Business Law

Business in the modern world is as complex as it is treacherous. Only the naive rely upon a “handshake deal.” The wise business proprietor knows when he or she must have outside support. Mirowski & Associates provide tough contracts and assist businesses of all sizes in protecting their interests. Mirowski & Associates provide a full range of civil legal services to small businesses and corporations in San Diego and throughout Southern California including: Corporate, L.L.C. and Partnership Formation and Maintenance; Business Negotiation & Contract Drafting; Business “Strategy” Counseling, Liability and Asset Protection, Employer-Employee Law, Civil Litigation & Arbitration (Both Plaintiff and Defendant); Internet Law; Intellectual Property Matters Including Trade Secret, Copyright & Trademark; Tort and Unfair Competition Litigation, Wine Law and Licensing and Governmental Liaison.

CONTRACTS PRIMER: WHY WRITTEN CONTRACTS ARE ESSENTIAL
(From “Protecting Information in the Computer & Hi-Tech Industries” by Paul J. Mirowski)

  • “For the memory of men slips and flows away, and the life of man is short, and that which is not written is soon forgotten.” - The Scholar Beaumanoir in 1283
  • “A verbal contract isn't worth the paper it's written on.” Samuel Goldwyn

The above quotes suggest a couple of the reasons why any contract worth having is worth reducing to a writing. Even though the law does acknowledge that verbal contracts are valid and enforceable (sometimes), such laws only set a societal baseline. You will likely need substantial independent proof of the terms. Your mother saying you were raised to never lie will not suffice. In addition, the law tends to be remedial and seldom imposes any requirement that the parties "do the right thing." Quite simply, this means it will cost you a great deal of money and time to obtain what that verbal contract says that you are already entitled to. So, the question comes down to, do you want to hope that the courts will get it right, save the day and not require you to go broke in the process of enforcing your rights or, would you rather create a written contract.

A contract forms an enforceable relationship between two parties and this relationship can far exceed the concerns of society. The terms of a contract are basically only limited by the general rule that a contract may not be used to enforce "illegal" actions (i.e., a societal wrong). On the other hand, since society has an interest in parties ordering their affairs between themselves and keeping the peace, the "law" will enforce extensive self-imposed obligations called for by a valid contract. Therefore, a contract can be used to provide expansive protection of the parties, their businesses and may also be used to regulate and protect intellectual property and even ideas. In some cases, a contract is the only effective tool available to control use or transfer of proprietary information (intellectual property). This is especially true in the hi-technology industries.

Central to any contract is the assumption that it must be laid out in writing at a point where it will be of some use. In essence, this means that it must be drafted BEFORE the parties have begun their work. Anyone who has attempted to draft a contract after the first dollar has been invested or any significant amount of time/effort has been spent by one of the parties, knows that ambiguity quickly creeps into these relationships. Ambiguous contracts are grist for the litigation mill and the most ambiguous contract a party may have is the "verbal" contract.

Many people complain that they dislike the "formality" of a written contract. They consider a written contract too adversarial and after all, "we're friends." This emotional reaction usually turns to regret when the same parties are faced with a failure of their relationship to live up to their expectations. If an agreement is important enough to be made, and if you have an expectation of it being honored, there is no reason to NOT write it down.

Besides providing an objective record of the intent of the parties at a later date when memories have faded and relationships changed, a well-written contract:

  • Clarifies the parties' goals, defining the issues and expectations before the parties have invested time and money into a project.
  • Minimizes the chance of conflict and disputes between parties because the agreement is available for review and to refresh their memories at any time.
  • Avoids the delays and confusion inherent in joint ventures by providing a clear assignment of responsibility.
  • Provides a mechanism for resolution of disputes to keep it "out of court" and therefore protect the venture from ruin by expensive and wasteful litigation.
  • Provides penalties for parties who act in bad faith thereby taking the potential benefit out of a malfeasance and protecting the good-faith party.

Many inexperienced entrepreneurs like to say that they cannot be bothered with attorneys and that “mumbo jumbo” of legalese. These very same persons are likely to sign any "boilerplate" contract that some smiling person has presented to them as a "standard" contract. These people create a great deal of income for attorneys when they later realize that a contract is only “standard” from the point of view of the person offering it. Failure to read and negotiate such a contract will often leave them and their business “out in the cold” when the cost-benefit of a good attorney and well-drafted contract becomes painfully clear. The lesson to be learned is simple, write it down and write it well!

back to top

THE BUSINESS LEGAL HEALTH CHECKLIST™

Take a few minutes and check up on the legal health of your business / organization. An ounce of prevention at this time might be worth that proverbial “pound of cure” at a later date! Simply read the following questions and make a note of anything that suggests there might be a potential problem with the organization of your business:

I. IS YOUR BUSINESS ORGANIZED & MAINTAINED TO AVOID PERSONAL LIABILITIES AND / OR LEGAL EXPOSURE?

A. Should your business be operated as a Corporation or Limited Liability Company (LLC)?

EXPLANATION: You should consider if any of the following advantages of conducting business under the corporate or LLC structure might be important to your business:

  1. 1. Entities can be used to avoid personal liability (for example, a principal owner’s home equity) for debts and liabilities of the business entity.
  2. 2. Unlike a sole proprietorship or a partnership, a corporation’s life span is usually perpetual, even when there is only one shareholder allowing long term planning for the conduct of the business uninterrupted by death or illness.
  3. 3. Bylaws of an entity constitute a traditional method of defining the management (decision making) and ownership among the principal owners of the business.

B. Is your business operated as a “Partnership” without a current partnership agreement which provides for:

  1. 1. The percentage of ownership by the respective partners?
  2. 2. How and when “draws” may be made by the partners?
  3. 3. How and when profit or loss will be determined?
  4. 4. A structured system of management and control of the business (decision making) and specifying what actions will require majority consent?
  5. 5. Under what terms will property be loaned to the partnership and what compensation will be paid?
  6. 6. Trade secret protection or ownership of trade name & proprietary interests (especially upon dissolution)?
  7. 7. Prohibiting partners from competing outside activities?
  8. 8. Prohibiting partners from transferring their partnership interests?
  9. 9. The terms of admission of new partners and what will happen upon a partner’s death, disability, or voluntary withdrawal?
  10. 10. How a dissolution would be handled and specifying the rights and responsibilities of the partners?

II. ARE YOU RISKING PERSONAL LIABILITY?

Although one of the advantages of a Corporation or LLC is to protect you from “personal liability” for the debts of the “entity,” pursuant to the “alter ego” doctrine, major shareholders and officers of a corporation may still be made personally liable if the entity fails to adhere to “corporate formalities.” Historically, the courts have used a number of factors to support their ability to “pierce the corporate veil” (i.e., to create personal liability) including, a corporation’s:

A. Failure to issue stock.

B. Failure to maintain minutes and adequate corporate records.

C. Failure to maintain arm’s length relationships (read appropriate contracts) among the related parties.

D. Treatment of the Corporation’s assets as if they were owned by an individual for his or her own benefit. See Associated Vendors, Inc. v. Oakland Meats Co. (1962) 210 Cal. App. 2d 825, 838-840.

EXPLANATION: One must conduct one’s corporate affairs properly or lose the advantages given to the owners by law.

III. ARE YOUR CORPORATE OR PARTNERSHIP FORMALITIES CURRENT?

A. Are there current annual corporate minutes for every year of operation or is the partnership agreement out of date?

  1. 1. Has the corporation / partnership changed in a significant manner that affects the owners’ rights and responsibilities?
  2. 2. Has the business procured new management (officers, directors or partners) without the appropriate contracts and minutes?
  3. 3. Have any major transactions occurred without the required approval of those who make the ultimate decisions?
  4. 4. Have the goals of the business changed?

B. Have new owners / investors acquired an interest in the business without contracts or shares representing their interests and the rules governing their ownership rights?

IV. ARE YOUR BUSINESS OPERATIONS CURRENT?

A. Has the corporation / partnership entered into any significant agreements without a proper written contract? (Beware: see the “Contracts Primer” herein)

B. Has anyone contributed money / services / assets to the business without a written agreement?

V. ARE YOUR EMPLOYMENT CONTRACTS CURRENT?

A. Are all major owners (officers, directors, shareholder, partners) and management personnel under comprehensive employment contracts?

B. Has your business retained independent contractors or key employees without a written contract?

C. Does your company have personnel policies to control entry and exit procedures and limit liability.

D. Does your business protect its trade secrets from departing employees? (See “Intellectual Property” herein)

VI. ARE YOUR CONTRACTS COMPLETE?

A. Have you had your contracts reviewed to insure that they provide appropriate safeguards and protection?

B. Do your contracts provide disincentives to deter litigious persons from starting litigation?

C. Do your contracts provide appropriate remedies for your particular situation?

D. Do your contracts provide a “home court” advantage (i.e., the parties are required to come to your local jurisdiction rather than have you travel to their jurisdiction)?

E. Do your contracts provide that “attorney fees” and “costs” will be paid by the loser?

VII. GENERAL ISSUES

A. Does your business need a “fictitious business name” filing in its counties of operation?

B. Does your business need any licenses to operate in the territory in which it currently conducts active operations?

C. Have you complied with all state \ county \ city requirements for your business?

D. Will your business enter into or renew a lease soon without having the terms reviewed?

E. Will you be doing any business internationally?

F. Will you be doing business over the internet and have you made provisions for security of your files and transactions?

back to top
© 2008 Paul J. Mirowski. All Rights Reserved