We have written before that businesses do not necessarily have to have written contracts to form a binding contract. If a customer verbally offers to pay you $200 to do X, and you verbally agree to do X for $200, you may have a binding contract. To form an oral contract, there must be an offer, an acceptance, and mutual assent. This last requirement, also called “meeting of the minds,” means that you both agree to the terms of the contract – which can be tricky if the contract is not written down.
Even though oral contracts are valid, we always recommend contracts in writing because (1) then there is proof that the parties contracted with each other, other than just two people’s versions of the truth, and (2) there are oftentimes many more terms and conditions other than X and the price that need to be included in the contract. What time does X have to be completed? When is payment due? Inclusions/exclusions? For example, if X is painting a house, does the painter include white paint on the front porch railings but exclude the stain on the wood deck?
If you and the customer are not on the same page and do not have a “meeting of the minds” as to these terms, there can be no contract. However, if you hand your customer a piece of paper with terms and conditions written on it, that is simply an offer (or a counteroffer to their offer). How do you know the agree to the terms? This is why people get their customers to sign it, which acknowledges that they agree to the terms (even though a signature is NOT a legal requirement to form a contract).
For a lot of our clients, written contracts and signatures just aren’t practical. The house painter is going to want the homeowner client to agree to the terms and conditions BEFORE the painter buys supplies and drives out to the house, for example.
These days, everyone has e-mail. A lot of our clients are already utilizing e-mail to send their customers appointment reminders and quotes. Why not incorporate terms and conditions into the email? To legally guarantee that those e-mailed terms are incorporated into the contract, the customer would need to take some affirmative step to acknowledge that they’re agreeing to it. They could hit reply to the e-mail and say they agree to everything, you could include a way for them to electronically sign a document, or you could utilize software that allows the customer to click “I agree” or “I disagree” to the terms. This latter example is called “click-wrap” and technology companies like Apple have been using it for years to get consumers to agree to their terms of service. Click-wrap contracts are universally upheld as long as some procedures are put in place, like allowing the customer to click “I disagree,” putting the terms and conditions near the “I agree” button, and allowing the customer to download or print the terms of service.
Putting all the terms of the contract in writing helps to avoid confusion between the parties and prevent potential lawsuits if customers become unhappy. Please keep Jesson & Rains in mind if you or a colleague needs assistance drafting a click-wrap contract or other terms and conditions.
Litigation happens. We believe it’s beneficial to all parties involved to amicably resolve disputes before getting the courts involved; but sometimes that just isn’t possible. Litigation costs can be wildly unpredictable, vary on a case by case basis, and can add up quickly.
Take two similar cases: In “Case 1,” the case moves quickly towards trial but resolves early at mediation. In “Case 2,” the case moves slowly through discovery, with all parties objecting to the other party’s discovery requests; there is a day-long mediation where the case doesn’t settle; there are complicated issues of law to be researched and argued before the Court; and then a costly trial. It is obvious that “Case 2” would cost more money; however, what is not always obvious in the beginning is whether a case is going to follow “Case 1” or “Case 2”’s path. We try our best to estimate costs for our clients and be honest (sometimes brutally) about potential cost, but a lot of the cost depends on your opposing party.
For our business clients, and in some limited circumstances, individuals, there may be a cheaper and more predictable way: Alternative Dispute Resolution (“ADR”). ADR has been around for a long time and can be contractually mandated between the parties, usually in the form of mediation and/or arbitration. Mediation is when a neutral third party goes back and forth between the parties in an attempt to negotiate a compromise. Arbitration is a middle ground between mediation and a lawsuit. The parties present their evidence to a neutral third party who will decide the case; however, arbitration is generally far less formal than a lawsuit and costs less time and money because there are no motions filed or discovery exchanged between the parties.
There are other advantages to just saving time and money. For example, disputes that a business may not want made public (which would be a matter of public record should litigation ensue) can be resolved in a confidential nature through ADR. Where ADR really shines is in the resolution of complex disputes, like a complex breach of contract dispute or complex construction defect case. Using ADR, the parties can select an expert in the field to act as the arbitrator or mediator, instead of relying on a jury of average people who likely would not have the necessary specialist knowledge to properly decide your case.
However, businesses should be careful about blindly throwing in arbitration clauses into their contracts without first consulting an attorney. If the arbitration clause in your contract is not enforceable, then you will end up in litigation anyway. For example, there have been many lawsuits filed recently regarding the Samsung “exploding” phones. People who have been injured when the Samsung phones spontaneously combust are finding that, when they file the lawsuit, Samsung is filing a motion to dismiss the case because there is an arbitration clause contained within the phone’s warranty guide. While the consumer has 30 days to opt out of that provision after buying the phone, the majority of people do not do so because they do not know about it! Further, pursuant to the contract, the proceedings between the consumer and Samsung are secret, Samsung has the right to choose the arbitrator, and, if Samsung wins, the consumer may be required to pay Samsung’s costly legal fees.
Seems like a great deal for Samsung, right? However, In January of 2017, a federal appeals court in California ruled that the arbitration clause did not comply with California law and, therefore, the consumers were not bound by the clause. There have been many other cases in recent history where Courts have refused to enforce arbitration clauses against consumers. Frequently, the Court’s reasoning is that the clauses are hidden among other terms (so the consumer is “tricked”), not negotiable, and unfair.
The takeaway from all of this should be that, while ADR is a useful tool to move cases towards a quick and often relatively cheap resolution, the arbitration clause needs to be enforceable. Litigating the issue of whether an arbitration clause is enforceable can be extremely costly. Make sure to consult an attorney who can check to ensure that your arbitration clause is enforceable in the states in which you do business.
“One size fits all” is the wrong approach to take when dealing with estate planning and business documents. And when you purchase legal forms from the internet, that is exactly what you are getting. For estate planning, no person’s circumstances and wishes is going to be identical to the next. For businesses, while forming the LLC or incorporating may be simply accomplished by using the Secretary of State’s forms (no need to even use RocketLawyer, here, for example), what about the other documents that you may need to go with it? We’ve talked about the importance of operating agreements before. Those are absolutely not one-size-fits-all.
Here are some risks:
1) The document may not be valid at all. I have personally had a client bring me a form he purchased online that was advertised as North Carolina-specific that was NOT valid in North Carolina. He wasted money on that form and then paid me to re-do it, when it could have been done correctly the first time. Attorneys oftentimes say, “Pay us a few hundred dollars now to do it right the first time or a few thousand dollars later to fix it.”
2) While valid, the document may not be the best. Admittedly, the online legal form websites sell forms that are likely valid. They put just enough stuff in there to make them valid. However, they leave out state-specific clauses and references to statutes that may save you and your family or business tremendous time and money in the future. Here are some examples:
a. Attorney’s fees provisions. In North Carolina, these are only valid in some types of contracts and only if reciprocal. Without these clauses, you could be out thousands of dollars if a dispute arises. Or, you could have a false sense of security thinking you will be entitled to attorney’s fees if a dispute arises, only to find out that your type of contract or the way the clause is written does not allow for attorney’s fees.
b. Leases. Did you know that if a tenant breaches a lease, other than for non-payment of rent, you cannot evict the tenant unless the lease specifically provides for such? This has happened to a client of ours – the lease did not provide for it, and he was stuck with that tenant. Also, you can put language in a lease that waives notice requirements prior to evicting them. Online form leases do not contain this language.
c. Wills. We have already discussed the very important language that can be included in a will that will save your executor time, money, and stress when they are handling your estate. It goes without saying, the only way to ensure that your last wishes are accomplished is to hire an attorney. There’s no way of knowing if you use an online form. I have spoken to attorneys who litigate estate cases (after someone has died, for example contesting a will on behalf of a beneficiary, or just asking the court for guidance in interpreting a will) and their business is booming thanks to online legal forms.
d. State laws are different. North Carolina treats non-compete clauses and forum selection clauses differently from Florida, for example. Laws are created by the courts, too. A legal form website is not going to be current on courts’ interpretations of a state’s statutes. Just take a look at LegalZoom’s terms of service: “. . . LegalZoom cannot guarantee that all of the information on the Site or Applications is completely current. The law is different from jurisdiction to jurisdiction, and may be subject to interpretation by different courts. The law is a personal matter, and no general information or legal tool like the kind LegalZoom provides can fit every circumstance. Furthermore, the legal information contained on the Site and Applications is not legal advice and is not guaranteed to be correct, complete or up-to-date. Therefore, if you need legal advice for your specific problem, or if your specific problem is too complex to be addressed by our tools, you should consult a licensed attorney in your area.”
3) While valid, the document may be worse than not having one at all. You may leave language in an online form that actually puts you in a worse position. A business owner may do something that puts him personally liable for the business. The devil is in the details. In a case out of Canada, a poorly placed comma cost a business nearly $1,000,000.
4) No attorney-client relationship. By having personal interaction with an attorney, the attorney can draw information out of you that is important that you did not know was important. As a layperson, you don’t know what you don’t know – and that’s what you pay an attorney for. Hopefully you develop a long-term relationship with your attorney. You can continue to seek advice from someone who knows the ins and outs of your business or knows your family. On a different note, an attorney is a fiduciary who owes a duty to you. If they do something incorrectly which costs you money, you can sue the attorney for malpractice. You cannot do this with online legal forms.
As simple as your legal issue may seem, there is value in consulting with an attorney. The document itself, in my opinion, is free.
Did you know you could be held personally responsible for your corporation’s debts if the corporation is dissolved improperly?
The first step in closing your corporation is called “dissolution.” Once a corporation has filed for dissolution, it is no longer able to carry on business, except for business that is necessary to wind up the corporation’s affairs (for example collecting assets owed to the corporation and disposing of any corporate property).
One of the most important steps involved in dissolving a corporation, and the one that can get the shareholders in trouble, personally, is that of disposing of claims against the corporation (in other words, money owed by the corporation). The dissolving corporation must notify known claimants, in writing, that: it is dissolving; describe any information required by the corporation to process a claim; provide a mailing address where the claim can be sent; state a deadline (which must be no fewer than 120 days from the date of the written notice) by which the corporation must receive the claim; and state that the claim will be barred if not received by the deadline. For unknown claims, the corporation can publish this notice in a newspaper in the county in which the corporation had its principal office.
If the procedure is not followed, then the shareholders of the corporation could be held personally liable, up to the individual shareholder’s pro rata amount of the claim or up to the amount of the corporate assets distributed to that shareholder.
For example, XYZ, Inc. is a corporation with two shareholders that wishes to dissolve. XYZ, Inc. has $1 Million in assets which are distributed to each shareholder evenly. At the time of XYZ, Inc.’s dissolution, there was a known claimant who had a claim against XYZ, Inc. in the amount of $800,000.00. If XYZ, Inc. properly notifies the claimant of XYZ, Inc.’s dissolution, and the claimant fails to make a claim within the deadline, the claim will be barred, and the shareholders can split the remaining assets.
However, had XYZ, Inc. not followed the correct notification procedures, the claimant could recover $400,000.00 from each of the shareholders. This is bad news for the shareholders if they have already spent or invested the $400,000 they received when the corporation closed.
As you can see, liability issues do not only occur during the initial startup phase or during the day to day business operations of the corporation. Even once your corporation has been dissolved, claimants can come back at a later date and claim money from a corporation’s shareholders.
The attorneys at Jesson & Rains, LLP can help you avoid many corporate pitfalls and are able to offer assistance and counselling in all stages of your corporation’s life.
1. Protect yourself from business liability.
2. Every business needs insurance.
3. Every business needs a good CPA.
4. If more than one owner, your business needs an operating agreement.
5. A bad contract is worse than no contract at all.
A buy/sell agreement governs how, when, and why partners/owners leave a business, as well as other types of events. A partner’s interest in the business is an asset, and assets are affected at death, divorce, and bankruptcy. As a business owner, you do not want a partner’s death, divorce, or bankruptcy to detrimentally impact the business, right? All of these contingencies can be planned for in advance. We typically encourage our clients to incorporate these provisions in their partnership or operating agreement right from the very beginning, but the buy/sell agreement can be a stand-alone contract.
There are a lot of decisions to be made when going into business with others—naming your business, marketing, capital and profit sharing arrangements, etc. Unfortunately, partners do not always think about the end game, which is exiting the business. Maybe there is a disagreement between the owners as to the future of the company. One partner may want to sell while another doesn’t. If one owner wants to sell just their interest and retire, do the other owners have any say to whom the owner sells to? Should the other owners get the option of purchasing the interest first? If a partner passes away, a family member could inherit their interest, leaving an unsophisticated person running the business with you. Even worse is divorce—during the equitable distribution of a couple’s finances, an ex-spouse could become part owner of a business or force the sale of the spouse’s interest.
Another important concept that many people overlook is how they are going to be able to afford buying another partner out. Oftentimes, having that much cash on hand is impossible. An installment payment plan can be provided for in the buy/sell or operating agreement. To protect against death, life insurance policies are a great way to fund the buyout of a partner who has passed away. The company or the other owners buy policies for each other (but not themselves), and upon the death of a member, the company or owners receive the life insurance benefit. That money can be paid to the family of the deceased as payment for his or her interest in the business.
Finally, buy/sell or operating agreements can stipulate the type of valuation that should be used if and when an ownership interest is sold. There are three main types of business valuation methods: Asset Approach, Market Approach, and Income Approach. Even if business owners agree on who should purchase the interest, if they haven’t previously agreed upon the valuation method, the owners could come up with different valuations and be forced to file a lawsuit and have the court decide.
In the event that business owners have not planned for these almost-certain future events, depending on the terms of the operating agreement, a court can force the dissolution of a business. Many business owners avoid hiring attorneys because of the cost. However, it is important that business owners consider the comparatively small cost of hiring an attorney to assist them with these matters now, as the future cost could be much, much higher, and their business could suffer or be forced to close as a result.
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