California Business Lawyer Blog

Undue influence (as a term in jurisprudence) is an equitable doctrine that involves one person taking advantage of a position of power over another person. It is where free will to bargain is not possible says California Business Lawyer Steven C. Peck.

Undue influence in contract law:
If undue influence is proved in a contract, in U.S. law, the contract is voidable by the innocent party, and the remedy is rescission. There are two categories to consider:

Actual undue influence:
An innocent party may also seek to have a contract set aside for actual undue influence, where there is no presumption of undue influence, but there is evidence that the power was unbalanced at the time of the signing of the contract.

Undue influence in probate law:
"Undue influence" is the most common ground for will contests and are often accompanied by a capacity challenge. In probate law, it is generally defined as a testator's loss of free agency regarding property disposition through contemporaneous psychological domination by an advisor which results in an excessive benefit to the advisor. It is important to note that "undue influence" is only an issue when the advisor is benefiting, not when advisor is getting a benefit for someone else; in that case it would be considered fraud. In litigation most jurisdictions place the burden of proving undue influence on the party challenging the will.

Continue reading "What is Considered The Basis of Undue Influence?" »

Liquidated damages (also referred to as liquidated and ascertained damages) are damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach (e.g., late performance).

When damages are not predetermined/assessed in advance, then the amount recoverable is said to be 'at large' (to be agreed or determined by a court or tribunal in the event of breach) says California Business Attorney Steven C. Peck.

At common law, a liquidated damages clause will not be enforced if its purpose is to punish the wrongdoer/party in breach rather than to compensate the injured party (in which case it is referred to as a penal or penalty clause). One reason for this is that the enforcement of the term would, in effect, require an equitable order of specific performance. However, courts sitting in equity will seek to achieve a fair result and will not enforce a term that will lead to the unjust enrichment of the enforcing party.

In order for a liquidated damages clause to be upheld, two conditions must be met. First, the amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the term. Second, the damages must be sufficiently certain at the time the contract is made that such a clause will likely save both parties the future difficulty of estimating damages. Damages that are sufficiently uncertain may be referred to as unliquidated damages, and may be so categorized because they are not mathematically calculable or are subject to a contingency which makes the amount of damages uncertain.

Continue reading "How Does A Business Determine Liquidated Damages?" »

Breach of contract is a legal concept in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance. If the party does not fulfill his contractual promise, or has given information to the other party that he will not perform his duty as mentioned in the contract or if by his action and conduct he seems to be unable to perform the contract, he is said to breach the contract.

Minor breaches:
A minor breach, a partial breach or an immaterial breach, occurs when the non-breaching party is unentitled to an order for performance of its obligations, but only to collect the actual amount of their damages. For example, suppose a homeowner hires a contractor to install new plumbing and insists that the pipes, which will ultimately be sealed behind the walls, be red. The contractor instead uses blue pipes that function just as well. Although the contractor breached the literal terms of the contract, the homeowner can only recover the amount of his damages. Generally, this means the difference in value between the red pipe and the blue pipe. Since the pipes are identical value, the difference is zero; therefore, there are no damages and the homeowner receives nothing.

Material breach:
A material breach is any failure to perform that permits the other party to the contract to either compel performance, or collect damages because of the breach. If the contractor in the above example had been instructed to use copper pipes, and instead used iron pipes which would not last as long as the copper pipes would have, the homeowner can recover the cost of actually correcting the breach - taking out the iron pipes and replacing them with copper pipes.

As with nearly everything in the law, there are exceptions to this. Legal scholars and courts often state that the owner of a house whose pipes are not the specified grade or quality (a typical hypothetical example) will not be able to recover the cost of replacing the pipes for the following reasons:

1. Economic waste. The law does not favor tearing down or destroying something that is valuable (almost anything with value is "valuable"). In this case, significant destruction of the house would be required to completely replace the pipes, and so the law is hesitant to enforce damages of that nature.[citation needed]

2. Pricing in. In most cases of breach, a party to the contract simply fails to perform one or more terms. In those cases, the breaching party should have already considered the cost to perform those terms and thus "keeps" that cost when they do not perform. That party should not be entitled to keep that savings. However, in the pipe example the contractor never considered the cost of tearing down a house to fix the pipes, and so it is not reasonable to expect them to pay damages of that nature.[citation needed]

The result is that most homeowners will not collect damages that will compensate them for replacing the pipe, but rather collect damages that compensate them for the loss of value in the house. For example, say the house is worth $125,000 with copper and $120,000 with iron pipes. The homeowner would be able to collect the $5,000 difference, and nothing more.

The Restatement (Second) of Contracts lists the following criteria to determine whether a specific failure constitutes a breach:

In determining whether a failure to render or to offer performance is material, the following circumstances are significant: (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

Fundamental breach:
A fundamental breach (or repudiatory breach) is a breach so fundamental that it permits the aggrieved party to terminate performance of the contract, in addition to entitling that party to sue for damages.

Anticipatory breach:
A breach by anticipatory repudiation (or simply anticipatory breach) is an unequivocal indication that the party will not perform when performance is due, or a situation in which future non-performance is inevitable. An anticipatory breach gives the non-breaching party the option to treat such a breach as immediate, and, if repudiatory, to terminate the contract and sue for damages (without waiting for the breach to actually take place).

Limits on Remedies and Damages:
Typically, the judicial remedy for breach of contract is monetary damages. See damages. Where the failure to perform cannot be adequately redressed by money damage, the court may enter an equity decree awarding an injunction or specific performance.

The aggrieved person has a duty to mitigate or reduce damages by reasonable means. Liquidated Damages may be limited to a specific amount. In the United States, punitive damages are generally not awarded for breach of contract but may be awarded for other causes of action in a lawsuit. Limitation of Liability (Exculpatory) clauses. [Private agreement is permissible.] [Invalid when public interest is involved and there is willful conduct or gross negligence.]

Continue reading "The Breach Of Contract: The Inability Or Failure To Fulfill The Promise" »

Every business should protect proprietary information when dealing with independent contractors, vendors and other businesses. The best way to do this is to use a non-disclosure agreement, often referred to as an "NDA."

What is an NDA?

An NDA is an agreement between two parties to protect confidential information disclosed in a business transaction. The proprietary information can include business methods, finances, client lists, and anything that isn't already readily available in the public arena. If a party subsequently breaches the NDA, the injured party can sue for damages, an injunction against further disclosure and attorney's fees.

Directional NDA

In many situations, only one party requires the protection provided by an NDA. If you invent a new product, you are going to need an NDA from manufacturers, distributors, etc., before you discuss the product with them. While this may seem like common sense, most businesses fail to carry the thought through to their daily activities.

Practically every business hires independent contractors, but they rarely obtain NDAs prior to disclosing information to the contractors. For example, do you use third parties to create or maintain your websites? Did you obtain NDAs from any of them? If not, what's to keep that party from using your business methods on other sites? A directional NDA can keep this from occurring.

Mutual NDA

As the name suggest, a mutual NDA allows two parties to protect confidential information. The mutual NDA is typically used when two businesses are negotiating a joint venture. Each party must disclose enough information to make the negotiations viable, but neither wants that information made public if the negotiations fail. If negotiations go well, additional non-disclosure information will be incorporated into the joint venture agreement to protect additional information revealed during the joint venture.

Refusing to Sign an NDA

Alarms and warning lights should go off if a party refuses to sign your NDA. Unless they can provide a very compelling reason for the refusal, you should walk away from the business relationship.

When an NDA isn't really an NDA

Just because a document is titled, "Non-Disclosure Agreement", does not mean it provides you with protection. You should ALWAYS read the language of an NDA because the document may establish that you are WAIVING all confidentiality rights. The waiver might be very direct and read something like, "The disclosure of information pursuant to this Agreement shall not be considered confidential." Alternatively, the language may be more indirect and read, "The parties acknowledge and agree that all information exchanged pursuant to this agreement has previously been established in public forums." Regardless, the "reverse NDAs" strip you of protection and should not be signed.

Continue reading "The Business of Obtaining Non-Disclosure Agreements For Your Business" »

There are times when a Business partner may decide that it is time to leave the partnership. Many times the Business partnership agreement will include details about how this is handled. The agreement may require that the Business partner first offer the remaining Business partners a buyout option, allowing them an opportunity to purchase his or her share/interest in the partnership before he or she tries to sell that share to some third-party says Woodland Hills, California Business Attorney Steven C. Peck.

If the Business partnership agreement is silent on the issue of what happens when a partner leaves, most states' partnership laws cover the issue. You should be very careful in this situation because the laws differ from state to state - however, in many states, the law says that the partnership automatically ends when any partner leaves.

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The major difference between a corporation being a C corporation or an S corporation is that S corporations use the pass-through taxation that partnerships use, while C corporations are subject to double taxation says Van Nuys, California Business Lawyer Steven C. Peck.

If this is an issue you are considering, you should meet with an business attorney and/or a tax advisor so that you can figure out what works best for your situation. Also, you should remember that this decision is not a permanent one, so if you initially elect to set your corporation up as an S corporation, you can always change it over to a C corporation later. In addition, if you are giving serious consideration to an S corporation because of the pass-through taxation, you should also consider setting up your business as an LLC, which also generally has pass-through taxation indicates Los Angeles Buisness Lawyer Steven C. Peck.

Continue reading "Should I Set Up a C Corporation Or An S corporation?" »

Your company needs a buy-sell agreement because change is constant,
and your relationship with your fellow shareholders will change. Shareholders bicker, lose interest in the business, go away, die, get divorced, get run over by trucks, etc.

Sometimes a shareholder gets a better job and stops putting time into your company. He's now a freeloader, and you don't want him to enjoy the benefits of your hard work in building up the business.
Sometimes a shareholder is such a malcontent that you must be rid of him. Or a shareholder might get divorced, in which case you don't want his spouse to take over his shares and become your partner. Or a shareholder might go bankrupt, and you need to protect the business from his creditors. In all these cases, the company needs a structure for the orderly and fair removal of shareholders.

The Economic Divorce. Enter the buy-sell agreement. When changes among the shareholders put yourcompany in danger, the buy-sell agreement forces a fair resolution. I call this the economic divorce - if the company cannot survive a particular shareholder, the buy-sell agreement gets you a divorce on terms that are fair to everyone.

Death. If a shareholder dies, the company buys his shares from his estate. This is fair to the surviving family because they usually want money, not shares in an illiquid small business. This is fair to the company because you don't want the deceased shareholder's spouse or son to show up and announce himself as your new partner. Usually you pay a death buy-back in one lump-sum using the proceeds of life insurance.

Disability. Similar to death (except without the finality) if a shareholder becomes disabled, the company buys his shares. The company can pay a disability buy-back using a promissory note.

Divorce. The divorcing shareholder buys out his spouse's entire community property interest in the company's shares. This is done in the divorce proceedings.

Disputes. Sometimes two shareholders just can't get along. To deal with this situation, you use"shotgun" procedures. This means that, between the two warring shareholders, the first shareholder offers to buy out the second shareholder, and the second shareholder has the choice, either be bought out or turn around and buy out the first shareholder on identical terms (i.e. I cut, you choose). Either way, a price is fixed for the buy-out, and one of the warring shareholders leaves the business.

Bankruptcy; Bad Transfers. If a shareholder transfers shares in violation of the shareholders agreement or goes bankrupt, the company can purchase all of his shares to keep the shares away from his creditors. This serves an asset-protection function.

Buy-out Price. The buy-out price is crucial. A high buy-out price gives the exiting shareholder a windfall. A low buy-out price is unfair and leads to litigation. The trick is finding a procedure that ensures a fair price - for example, using a neutral appraisal process to fix a price.

Variation for a Real Estate Venture. As a final note, for some businesses, instead of a traditional buy-sell, it's easier just to liquidate the entire business. This can be true where a business does not have goodwill. For example, the value in most real estate ventures is the real estate. There is neither goodwill value in the venture nor sentimental value in the real estate. With this in mind, if the shareholders can't get along, it's easy to liquidate the assets, distribute the profits and let the shareholders go their separate ways. This is pure economic divorce.

Continue reading "What items Should One Consider When Drafting the Business Buy-Sell Agreement?" »

Gossiping is many people's favorite pass time. They just cannot stop talking about everybody else's life. If they come to know about somebody else's secret, they have to discuss it with their daily gossip partners. But imagine, if someone ever gets charged with criminal offense for leaking out a secret? You must be wondering what is the connection between gossiping and confidentiality agreement. Well, Confidentiality agreement came in to existence, so that, certain secrets or confidential informations are not leaked out.

As the name suggests, confidentiality agreement is signed when, parties involved in the contract do not want to disclose the information to the third party. It is generally signed between individuals, companies, corporations, societies, etc. who want to share each other's knowledge, information, business strategies, trade secrets, or any other confidential information. Any third party is restricted from accessing this information. Within a contract period, if any of the party discloses confidential information to the party outside the contract, it is considered a crime, and is liable to punishment. Confidentiality agreement is also known as, non disclosure agreement. Confidentiality agreement can be unilateral, where only one party shares information with another and wants to keep it confidential. Other type of confidential agreement is mutual agreement, wherein, both the parties share confidential information. The agreement is essentially signed by the lawyers of respective companies. Below given is a confidentiality agreement template and example, that will explain to you what confidentiality agreement is all about.

Suppose, a company manufactures a popular cola drink. There is one more rival company in to cola manufacturing. They both decide to come together and share each other's cola drink ingredients and marketing strategies hoping that this may improve the sales of their cola drink, fetching them more revenues and profits. This would be beneficial to both the companies to establish their monopoly in the market. But, if either of the company, shares the other company's secret with a third cola manufacturing company, then the victim company may have to suffer severe losses. In order to avoid this, both the companies sign the confidentiality agreement, which is a legal document.

A business is built on a series of interwoven agreements and relationships. Small business owners often trust that their personal relationships are strong enough to ensure that agreements will be honored. But a well-written contract not only helps enforce these agreements, it can also strengthen vital relationships.

What is a contract?

In simple terms, a contract is a legally enforceable agreement. The precise conditions that create an enforceable contract vary from state to state. But, a few basic elements must be present.

First, a contract must be something both parties have agreed to. Typically, this occurs when one party makes an offer or a counter offer, and the other party accepts that offer. Second, both parties must exchange something of value. A promise to do something, or not to do something, is sufficient. Third, the terms of the agreement must be sufficiently definite for a court to determine what the parties have agreed to.

Contracts can be written or oral, formal or informal. The best contracts are ones that explain what each party has agreed to do in plain language.

Why written contracts?

While oral contracts are enforceable, there are many reasons not to rely on them. First, every state requires that certain types of contracts be in writing to be enforceable. These requirements vary from state to state, and include both the obvious (contracts for the purchase of land) and the innocuous (contracts guaranteeing the debts of a third party). If you're dealing with an important agreement, it's best to make sure you've complied with the law by getting something signed and in writing.

Second, while it might seem counterintuitive, a written contract actually helps parties stay out of court. Most business disputes arise out of a disagreement about what the parties agreed to do, not one party simply refusing to do what it promised. Taking time to put an agreement in writing will help avoid misunderstandings that can lead to disputes and lawsuits.

What should be in a written contract?

Each contract is as unique as the underlying business relationship. However, every contract should cover a few key points. A contract for the purchase or sale of goods should usually contain terms like the parties involved, the time and place of delivery, the time and method of payment, the product description and the unit price. Cliff Ennico, small business author and lawyer, suggests business owners make sure certain elements are clear in their contracts: who is doing what and when; what are parties not going to do; how much is being charged; and, when payment is due.

Continue reading "A Well Written Contract Will Strenghten and Reinforce Business Relationships" »

In a general partnership, each partner has the ability to take actions which can legally bind the partnership and, thus, the other partners themselves (even if those other partners have not been consulted or given their approval). In other words, each partner has full authority to exercise management and control of the partnership. When owners do not want to have control fully and equally shared like this, they can change the management structure through the terms of the partnership agreement. However, there are certain duties and obligations that cannot be changed. For example, in all partnerships, the individual partners are always entitled to all information about the business, such as financial information, details about transactions, etc. Similarly, because there is a fiduciary relationship between the partners, they always owe the other partners a duty of good faith, a duty of loyalty, and a duty of fairness in dealing with transactions relating to the partnership (in other words - you can't screw over your partners).

As for the actual details about controlling and running a partnership, things can generally be as simple as you want them to be. While all partners in a general partnership (and all general partners in a limited partnership) have equal ability to conduct business, the major decisions are usually made by having the partners vote. While the votes may be based on the number of partners, most partnerships instead base them on partnership interests. Thus, if there are five partners, but one has a 60% interest in the partnership, he is essentially the controlling partner of the business. However, instead of this so-called "owner management," the partners can adopt a structure more like a corporation, appointing a managing partner or a president, vice-president, etc.

Partnerships do not generally have to hold any form of regular meetings, like corporations. Thus, the partners can simply hold meetings when and if they feel there are important things to discuss or vote on. Similarly, unlike corporations, partnerships generally do not have to file any annual reports with the state, listing the details of the business. As a result, there are not really any business documents which a partnership should maintain aside from those which it decides are useful and necessary for running a business. However, while not necessary, partnerships should consider keeping a partner ledger.

Continue reading "How Are General Partnerships Controlled and Managed?" »

Since a sole proprietorship is not a separate legal entity from its owner, the owner is on-the-hook for any liability attached to the business. So if someone wins a lawsuit against your sole proprietorship (such as in a claim for negligence, or default on a contract), you will be legally obligated to cover that judgment. This is one of the greatest risks in starting a sole proprietorship (because several other business forms offer their owners limited liability), particularly where there is any potential danger connected to your business, its operation and/or its products.

Continue reading "What Happens If A Sole Proprietorship Is Sued?" »

There are no formal procedure requirements which sole proprietorships have to follow, which is why they are these easiest type of business to run. Partnerships and LLCs have some limited formalities they have to file, as mandated by state law, although there are generally no requirements for things like annual meetings. Most states have very strict formalities which corporations must follow, including the fact that they generally must hold annual meetings of their shareholders and directors.

Continue reading "What Business Types Have To Follow Strict Procedural Requirements?" »

Partners in a partnership are fiduciaries to each other. This relationship means that they owe each other, and the business, certain basic duties. For example, they must be truthful to each other regarding anything relating to the partnership itself, property owned by the partnership and the other partners. Thus, it would be a violation of these duties if a partner embezzled money from the business, misused or abused property belonging to the partnership, or tried to take advantage of another partner. Related to these fiduciary duties, the partners also have a duty of loyalty, which means that they must remain loyal to the partnership. Thus, a partner cannot do business with another company which is at odds with the partnership, nor can he or she conduct any side business which places them in competition with the business of the partnership itself.

Continue reading "Partners In a Business Partnership Are Fiduciaries to One Another" »

Shareholder agreements, also known as stockholder agreements, are important for many businesses but particularly for closely held businesses and family businesses. A shareholder agreement is negotiated and executed before any business problems develop. Shareholder agreements provide businesses with a roadmap of how to act in certain situations. Also, in privately held companies, some shareholder agreements may be kept confidential among the stockholders, unlike the corporate governance documents that must be filed with the state's Secretary of State's office.
Stock Ownership Provisions of Shareholder Agreements
The most important issues that are addressed by shareholder agreements are those that address stock ownership. A shareholder agreement can serve two important purposes with regard to stock ownership- it can control when a stock is sold and to whom. For example, in a closely held or family business a shareholder agreement can limit the sale of stock to third parties and it can define triggering events that require a stockholder to sell his or her shares to the other existing shareholders. This is important for a closely held business that only wants specific shareholders and does not want to extend ownership rights to others.
However, some closely knit businesses and family businesses may not want to prevent the transfer of stock to third parties in every situation. Therefore, they may require that an existing stock owner offer other existing stock owners the right of first refusal when selling stock. If the existing owners do not want to purchase the stock then, pursuant to the shareholder agreement, it may be sold to a third party.
A shareholder agreement can also limit a stockholder's actions after his or her shares are sold. Many shareholder agreements include no competition clauses that prevent a stockholder who sells his or her shares from directly competing with the business for a certain amount of time. In order to be enforceable, this provision must be carefully written so as to allow the selling shareholder a reasonable opportunity to make a living and not unduly restrict economic competition.
Other Provisions of Shareholder Agreements
Shareholder agreements can also contain other important provisions related to the operation of a business. For example, a shareholder agreement can:
· Explain how individual stockholders will be elected to the Board of Directors;
· Require a "super majority" vote among stockholders for certain important votes;
· Describe how future capital contributions will be made to the business and how these contributions may affect ownership rights;
· Create procedures to follow when there is a "tie" vote and the shareholders do not have a majority opinion; and
· Establish conflict resolution procedures to follow if disputes arise among stockholders. This could include mandatory mediation and/or arbitration, for example.
Like all businesses, closely held and family businesses want their businesses to succeed. However, unlike other businesses, they have additional concerns and must take the necessary steps to protect their business from outside control and to protect the rights of different family members. For these reasons, shareholder agreements are particularly important to closely held and family businesses.

There are times when a business or entrepreneur would benefit from sharing confidential and valuable information with a third party. Yet, some business owners and entrepreneurs hesitate because they are concerned about what the third party will do with the information. They do not want the confidential information shared with others or used by the third party for that party's own benefit. The law recognizes the important business interest of keeping certain information confidential and the need to consult with third parties in order to make a business more profitable or to allow a new idea to be implemented. A confidentiality or nondisclosure agreement can allow the business or entrepreneur to share information with a third party and be confident that it the information will remain classified says California Business Lawyer Steven C. Peck.

When to Use a Confidentiality Agreement or Nondisclosure Agreement:
Confidentiality and nondisclosure agreements can be used in many business situations. Some common situations where these types of agreements may be useful include when:
You are soliciting investors, partners or contractors for an invention or new business idea;
You are negotiating with a potential buyer of your business, invention or idea; or
A contractor or employee will have access to confidential data that could be financially detrimental to your business should it be disclosed.
What to Include in a Confidentiality or Nondisclosure Agreement
There are two types of confidentiality or nondisclosure agreements.
One type is called a unilateral agreement where the party presenting the agreement is requesting that the other party keep the information confidential but does not require itself to maintain confidentiality. The other type is called a mutual agreement where both sides agree to maintain confidentiality.
In order to enforce a confidentiality or nondisclosure agreement it is important that the agreement be in writing. When you are drafting your agreement, it is useful to consider whether the following elements should be included:
A description of the confidential information so that both parties understand the scope of the agreement;
A description of why the confidential information is being shared in this case and how it may be used. Generally, parties receiving confidential information must use it only for the limited purpose of the contract and not in any other way;
An agreement by the parties that the information will not be disclosed during the term of the contract; and
Other provisions as are necessary to the needs of the parties to the confidentiality or nondisclosure agreement.
Most confidentiality and nondisclosure agreements are in writing, dated and signed by both parties. While state law may allow for oral contracts, it is important for business contracts to be in writing in case of a future dispute. It is particularly important in narrowly drafted confidentiality agreements indicates Los Angeles Business Lawyer Steven C. Peck.
Confidentiality and nondisclosure agreements fulfill an important business objective. They allow businesses to obtain financing, outsource certain jobs to experts and to pursue selling their business with the security that important business secrets will remain confidential and will not be used to compete with their own business interests.