disputes to keep it “out of court” and therefore protect the venture from ruin by expensive and wasteful litigation.
Provides penalties for parties who act in bad faith thereby taking the potential benefit out of a malfeasance and protecting the good-faith party.

Many inexperienced entrepreneurs like to say that they cannot be bothered with attorneys and that “mumbo jumbo” of legalese. These very same persons are likely to sign any “boilerplate” contract that some smiling person has presented to them as a “standard” contract. These people create a great deal of income for attorneys when they later realize that a contract is only “standard” from the point of view of the person offering it. Failure to read and negotiate such a contract will often leave them and their business “out in the cold” when the cost-benefit of a good attorney and well-drafted contract becomes painfully clear. The lesson to be learned is simple, write it down and write it well!

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STANDARD CLAUSES FOR ALL YOUR CONTRACTS

The following is a short version of standard language which I recommend be inserted in all contracts made and to be enforced in San Diego, California:

“This agreement and any modifications hereto shall be binding upon the heirs, assigns, and/or successors in interest to the parties hereto. If any provision in this agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions will nevertheless continue in full force. No waiver of any breach of this Agreement shall be construed as a continuing waiver or consent to any subsequent breach hereof. This Agreement shall be governed and interpreted by the laws of the State of California. Should any controversy or claim arise out of or relate to this contract, the Parties shall first attempt to resolve the matter by submitting the same to a Mediator mutually selected by the Parties. Should the Parties fail to resolve the matter through mediation, the Parties shall then submit the matter to binding arbitration before a single arbitrator in accordance with the rules of the ADR, Services, Inc. located in San Diego, California or such other arbitration service as shall be mutually agreed to by the parties within thirty (30) days of written demand being made on the other party or parties. Any judgment rendered by said arbitration may be entered as a judgment in any court having jurisdiction. In the event that any action, mediation / arbitration or proceeding is commenced to interpret or enforce the terms of this Agreement, the prevailing party shall be entitled to recover its actual attorney’s fees, costs and expenses. The sole jurisdiction and venue for any dispute arising out of this contract shall be the central district of San Diego, California. This agreement supersedes any and all agreements, either oral or written, between the parties hereto. This instrument contains the entire agreement of the parties hereto.”

THE BUSINESS LEGAL HEALTH CHECKLIST™

Take a few minutes and check up on the legal health of your business / organization. An ounce of prevention at this time might be worth that proverbial “pound of cure” at a later date! Simply read the following questions and make a note of anything that suggests there might be a potential problem with the organization of your business:

I. IS YOUR BUSINESS ORGANIZED TO AVOID PERSONAL LIABILITIES AND / OR LEGAL EXPOSURE? A. Entity: Should your business be operated as a Corporation or Limited Liability Company (LLC)? EXPLANATION: You should consider if any of the following advantages of conducting business under the corporate or LLC structure might be important to your business: 1. Entities can be used to avoid personal liability (for example, a principal owner’s home equity) for debts and liabilities of the business entity. 2. Unlike a sole proprietorship or a partnership, a corporation’s life span is usually perpetual, even when there is only one shareholder allowing long term planning for the conduct of the business uninterrupted by death or illness. 3. Bylaws of an entity constitute a traditional method of defining the management (decision making) and ownership among the principal owners of the business. B. Partnership Agreement: Is your business operated as a “Partnership” without a current partnership agreement which provides for: 1. The percentage of ownership by the respective partners? 2. How and when “draws” may be made by the partners? 3. How and when profit or loss will be determined? 4. A structured system of management and control of the business (decision making) and specifying what actions will require majority consent? 5. Under what terms will property be loaned to the partnership and what compensation will be paid? 6. Trade secret protection or ownership of trade name & proprietary interests (especially upon dissolution)? 7. Prohibiting partners from competing outside activities? 8. Prohibiting partners from transferring their partnership interests? 9. The terms of admission of new partners and what will happen upon a partner’s death, disability, or voluntary withdrawal? 10. How a dissolution would be handled and specifying the rights and responsibilities of the partners? II. ARE YOU RISKING PERSONAL LIABILITY? Although one of the advantages of a Corporation or LLC is to protect you from “personal liability” for the debts of the “entity,” pursuant to the “alter ego” doctrine, major shareholders and officers of a corporation may still be made personally liable if the entity fails to adhere to “corporate formalities.” Historically, the courts have used a number of factors to support their ability to “pierce the corporate veil” (i.e., to disregard the entity to create personal liability for the owners) including, a corporation’s: A. Failure to issue stock. B. Failure to maintain minutes and adequate corporate records. C. Failure to maintain arm’s length relationships (read appropriate contracts) among the related parties. D. Treatment of the Corporation’s assets as if they were owned by an individual for his or her own benefit. See Associated Vendors, Inc. v. Oakland Meats Co. (1962) 210 Cal. App. 2d 825, 838-840. EXPLANATION: One must conduct one’s corporate affairs properly or lose the advantages given to the owners by law. III. ARE YOUR CORPORATE OR PARTNERSHIP FORMALITIES CURRENT? A. Current Formalities. Are there current annual corporate minutes for every year of operation or is the partnership agreement out of date? 1. Has the corporation / partnership changed in a significant manner that affects the owners’ rights and responsibilities? 2. Has the business procured new management (officers, directors or partners) without the appropriate contracts and minutes? 3. Have any major transactions occurred without the required approval of those who make the ultimate decisions? 4. Have the goals of the business changed? B. Interests Defined. Have new owners / investors acquired an interest in the business without contracts or shares representing their interests and the rules governing their ownership rights? IV. ARE YOUR BUSINESS OPERATIONS CURRENT? A. Contracts. Has the corporation / partnership entered into any significant agreements without a proper written contract? (Beware: see the “Contracts Primer” herein) B. Contributions. Has anyone contributed money / services / assets to the business without a written agreement? V. ARE YOUR EMPLOYMENT CONTRACTS CURRENT? A. Employment Contracts. Are all major owners (officers, directors, shareholder, partners) and management personnel under comprehensive employment contracts? Has your business retained independent contractors or key employees without a written contract? B. Personnel Policies. Does your company have personnel policies to control entry and exit procedures and limit liability. C. Trade Secrets. Does your business protect its trade secrets from departing employees? (See “Intellectual Property” herein) VI. ARE YOUR CONTRACTS COMPLETE? A. Have you had your contracts reviewed to insure that they provide appropriate safeguards and protection from litigation and provide disincentives to deter litigious persons from starting litigation? B. Do your contracts provide appropriate remedies for your particular situation? C. Do your contracts provide a “home court” advantage (i.e., the parties are required to come to your local jurisdiction rather than have you travel to their jurisdiction)? D. Do your contracts provide that “attorney fees” and “costs” will be paid by the loser? VII. GENERAL ISSUES A. Does your business need a “fictitious business name” filing in its counties of operation? B. Does your business need any licenses to operate in the territory in which it currently conducts active operations? C. Have you complied with all state \ county \ city requirements for your business? D. Will your business enter into or renew a lease soon without having the terms reviewed? E. Will you be doing any business internationally? F. Will you be doing business over the internet and have you made provisions for security of your files and transactions?