February 19, 2018
WHAT’S THE DEAL WITH ALL THOSE “BOILERPLATE” PROVISIONS
THEY STUCK AT THE END OF MY CONTACT?
Almost every written agreement includes a slew of provisions that do not appear to relate to the substance of the agreement itself.
The agreement could be a promissory note (when you borrow money), a mobile phone service agreement, a bank or brokerage account agreement, an agreement for building an addition to your house, etc. Why do they need all those provisions that have nothing to do with repayment of the loan, provision of wireless service, or building the addition?
It turns out that those provision are extremely important and can significantly affect your rights and obligations if there is ever a dispute arising from the agreement.
There are many such provisions. Here I will discuss only three: (1) attorney’s fees; (2) jurisdiction; and (3) governing law.
ATTORNEY’S FEES PROVISION
In the U.S., in most lawsuits, the general rule is that each side has to bear its own attorney’s fees, irrespective of who wins the lawsuit.
There are a few exceptions to this general rule. One exception is if the lawsuit is based on a contract between the parties, and the contract contains a provision that allows the prevailing party to recover its attorney’s fees from the losing party.
So if you think that you are not likely to breach the agreement, then you might want to include a provision in the agreement that if there is a lawsuit for breach of the agreement, then the prevailing party could recover its attorney’s fees from the other party.
But there are instances when the attorneys’ fees provision in the written agreement is poorly drafted, and the question of entitlement to recover attorney’s fees has to be litigated (in addition to litigating whether there was a breach of contract, and what the damages are.) Here are a few examples.
Example 1
“In any lawsuit to enforce any right under this Agreement, the prevailing party shall be entitled to recover from the other party reasonable attorney’s fees and expenses reasonably incurred in connection with such lawsuit.”
-This provision is reciprocal (it applies to both parties), which is good; and
-It is limited to “reasonable” fees, which is good.
This provision will likely be enforced by the court.
Example 2
“In any lawsuit to enforce any right under this Agreement, if Company is the prevailing Party then Company shall be entitled to recover from Consumer reasonable attorney’s fees and expenses reasonably incurred by Company in connection with such lawsuit.”
-This provision is limited to “reasonable” fees (good); but
-It is one-sided (bad).
This provision will almost certainly be interpreted to mean that any prevailing party may recover attorney’s fees (not just Company). The Company probably did not anticipate such an outcome.
Example 3
“In the event of a breach of any of the terms of this Subcontract, Subcontractor agrees to pay Owner and Contractor, in addition to all other damages, all attorney’s fees incurred by the Contractor in enforcing the terms of the Agreement.”
-This provision does not say that there must be a lawsuit and that Owner and Contractor must be the prevailing parties. Do the Owner and Contractor recover attorney’s fees even if they lose the lawsuit?
-The provision is one-sided. If Owner or Contractor breaches the contract, is Subcontractor entitled to recover its attorney’s fees?
-The provision states that “all” attorney’s fees are recoverable; it is not limited to “reasonable” fees.
-How are “Contractor’s” attorney’s fees going to be split between “Owner and Contractor?”
This was the actual provision in a case in which I represented the Subcontractor. On the issue of attorney’s fees, I took the position that this attorney’s fees provision makes no sense, is too vague, is one-sided, and should be unenforceable. (The case settled before this issue was litigated.)
JURISDICTION
When you enter into an agreement with someone, you want to control where a lawsuit for breach of the agreement will be prosecuted.
For example, say you are a manufacturer in California and you want to buy a customized metal forming machine from a company in Michigan for $400,000. You enter into an agreement with the Michigan company, which their lawyer had drafted.
In the agreement, they agree to build the machine to your specifications. But when they deliver the machine, it fails to perform to the specs. You call your favorite lawyer at the Soffer Law Firm and tell him, “I want to sue the bastards.” The lawyer reviews the agreement for the first time and he tells you that the lawsuit must be filed in Detroit and that you are going to have to hire an additional lawyer who is licensed in Michigan. Why? The agreement includes the following provision:
“Each party hereby consents and irrevocably submits to the exclusive jurisdiction of the Third Judicial Circuit of Michigan located in Wayne County in any action on a claim arising out of, under, in connection with, or relating to this Agreement.”
-The Michigan court has exclusive jurisdiction. The lawsuit cannot be filed in any other court.
If you had consulted the Soffer Law Firm before you signed the agreement, we would have tried to change the provision to the following:
“The Third Judicial Circuit of Michigan located in Wayne County shall have jurisdiction over any action on a claim arising out of, under, in connection with, or relating to this Agreement.”
-The Michigan court still has jurisdiction, but it is not exclusive. This provision does not rule out the jurisdiction of other courts, for example Los Angeles Superior Court. So you would have a strong argument that filing a lawsuit in Michigan is definitely allowed, but that filing elsewhere might also be allowed.
GOVERNING LAW
When you enter into an agreement with someone, you want to control which state’s law will govern the agreement and disputes that relate to the agreement.
For example, say you are a seller of aircraft parts in California and you want to buy certain engine parts from a distributor in Seattle, Washington. You enter into an agreement with the Washington distributor, which their lawyer had drafted. In the agreement they included a representation and a warranty that the engine parts are genuine. You buy the parts and then sell one of those parts to a flight school, they install it in the engine of their airplane, and the plane crashes because the part was a fake foreign knockoff. You get sued for wrongful death. In turn, you sue the Washington distributor in California for fraud and misrepresentation (they had made a false representation in the contract). In the course of the lawsuit, you discover that they knew all along that the parts were fake and that there had been other lawsuits involving accidents caused by this fake part. This sounds really bad. The distributor’s conduct is outrageous. You want the distributor to be punished so you ask the judge to award punitive damages.
The distributor argues that they cannot be liable for punitive damages. The judge agrees with the distributor. Why? The agreement between you and the distributor contains the following provision:
“Any and all lawsuits arising out of and relating to this agreement shall be governed by the laws of the State of Washington, without regard to conflict of laws principles.”
-It turns out that Washington State law does not allow for recovery of punitive damages. (This is very unusual.) Even though the lawsuit was filed in California, the California judge must apply Washington law.
If you had consulted the Soffer Law Firm (or any competent attorney) before you signed the agreement, we would have tried to change the provision to the following:
“Any and all lawsuits arising out of and relating to this agreement shall be governed by the laws of the State of California, without regard to conflict of laws principles.”
Or, alternatively,
“Any and all lawsuits arising out of and relating to this agreement shall be governed by the laws of the State of Washington.”
-Omitting the provision regarding conflict of laws leaves open the possibility that the laws of another state – in this case California (which does allow punitive damages) – should apply, because, under conflict of laws principles, the interests of the State of California supersede those of Washington. It’s not necessarily a winning argument, but at least there is a possibility of winning the argument.
August 4, 2017
CALIFORNIA BUSINESS ENTITIES
Business clients often want to know what sort of business organization is best suited for their existing business or a new business they are preparing to start. There are many factors the owner(s) must consider in making this decision, including the number of owners, owners’ experience, availability of capital, legal costs, taxation, and growth prospects.
This presentation does not attempt to provide advice as to which type of entity is right for you. Rather, it attempts to give a basic overview of the most common business entities available in California. It is not a substitute for having a thorough consultation with your business attorney and CPA to discuss your particular situation and obtain individualized advice.
There are four basic types of business organizations permitted in California, each with its own advantages and disadvantages. The basic business entities are (1) sole proprietorship; (2) partnership; (3) corporation; and (4) limited liability company (LLC).
The following tables provide a summary of these basic business types and some of the pros and cons typically associated with each.
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SOLE PROPRIETORSHIP In a sole proprietorship in California, the business is not a legal entity that is separate from the individual who owns it; the owner of the business and the business are one-and-the-same. The owner often operates the business under a fictitious business name (a “dba”). |
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ADVANTAGES |
DISADVANTAGES |
| · Easiest to start. · Registration with the Secretary of State is not required. · No filing fees. · Entire profit or loss passes through to owner. · Business does not pay income tax on profit (owner does). · Owner is solely responsible for all operational decisions. |
· Owner is personally liable for debts and liabilities incurred by the business; owner’s entire personal wealth is at risk (but some risk could be mitigated with liability insurance). · Difficult to raise money from outside sources without owner’s personal guarantee. · Business ceases to exist when owner dies (but heirs who inherit the business can continue to operate it as a new sole proprietorship). |
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PARTNERSHIP A California partnership is an association of two or more persons (not necessarily natural individuals) to carry on as co-owners of a business for profit. The partnership is an entity that is distinct from its partners. A partnership may be either general or limited. (California law also provides for a limited liability partnership (LLP) entity in which all the partners receive limited liability protection. The LLP structure is limited to licensed CPAs, lawyers, and architects (and, until 01/01/19, also engineers and land surveyors).) |
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General Partnership In a California general partnership, all the partners jointly own the business, have an equal right to participate in the management of the business (unless agree otherwise), and share the profits and losses of the business in proportion to their respective financial contributions. |
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ADVANTAGES |
DISADVANTAGES |
| · Easy to establish. · Registration with the Secretary of State is not required. · No filing fees. · Entire profit or loss passes through to partners in proportion to their percentage interest in the partnership. · Business does not pay income tax on profit (each partner does). · Greater opportunities for success because partners can bring to the table more ideas, knowhow, management skills, and contacts. · Ability to raise capital is improved because there are multiple owners with a greater pool of resources. |
· Each partners is jointly and severally liable for the conduct of the other partners and the debts and other legal obligations incurred by the business. Consequently, the personal liability of each partner is unlimited; each partner’s entire personal wealth is at risk (but some risk could be mitigated with liability insurance). · Unanimous consent of all partners is required for the transfer of any partner’s interest in the business. · Death or withdrawal from the partnership of any partner, no matter how small his/her interest, causes the dissolution of the entire partnership (but a new partnership, sans the deceased/withdrawn partner, may emerge). · Many potential problems in the absence of a written general partnership agreement. · Registration of a fictitious business name is required if the name of the business is different from the last names of the partners. |
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Limited Partnership A California limited partnership comprises a general partner and at least one limited partner. The general partner manages the business while the limited partners contribute capital or other assets to the business but have no role in running the business. |
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ADVANTAGES |
DISADVANTAGES |
| · Limited liability for limited partners. Only the capital contributed by the limited partners is at risk. Creditors cannot reach a limited partner’s personal assets to satisfy obligations of the limited partnership. · Limited partners share in the profits and losses without actively participating in the business. Profits or losses pass through to the partners. · Business does not pay income tax on profit. Partners pay personal income tax on their share of the profits. · Limited liability aspect is attractive to a greater number of potential investors. · Partnership survives the death or withdrawal from the partnership of a limited partner. |
· General partner has unlimited personal liability for the debts and obligations of the business; the general partner’s entire personal wealth is at risk (but some risk could be mitigated with liability insurance). · Risk that a limited partner could unwittingly become a general partner if he/she actively engages in the operation of the business. · Must be registered with, and a filing fee must be paid to, Secretary of State before the limited partnership is created. · Must pay an annual franchise tax of $800 to the California Franchise Tax Board. · Death or withdrawal from the partnership of the general partner causes the dissolution of the entire limited partnership. · Many potential problems in the absence of a written limited partnership agreement. |
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CORPORATION A California corporation is a legal entity that is separate and distinct from its owners. A for-profit corporation is created by individuals or other “persons” (shareholders) who contribute money and/or property and, in exchange, receive the corporation’s capital stock. The corporation maintains a legal identity that is separate from the persons who manage and control the its operations. A for-profit corporation may be either a C corporation or it may elect to be an S corporation in order to avoid paying corporate income taxes. |
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C Corporation |
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ADVANTAGES |
DISADVANTAGES |
| · Limited liability for shareholders. Only the capital contributed by the shareholder is at risk. Creditors cannot reach the shareholder’s personal assets to satisfy obligations of the corporation. · Ability to raise capital is vastly improved because there are multiple, sometimes many, owners with a greater pool of resources. Also, additional capital can be raised by selling shares of stock or creating and selling new classes of shares. · Unlimited number of shareholders (but may have a single shareholder) · No restrictions on shareholder’s citizenship or immigration status. · No restrictions on type of entity that may be a shareholder. · Multiple classes of stock are permitted. This affords flexibility if original owners plan to expand future ownership. · Corporation survives the death of any shareholder or the transfer of any shareholder’s shares. |
· Must file Articles of Incorporation with Secretary of State (SOS) and pay filing fee. · Double taxation. Corporation must pay income tax of its profit. When the profit is distributed to the shareholders as dividends, each shareholder must pay income tax on his/her respective distribution. · Shareholders owning or controlling only a minority of the corporation’s voting stock have little or no say regarding the operation of the business. Shareholders who own or otherwise control a majority (or a significant number) of the corporation’s voting stock have an overriding influence in the management of the business. · Corporate formalities, such as election of a board of directors, appointment of officers, board meetings, corporate minutes, etc., must be followed. · Many potential problems in the absence of a written shareholders agreement. |
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S Corporation |
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ADVANTAGES |
DISADVANTAGES |
| · Limited liability for shareholders. Only the capital contributed by the shareholder is at risk. Creditors cannot reach the shareholder’s personal assets to satisfy obligations of the corporation. · All business profit/loss passes through to the shareholders every year. Income is taxed only at the shareholder level (i.e., S Corporations avoid the double taxation issue that C Corporations face). · May have a single shareholder. · Ability to raise capital is improved because there are multiple (up to 100), owners with a greater pool of resources. Also, additional capital can be raised by selling shares of stock. · Corporation survives the death of any shareholder or the transfer of any shareholder’s shares. |
· Must file Articles of Incorporation with SOS and pay filing fee. · Shareholders owning or controlling only a minority of the corporation’s voting stock have no say regarding the operation of the business. Shareholders who own or otherwise control a majority (or a significant number) of the corporation’s voting stock have an overriding influence in the management of the business. · Although S corps pay no income tax, they must pay a franchise tax (1.5% of the corporation’s net income with a minimum annual tax of $800). · Corporate formalities, such as election of a board of directors, appointment of officers, board meetings, corporate minutes, etc., must be followed. · Limited number of shareholders (maximum of 100). · All shareholders must be either U.S. citizens or lawful permanent residents. · Generally, shareholders must be natural persons (estates and certain trusts may become shareholders for a limited period of time after the death of a shareholder; an S corp may be a shareholder if it owns 100% of the stock; C corps, LLCs, partnerships, and many trusts may not be shareholders). · S corp election is limited to domestic corporations. · Only one class of stock is permitted (excluding voting rights shares), which could limit the ability to expand ownership. · Many potential problems in the absence of a written shareholders agreement. |
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LIMITED LIABILITY COMPANY (LLC) A California LLC is a hybrid business entity that blends elements of partnership and corporate structures; it offers the tax benefits of a partnership and limited liability of a corporation. |
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ADVANTAGES |
DISADVANTAGES |
| · Limited liability for members. Only the capital contributed by the member is at risk. Creditors cannot reach the member’s personal assets to satisfy obligations of the company. · No restrictions on type of entity that may be a member. · Multiple classes of owners are permitted. This affords flexibility if original owners plan to expand future ownership. · Operational flexibility — members decide how to operate the business through an operating agreement. · LLCs do not issue stock and are not required to hold annual meetings or keep written minutes (which a corporation must do) in order to preserve the owners’ liability protection. · All business profit or loss passes through to the members every year. Income is taxed only at the member level (i.e., LLCs avoid the double taxation issue that C Corporations face). · Ability to raise capital is improved because there is no limit on the number of members (but may have a single member). · Members may participate in management of the company. · An LLC’s life is perpetual; company passes to heirs after the death of a member of a single-member LLC. |
· Must file Articles of Organization with Secretary of State and pay filing fee. · Members must enter into an oral or, preferably, a written operating agreement. · For California income tax purposes, an LLC is classified as a partnership if it has more than one owner and is treated as a disregarded entity (same as a sole proprietorship) if it has only one member. However, an LLC is allowed to elect to be treated (taxed) as a corporation. · Although LLC pay no income tax, they must pay a $800 annual franchise tax and an annual fee ranging from $900 on a total income of $250,000 to nearly $2,000 on a total income of $5 million or more. · Members owning or controlling only a minority of the LLC’s voting rights have little or no say regarding the operation of the business. Members who own or otherwise control a majority (or even a significant number), of the LLC’s voting rights have an overriding influence in the management of the business. · Company is dissolved if a member of a single-member LLC dies with no heirs. |
September 2, 2015
ALWAYS TAKE YOUR DISCOVERY OBLIGATIONS SERIOUSLY
A a July 2015 opinion of the United States Ninth Circuit Court of Appeals serves as a cautionary reminder that intentionally failing to meet one’s discovery obligations, actively withholding responsive information, and repeatedly deceiving opposing party and the court regarding the existence of such information, can be an extremely costly litigation strategy. Certainly, the offending party and its attorneys could be ruined financially. Even worse, counsel’s reputation could be irreparably destroyed.
In a two to one decision published in July 2015, a three-judge panel of the Ninth Circuit affirmed an order of an Arizona district court judge imposing monetary sanctions totaling $2.7 million against Goodyear Tire & Rubber, its national coordinating counsel, and its local counsel, and non-monetary sanctions against Goodyear only, in a case where the sanctionees’ discovery fraud amounted to “frequent and severe abuses of the judicial system.” (Haeger v. Goodyear Tire & Rubber Co.) The Ninth Circuit held that it was within the district court’s discretion to rely on its inherent power to sanction the discovery fraud, which came to light only after the case had settled. It held that the district court did not abuse its discretion in finding that the sanctionees acted in bad faith and awarding to plaintiffs all the attorneys’ fees and costs they incurred after the point where Goodyear started engaging in the discovery fraud. Furthermore, the court held that, since the underlying case involved alleged defects in Goodyear’s G159 tires, the district court acted within its discretion in ordering Goodyear to file a copy of the court’s order in any G159 case initiated after the date of the order. The court held that this non-monetary sanction was balanced, narrowly tailored, and imposed no sanctions beyond what was required to remedy the perceived ongoing problem in Goodyear’s litigation.
The take-away from this decision is that litigants must take their discovery obligations with utmost seriousness, and honor those obligations