California Business Lawyer Blog

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" »

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.

Call us for an immediate free consultation toll free at 1.866.999.9085 to discuss your California Business Law Issues. We Will Help You!!!

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" »

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.

An Internal Revenue Service watchdog warned recently that the paperwork burdens on small businesses may outweigh the benefit of tax collections generated as part of the new health-care law.

Starting in 2012, about 40 million businesses, charities and other entities will be required to report to the IRS payments they make to suppliers and service providers, the IRS Taxpayer Advocate Service said in its midyear report to Congress says California Business Attorney Steven C. Peck.

The reporting regime is aimed at giving the IRS more information to help it collect taxes from the vendors. But the report said it could disrupt commerce and that IRS systems might not be equipped to make much use of the information anyway.

Businesses are already required to report payments to noncorporate service providers that exceed $600 in a given year.

The health-care law expanded that to cover incorporated service providers, and also vendors of goods. That means that a self-employed person who pays the same vendor more than $600 for office supplies, equipment or consulting services in the same year must now generate a 1099 form for that vendor and send it to the IRS.

The IRS has announced that businesses wouldn't have to report payments made by credit card, as those payments will be picked up by a separate reporting regime.

That isn't much comfort, as many transactions within a single industry -- like the payments between manufacturers and distributor -- are handled by check.

The Taxpayers advocate, which represents a variety of industries from electricians to toy makers, has fought the new requirements.

The rules could well push more small businesses toward making payments by credit card in order to avoid the extra paperwork, "The credit-card companies get a major windfall out of this."

For instance, the law requires that the vendor provide its business customers with a taxpayer identification number, which the customer must then include on the 1099 form. If the vendor doesn't provide an ID number, the business is required to back-up withhold, on behalf of the IRS, 28% of the purchase price.

"A vendor may simply refuse to sell goods to any purchaser that refuses to pay the full purchase price. Such an outcome could significantly impair the normal course of commerce,"

In addition, she said large company vendors will have an advantage over small firms because they may offer to keep track of payments for their customers to help meet the IRS requirement.

The new reporting requirements were included in the health-care bill to help offset the cost of new health-insurance subsidies. They were estimated to raise $17 billion for government coffers over the next 10 years.

The information-reporting requirement is one of two main areas of concern on which the Taxpayer Advocate said it will focus during the coming year.

Writen by Martin Vaughan at martin.vaughan@dowjones.com
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

In many of our activities, we have already encountered contracts. The contract contains the details agreed upon by the parties involved in the project or any agreement. A contract is a legal document and can be used as evidence in the court. That is why a contract should be well made and the details in them should be clear and complete. Both parties should also be able to understand what is written in the contract. If you wish to make a contract or you are about to sign a contract, it is best if you consult a lawyer. It may mean more expense for your part but it will also save you from any problems in case the contract is faulty. But either way, it is still best that we know what a contact must have says California Business Attorney Steven C. Peck.

A basic contract usually has five elements in it and we will discuss each of it in details.

The work to be done for the project should be clearly stated in the contract. The work the contractor would do and will not do should be indicated in the contract. The work to be accomplished should be clear to both parties to prevent any misunderstanding.

The time limit of the project is also a very important aspect. In construction projects where the time is of essence, the contractor should be able to meet with the deadlines. In some contracts, a penalty is usually included in the clause if the contractor will not be able to meet the deadline and a bonus is also given if the project is ready before the deadline.

The payment clause of the issue tackles the monetary issue in the contract. Some contracts are paid in a fixed price while others are paid by computing the cost of materials and the time spent on the project. The manner on how the payment is to be done (either monthly or weekly or so forth) and when the payments should be made are also specified on the contract. The arrangement of the payments should be agreed by both parties to satisfy the quality of the work done.

The contract should also address any confidentiality issues and reporting of the progress of the project. The contract should state all the information that the contractor should not divulge in any circumstances. The information should also be kept just between the contractor and the buyer. Information should not be divulged for the buyer's benefit unless you discover it to be illegal and proper authority should be contacted. The progress on the project can also be reported to the buyer only unless stated otherwise in the contract.

Warranty and subcontractors on any project made is also indicated in the contract. Warranties are also just valid for only a year. This is to ensure that any services done will be of high quality and done in a timely manner. If a subcontractor will be needed for the project, the buyer should know of it and have a list of the subcontractors. The buyer must first agree on the subcontractors before she signs the contract and then the project can be a closed deal!

A general partnership is where all of the partners are actively involved, to one degree or another, in the control and management of the partnership. These general partnerships, which are the most common type of partnerships, are distinguished from limited partnerships, where some of the partners are silent investors with no actual management or control of the partnership. The major difference that arises from this distinction is that all partners to a general partnership are personally liable for the partnership's losses and debts, while only the general partners of a limited partnership are liable for the limited partnership (the limited partners are afforded limited liability because they do not actively run or control the business) says California Business Attorney Steven C. Peck who may be contacted toll free at 1.866.999.9085.

This is very similar to the notion of piercing the corporate veil (aside from certain technical distinctions that are being ignored for the purpose of this discussion). Owners of corporations (i.e., its shareholders) are generally not personally liable for debts, losses and liabilities of the business itself, because of limited liability. However, if those owners have acted in a way where their business is really just a shell, and not an entirely separate legal entity, a court may decide that the business is simply an alter ego, meaning the owners should be held personally liable because of their wrongful acts states California Business Attorney Steven C. Peck.

There are many things that a court will look at in determining whether alter ego liability should be applied. Typical factors include (but are not limited to) whether the company kept its own records, whether there were shares (for a corporation) or units (for an LLC) that were actually issued, whether the owners co-mingled their finances with the business entity, whether there were actually corporate directors or LLC managers running the business, how legal formalities were followed and whether the owners used the business for personal purposes. It is often a case-by-case situation, and the key here is that you should take every precaution to run your business in full compliance with the legally required formalities and use the business in a proper way in order to avoid such alter ego liability indicates Los Angeles Business Lawyer Steven C. Peck who may be contacted toll free at 1.866.999.9085.

Conventional wisdom among California homeowners has been that if they go through foreclosure, they will lose their homes, yet be freed from the remaining debt on the mortgage. But that silver lining, distressed borrowers are learning, applies only if they did not previously refinance their loan.

The state Legislature created laws during the Great Depression intended to allow people who lost their homes to get back on their feet. They protected borrowers from being pursued for the difference between what they owed on their mortgage and the decreased value of their former home. But, at a time when refinancing was less common, those laws did not include loans that refinanced the original purchase mortgage - even if it was done only to obtain a lower interest rate.

Now, proposed legislation would extend protections to those foreclosed owners who refinanced their loans. The state Senate approved the new law in June and it was passed by a state Assembly committee on June 29, 2010., but its future is unknown.

State bankers' groups are trying to alter the bill, which was sponsored by the California Association of Realtors, before its final vote this summer. The bankers do not want changes to apply to existing loans, but rather only to future mortgages.

We do not wish for the California Legislature to go in and amend contracts," said Rodney Brown, chief executive of the California Bankers Association. "The banking industry is very supportive of extending these kind of protections, but the idea of breaking a contract between the borrower and the lender is not really consistent with contract law in the U.S. or the way to do business."

The gap between what is owed on a mortgage and the value of a home is known as a deficiency states California Business Attorney Steven C. Peck.

As it stands, homeowners who only have an original purchase loan can walk away from their debt obligation and not worry about bill collectors. Their credit might suffer, but their future earnings will not be threatened by debts from their current crisis.

That has led some owners to pursue so-called strategic defaults, where they have the means to continue paying their mortgage, but choose not to.

In contrast, an owner who refinanced the original loan - whether a strategic defaulter or someone who lost his job and could not pay the monthly mortgage - could be chased down for debts almost indefinitely.

For homeowners in default, the concern is not academic. Real estate lawyers say they increasingly are getting calls from distressed owners who are trying to work with lenders. Many owners are discovering that even if they pursue a short sale - where the bank allows the home to be sold for less than what is owed on the mortgage and ostensibly forgives any remaining debt - they still could be on the hook for the unpaid balance at a later date indicates Los Angeles Business Lawyer Steven C. Peck.

"If the state legislation goes the way the bankers want it to, it could hamper former owners' ability to ever buy a house again and would violate fundamental principles of fairness, according to Alex Creel, senior vice president and chief lobbyist for the California Association of Realtors.

"Our thinking is why should refinancing the loan, and nothing more, result in a loss of protections that you had when you made the loan at the outset," Creel said. "But in California, you lose that protection, and it's not as if the lender tells you about it. But you lose it nonetheless."

Creel points out that the proposed legislation does not protect those who refinanced their loans to get cash, in the form of home equity lines of credit and other second loans. And it shields former homeowners only up to the amount of their original mortgage.

If an owner obtained a mortgage of $400,000, but then boosted the loan to $500,000 by refinancing for cash, the law would allow him to be billed for the $100,000 difference, he said.

Peck notes that pursuing loan deficiency payments requires going to court and is cumbersome, and therefore not favored by banks. But that does not stop lenders from using the threat of court action as leverage in negotiations over the fate of a property verging on foreclosure.

"We've heard of lenders saying, we're not going to agree to a short sale unless you sign a contract to pay all or some of the deficiency," "And it's not a hollow threat because currently, they are entitled to do it."

Peck indicates lenders have four to six years to obtain a judgment against a borrower, but the judgment is good for 10 years and can be extended another 10 years.

The law needs to be changed because there is no express reason for the distinction between those who refinance and those who don't, but the difference has enormous financial implications.

"We feel like it's a fairly arbitrary distinction that is applied to refinanced loans and purchase loans, and we believe that many people did not fully appreciate the potential danger,"

Written by Robert Selna at rselna@sfchronicle.com.

One of the biggest advantages to forming a company as an LLC is that, much like C corporations, the owners/members are not personally liable for most losses or debts of the company itself. Thus, there is so-called limited liability and the owners can only, generally, lose whatever money has been invested in the LLC, and nothing more. However, personal liability can attach in certain instances, such as where an owner tries to defraud company creditors or do some other illegal act - in these cases, a court may apply alter ego liability. Similarly, limited liability does not protect an owner for acts taken outside of his or her capacity as a company owner/employee. For example, if an LLC takes out a $500,000 loan and one of its members personally guarantees the loan, the bank could go after that member's personal assets, despite limited liability. Of course, if a co-owner is the one who has committed some bad deed making them personally liable, you would not be personally liable just for being another co-owner, as long as you did nothing wrong (this differs from a partnership, where you are personally liable for your partners' wrong-doings).

The LLC operating agreement is a document created when setting up an LLC which governs how the LLC is going to be maintained and operated (the LLC operating agreement is similar to a partnership agreement or corporate bylaws) says California Business Attorney Steven C. Peck.

As a result, the LLC operating agreement is considerably more detailed than the articles of organization. The LLC operating agreement should address whether the LLC is going to be member-managed or manager-managed, and should outline what powers the members and/or managers will have. It should also address how the LLC handles meetings - how, when and where meetings are held, what notice is necessary before holding a meeting, what qualifies as a quorum, how voting and elections are handled, etc. The LLC operating agreement typically covers some other related issues, as well, such as who has the power and right to audit the company books and records, how the fiscal year is defined and how the agreement itself can be updated and amended.

Once you have prepared your LLC operating agreement, you do not need to file them, like you do with articles of organization. Instead, they should simply be maintained in your company records. However, you may need to formally adopt the agreement - you should check the laws for the state you are organizing in. In some states, the incorporator has the power to adopt the agreement, other states require the first board of directors to formally adopt the agreement, and the remaining states leave both options open.

Continue reading "The Limited Liaibility Company Operating Agreement" »

Financing your new business with equity makes sense when you want to share the risk, rather than taking on all the risk yourself by obtaining a loan. The risk is shared because your investors become co-owners, and each offers some money or services which they risk losing if the business fails. In exchange for taking this risk, your investors become co-owners of the company indicates California Business Lawyer Steven C. Peck.

Your investors will typically want some type of protection, so that they know only their invested amount of money is at risk. You can offer this protection by setting your business up as a limited partnership (and making those investors limited partners), a corporation (and selling those investors stock, making them shareholders) or as an LLC (making the investors members of the LLC).

Continue reading "Equity Financing of Your Business" »

Businesses involve contracts, sales, leases, real estate,and various other types agreements with other business entities. Sometimes, these transactions turn into disputes which business disputes arise when one or more party fails to honor their end of the bargain, causing a law suit to be filed and cross-actions should they be deemed appropriate.

In California, along with most courts in the United States, litigated matters may be settled if the disputing parties elect to have the matter resolved outside of the courtroom says California Business Attorney Steven C. Peck.

The Alternative Dispute Resolution or ADR is a series of positive and organized procedures for resolving disputes with the mutual consent of the parties involved. ADR encourages the parties to engage in negotiations to settle the dispute.

Business owners have options in dealing with this matter. They have four options to be precise. These are the following:

1. Direct Negotiation

Direct negotiation is a dispute resolution process wherein the two disputing parties work together and come to a resolution on their own. The parties communicate directly with each other without a third party who shall oversee or help with the dialogue.

This resolution process is the cheapest way to resolve a conflict. It needs no court fees, attorneys' fees, or other payments. It only requires that the two parties are there, willing to exchange sides regarding the disagreement. This form of resolution calls for effective planning, communication and negotiation skills.

2. Arbitration

This is a resolution wherein the parties in a dispute refers it to a third party, called the "arbitrators." The neutral party listens to the problems and arguments of both sides, examines their evidence, and renders a decision (award) after careful analysis.

Arbitration awards are generally an award of damages against a party. Both parties are bound to agree to the award, this is referred to as the "binding arbitration." The arbitrator's decision is final.

3. Mediation

Mediation is another form of resolution which aims to make disputing parties reach an agreement. The parties meet together with a mediator/s. In this case, the mediator assists them in the negotiation of their differences, but leaves the power to decide between the parties. The parties should be able to come to a mutual decision.

Mediation starts on a joint session and then proceeds to a separate caucus between the mediator and each individual party or their attorney. Mediation is strictly confidential. Thus, everything that is said and discussed in this process will be held in private and cannot be deemed admissible in court or in any other proceedings.

4. Litigation

If the parties cannot settle into an agreement by using an alternative dispute resolution, then their last option is to have the matter decided in a Court of Law. The purpose of business litigation is to determine which side is right or wrong.

Continue reading "Business Disputes Can Be Resolved Using Different Forms of Alternative Dispute Resolution" »