Articles Posted in Contracts

In the simplest terms, consideration is value. Under California contract law, mutual consideration (the exchange of value) is an essential element in the formation of a contract. Without it, a California court will (as will all courts across the country) most likely deem a contract unenforceable. For instance, consideration is lacking if two parties enter into a contract where one party is required to provide services and the other party is not required to pay or do anything. The bottom line is that the law disfavors one sided deals. It is presumed that one sided contracts are coerced in some form or another or fraudulently entered into. This makes perfect sense of course. What reasonably aware person would agree to provide something of value in exchange for nothing? However, consideration may come in a variety of forms including cash, property (real or personal) and services. Consideration may also come in the form of a promise to do something or to refrain from doing something that a party is otherwise legally entitled to do. The promise has its own value. If Party A promises to clear the snow from Party B’s driveway the following winter in exchange for Party B’s advance payment, there is a sufficient exchange of value (consideration). Similarly, if party A promises not to sue Party B if Party B pays restitution for some claimed harm, the promise not to sue may also be considered adequate consideration.

gold-1422084-225x300There are two general types of contracts – the bilateral contract and the unilateral contract. In both, however, there is an exchange of value in one form or another. Most people regularly enter into bilateral contracts. Paying for groceries or auto repairs, cell phone agreements and utility agreements are all forms of bilateral contracts. With unilateral contracts, only one party to the contract makes a promise. The most common example is the reward contract. One party offers a reward for the return of a lost dog. No person or business entity is obligated to look for, find or even return the lost dog under the contract, but the reward offeror is obligated to pay the reward if the dog is returned. The distinction has become less significant of late. Courts are increasingly focusing on other issues such as performance, party expectations and of course consideration rather than worrying about whether a contract is technically unilateral or bilateral. In any case, consideration remains a necessary element of any enforceable contract with a few narrow exceptions such as a promise to pay a prior debt that is no longer collectible because of a statute of limitations.

Consideration must be “adequate”. The exchange in value doesn’t necessarily have to be exact but there should be a reasonable exchange of value. The value of consideration is generally determined by the market values for goods and services. While parties are free to negotiate however they see fit, paying one dollar for a new car worth $10,000.00 (absent any other value exchanged) would clearly be inadequate. The one dollar is considered nominal consideration and therefore inadequate. The one dollar is essentially pretend consideration which courts see through. On the other hand, bad negotiation will not generally result in a contract being deemed unenforceable. Parties are free to make bad deals so long as the consideration is at least reasonable. The one dollar example above is an extreme case. Generally, courts analyze exchanges of value on a case by case basis. Other examples where consideration may be lacking include: performance when a party is already legally required to perform; gifts; past performances (in essence creating retroactive obligations); or illusory promises (where an obligation created is uncertain).

Remedies (types of relief sought by injured parties) can be either legal or equitable in nature. The recovery of money damages (monetary damages) is a legal remedy. An equitable remedy is designed to provide more flexible relief to aggrieved parties. The goal of equitable remedies is fairness. Injunctive relief where a court orders a party to do or refrain from doing something is a common example of an equitable remedy. In contract law, a common equitable remedy is rescission. The word “rescission” is derived from the word “rescind” which means to cancel. It seeks to restore the parties to a contract to the positions they held before they first entered into the contract. Rescission nullifies or “undoes” the contract which relieves all parties of their duties and obligations under the contract. Its effect can be analogized to restoring your computer to its factory settings. In California, there can be no partial rescission. The entire contract must be rescinded. A contract can be rescinded for a variety of reasons, including fraud, mutual mistake of fact or law, undue influence and duress. If the parties do not agree that a contract should be rescinded, the party seeking rescission will need to file a legal action to seek resolution.

steps-1229559-300x96There are numerous grounds for rescission. The following are some of the most common grounds upon which a party may rescind a contract:

Mistake of Fact or Law: If both parties entered into the contract based on a mistake of fact, the contract may be rescinded. The fact must be material to the contract. A fact only collateral to the contract will not suffice. Sometimes, parties may be mutually mistaken about a material fact. For example, if the contract is for the sale of a book that contains the original signature of the author, it would be a mutual mistake of fact if the signature was forged and both the buyer and seller believed it to be real. A unilateral mistake of fact may serve as the basis for rescission where the effect of the mistake is such that enforcement of the contract would be unconscionable. Similarly, a mutual mistake of law is grounds for rescission. A mistake of law exists where all parties believe they know the law as it pertains to their contract but are wrong (i.e. both parties enter into a gambling contract believing gambling is legal in their state). A unilateral mistake of law is not a basis for rescission except where one party misunderstands the law and the other party knowing this fails to clarify the misunderstanding.

Generally, parties are liable for their own negligent conduct.  An indemnity provision in a contract reallocates this liability from one party to another.  Viewed practically, an indemnity clause shifts insurance obligations from one party (“indemnitee”) to another party (“indemnitor”). Under an indemnity clause, the indemnitor agrees to pay the indemnitee for losses resulting from a claim brought by a third party. Absent explicit language assuming the obligation to defend, the party providing indemnity has no obligation to provide or assist in defending claims. Almost every contract includes an indemnification clause. It is important to read the clause carefully when entering into a contract of any nature, as the precise language of the clause can make a dramatic difference in each party’s financial obligations.

meet-up-1538121A typical indemnity clause looks something like the following:

To the extent caused by A’s negligence or willful conduct, A agrees to indemnify B of and from all reasonable claims, losses, causes of action, damage, lawsuits, and judgments, including attorneys’ fees and costs, provided that such claims, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property. Party A shall indemnify B only for the percentage of responsibility for the damage or injuries attributable to Party A. Nothing herein shall be interpreted as obligating A to indemnify B against its sole negligence or willful misconduct.

Under California law, oral contracts (verbal agreements) are generally valid and enforceable.  However, due to the uncertainty inherent in oral agreements, in some circumstances, a written record of the contract is required to make it legally binding.

1045239_butterfly_2.jpgCalifornia has statutory provisions, codified in Cal. Civ. Code. section 1624 and commonly referred to as the Statute of Frauds, that enumerate specific situations under which an oral contract is unenforceable.  The Statute of Frauds is designed to reduce the likelihood of fraudulent conduct by requiring a written record of the terms agreed-upon by the parties to a contract.
California’s Statute of Frauds.
Under California’s law, the following transactions are invalid unless supported by a written agreement:

  • An agreement that by its terms cannot be performed within a year from its making.
  • A promise to answer for the debt, default, or miscarriage of another person.
  • A lease lasting longer than one year, or a contract for the sale of real property.
  • An agreement authorizing an agent to purchase or sell real estate, or to lease real estate for a longer period than one year.
  • An agreement that is not to be performed during the lifetime of the promisor (the person promising to undertake some action).An agreement by a purchaser of real property to pay an indebtedness secured by a mortgage.
  • An agreement to loan money or extend credit in an amount greater than one hundred thousand dollars ($100,000) made by a person engaged in the business of lending money or extending credit.
  • An agreement for the sale of goods in excess of $500.00 in value. 
  • An agreement for the sale of personal property in excess of $5000.00 in value.

Requirements of the Statute of Frauds.
In order to comply with the requirements of the Statute of Frauds, a written agreement must:

  • Be in writing.
  • Identify the subject matter of the contract.
  • State the material terms of the agreement (contracts for the sale of goods must state the quantity and price of goods to be sold).
  • Be signed by both parties (under the Uniform Commercial Code, contracts for the sale of goods need only be signed by the party against whom enforcement of the contract is being sought).

Continue reading

The best advice an attorney can give a client regarding any type of a business agreement is to “get it in writing”.  Too often, inexperienced business owners rely upon “hand-shake” verbal agreements to accomplish commercial transactions. See “Why Oral Partnerships Are a Bad Idea.”
83672_oil_purchase.jpgIn California, oral contracts are legally binding.  However, in the event a dispute arises between the parties, the existence and terms of oral contracts are much more difficult to prove than with traditional written contracts.  As such, it is important for business owners to be cognizant of the issues that can arise when attempting to establish and enforce an oral agreement under California law.     
Non-Enforceable Oral Contracts
While oral agreements are generally valid and enforceable under California law, there are important exceptions:

  • Verbal agreements that are illegal in nature or violate federal, state, or local law are void and unenforceable. For instance, an oral agreement to sell/purchase a stolen car would be invalid. 
  • A verbal agreement is invalid if the parties to it misunderstood a material term or terms of the contract.  To have a valid contract, the parties must have a “meeting of the minds”, meaning they both understood what they were agreeing to.
  • A verbal agreement that is too vague or non-specific as to its terms is unenforceable because it does not technically exist.  For example, a verbal contract to purchase a car at some undefined date in the future would be unenforceable because it does not specify enough of the material terms of the agreement such as purchase price or the date of the transaction.
  • Pursuant to California Civil Code §1624, referred to as the Statute of Frauds, certain contracts are required to be in writing.  The following transactions are invalid unless supported by a written agreement:
  •  An agreement that is not to be fully performed within a year from its making.
  • A promise to answer for the debt, default, or miscarriage of another person (except in certain circumstances).
  • A lease lasting longer than one year, or a contract for the sale of real property.
  • An agreement authorizing an agent to purchase or sell real estate, or to lease real estate for a longer period than one year.
  • An agreement that is not to be performed during the lifetime of the promisor (the person promising to undertake some action).
  • An agreement by a purchaser of real property to pay an indebtedness secured by a mortgage.
  • An agreement to loan money or extend credit in an amount greater than one hundred thousand dollars ($100,000) made by a person engaged in the business of lending money or extending credit.

Continue reading

There are countless franchise opportunities available to San Diego entrepreneurs.  The majority of these opportunities are offered by out of state franchise companies.  Purchasing and operating a franchise can be a lucrative option for those looking for alternatives to starting a new business from scratch.  Franchises offer economies of scale, proven systems and existing markets.  It is a known quantity that is typically well marketed, often nationally.  These advantages are obvious.  However, franchising is not a guaranty of success.  Much depends on the geographic location of the franchise, the proximity to other franchises, the proximity of similar businesses, the market for the franchises goods or services in the area, the economy and the skill and commitment of the franchisee.  When lucrative, franchises rarely result in conflict and the terms of the franchise agreement seem less important.  When the franchise is not profitable for whatever reason, the terms of the franchise agreement become critical.

27833_stores_windows.jpgVirtually all franchise agreements include a venue provision wherein any litigation and/or arbitration will be heard in the home state of the franchisor.  For San Diegans, this means somewhere other than California.  This is of course problematic especially for the small businesses with limited resources.  Litigating or arbitrating a case in a distant jurisdiction is more costly and time consuming than it would otherwise be here in San Diego.  In many cases, franchisees are simply priced out of the process and have little recourse but to try and negotiate some sort of reasonable solution with the franchisor in lieu of facing a default judgment and/or bankruptcy.

Unfortunately for franchisees, it is almost always impossible to negotiate away venue provisions in franchise agreements.   This is particularly true with national chains.  Venue provisions provide the national chains legal consistency, and it’s the rare circumstance that they would be willing to give up this important benefit.  Nonetheless, it’s important for franchisees to discuss the matter with their business attorney and/or try to negotiate the provision’s removal.  Understanding the consequences of the provision better prepares the franchisee should a dispute later arise with the franchisor.  It also provides the franchisee the opportunity to explore other options.  Selecting a franchise located in one’s home state is a better option all other factors being equal.  If you are considering the purchase of a franchise, consult a San Diego franchise attorney for assistance.

Continued from Negotiating Power – The Often Neglected Contract Position.

In most cases, the party with the greater bargaining power presents a draft contract to the other and asks them to sign it as is.  The draft will set forth the major contract terms already discussed by the parties such as price, delivery method, term of a lease, etc.  The remaining terms tend to favor the party who prepared the contract.  If you are an entrepreneur looking to capitalize on a new shopping center for your small café, you will have a harder time convincing the landlord to agree to changes in a commercial lease than a national chain that will anchor the center.  

Corporate formalities 3.jpgUnderstanding your bargaining position prepares you for the negotiation process whether or not you are working with an attorney.  If you really want to open your café in the new shopping center, you will want to tread carefully during negotiations.  First, understand your rights and obligations as set forth in the proposed contract.  If you are negotiating without the benefit of legal counsel, consider asking a San Diego contract attorney to at least explain these rights and obligations.  Next, consider those terms you would like to change and prioritize.  What are the most important changes?  Remember, less bargaining power is not zero bargaining power.  By focusing your negotiations on only the most important issues, you preserve leverage.  Direct your discussions to the success of the transaction.  If we change Term X, it will improve both our volumes.  If you keep Term Y in the lease, I will lose significant business.  Stressing the success of the transaction shows that you are focused and professional, and the other side has little choice but to accept it as a valid concern.  Avoid the temptation to play “hard ball” with a party holding all the cards.  Finally, where possible increase you bargaining power by giving yourself alternatives.  No deal should be so important that you are willing to agree to terms destructive to the end goal.  If you are convinced there are no reasonable alternatives, make sure the other side doesn’t know the extent of your desire.  

Because San Diego businesses routinely enter in to contracts with vendors, clients, customers and other partners, it is important that they are familiar with basic contract principles and the need for negotiating favorable contract terms.  This is true whether or not they retain the services of a San Diego contract attorney.  The art of negotiating contracts requires a careful balancing of nuance and tactic.  Contract lawyers must weigh the needs of their clients against the desire for and/or business necessity of the contractual relationship.  The business contract binds the parties to its terms.  It defines the rights and obligations of the parties moving forward and can have far reaching effect, especially where disputes arise.  

864602_escalator_2.jpgIn the vast majority of contract negotiations, one side is considerably more concerned about ensuring the success of the agreement.  In such circumstances, the “more concerned” party must decide how much they are willing to give up.  This defines the “more concerned” party’s negotiating power.  The more the party is willing to walk away from the agreement, the more power that party has.  Negotiating power is probably the single most important factor in contract negotiation.  It is simultaneously one of the most often overlooked factors.  

The issue of course is not black and white.  The mere fact that one side has more negotiating power than the other does not necessarily mean that no negotiation is possible – although clearly this is the case sometimes.  The key is to recognize your negotiation power and leverage it to its fullest with skill, tact, bluff and perhaps a tad bit of humbleness.  Humbleness may seem counter-intuitive to some, especially attorneys, but it can and should make up at least a small part of your negotiation tactics.  No matter how hard seasoned attorneys and negotiators work to dehumanize the negotiation process, it is still conducted by people.  A soft touch often disarms even the most purposeful intent.

Continued from The Business Contract – Part Two.  

Integration Clauses:  The integration clause states that the written contract entered into by the parties is their entire agreement.  A typical clause reads: “This Agreement constitutes the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements, oral and written, between the parties hereto with respect to the subject matter of this Agreement.”  The integration clause ensures that neither side will be able to later claim that there were additional terms agreed to in a side agreement, orally or otherwise.  All contracts should include an integration clause.  

1267744_time.jpgModification Clauses:  The modification clause is a simple but important clause that requires contract changes be set forth in writing and signed by all parties to be enforceable.  

Severability Clauses:  It is sometimes possible that a particular clause in a contract is unenforceable under California law for a myriad of reasons.  To avoid having such clauses invalidate the entire contract, parties routinely include severability clauses which state that in such cases the remainder of the agreement is valid and enforceable to the fullest extent permitted by law.  

Continued from Basic Business Contract Provisions – Part One.

Mediation/Arbitration Clauses: Mediation and arbitration are alternative methods of conflict resolution. ADR (“Alternative Dispute Resolution”) has grown in popularity of late especially with judges. For the most part, ADR relieves pressure on overcrowded courts, reduces litigation costs and results in faster resolution. It’s important that parties understand the consequences of mediation and arbitration clauses. Mediation, the tamer of the two, may require that the parties submit their case to a mediator (experienced attorney or retired judge) who will help the parties navigate through the realities of their respective positions. It often results in early resolution, but the mediator’s findings are not binding on the parties. Mediation is not cheap. The parties generally share the cost and if the mediation fails, the parties still face all of the additional costs of full scale litigation. Those with limited resources may want to consider forgoing mediation clauses in their contracts. The scenario with non-binding arbitration is similar to that of mediation except that the procedures differ.

1207444_courtroom_1.jpgBinding arbitration on the other hand has significant consequences, not the least of which is that the parties waive their right to a jury trial and, except in limited circumstances, waive their right to appeal. Foregoing these fundamental rights leaves parties at the mercy of arbitrators who are typically more business oriented and conservative than juries. It’s not surprising then that big business routinely includes arbitration clauses in their contracts. Nonetheless, resolving disputes without the significant costs associated with litigation is an appealing alternative to many businesses regardless of their size. Binding arbitration provides an affordable venue for dispute resolution that is otherwise unattainable for some due to the costly nature of full scale litigation.

Contact Information