Verberne x Maldonado LLP

03/15/2023

Can we admit that the bar exam is a bad test now that robots can outperform humans?

12/14/2022

Gasoline prices are wide ranging by region, with the average at $4.66 per gallon in California — but already below $3 per gallon in some states.

10/20/2016

VxM's blog:You CAN choose between LDs and termination, but why if you can have it all?

LDs or Termination for Default? Or Both?

Buyers may have a hard time choosing between liquidated damages and termination for default if seller performs late. Why not both?

WHAT’S THE DIFFERENCE?

If seller performs late, buyer may want to walk away from the deal and find another seller, and if the contract allows, the buyer can terminate for default in this way regardless of how much seller has completed. The termination for default clause should describe the consequences of lateness, and what kinds of costs and damages the seller will be liable for. In this case, buyer will walk away from the deal, leaving seller liable for the buyer’s damages incurred due to the lateness, and buyer will need a new seller, unlike in a deal containing LDs, in which buyer may stay in the deal and keep the seller.

Liquidated damages (“LDs”) can also address a seller’s late performance by allowing seller to continue performing, though late, while buyer holds the deal open. Readers of this blog know that there are two common themes in our topics: 1) you don’t ask, you don’t get, and 2) nothing is free, and so it is here. Buyers will sometimes ask for LDs, but sellers have to ask for some customary protections from them. We will address this in a future post, but for now, it’s enough to know that LDs means seller will pay money to avoid a termination for default, and the money is usually dollars or a percentage of the order value, per day or per week of lateness, and there’s usually a cap. This combination of information allows the parties to calculate how long buyer may hold open the deal for completion.

You can guess that buyers will want LDs AND termination for default damages, at the same time, and that seller will not want to pay anything at all no matter how late in performance. Add to this the fact that in poorly-drafted contracts, LDs and termination for default remedies can step all over each other, causing confusion as to which remedy is available. This is a mess, and you likely won’t realize it until there’s a problem and you go back to consult the contract for guidance, at which point it’s far too late.

SO WHICH IS BETTER: LDs OR TERMINATION FOR DEFAULT?

An attorney’s favorite answer to many questions is also the answer here: it depends.

For seller, LDs can be less costly than termination for default damages if seller anticipates being only slightly late and seller knows that seller can complete the deal before the LDs cap is reached. LDs would be more favorable in that situation because seller is unlikely to trigger the termination for default damages (of unknown amount) and instead, will pay a manageable, known sum for LDs. LDs are also better for the seller if the termination for default clause is really awful because an awful termination clause is one that is easy to trigger and also has high damages imposed on seller.

For the buyer, clearly, collecting the greatest amount of damages when wronged is best, but this is not practical because an experienced seller will not allow it. Buyers, note: you actually WANT an experienced seller because that seller is more likely to know what they’re doing and has had the time to get its house in order, which usually means better service for buyer. Also beware of unsavory characters who will sign whatever you put in front of them because sometimes these parties don’t understand what they’re signing (or worse), and when you send the bill for damages, you may find such sellers not inclined to pay up. To choose a remedy, buyers will need to know what is important: if it’s important to be able to get out of the deal and find a new seller when the original seller shows signs of distress, then buyer will want a lively termination for default clause instead of LDs. If the buyer anticipates not being able to find a new seller, or the lead time to begin anew with another seller takes longer than letting the first seller finish, then buyer will want a strong LDs clause to compensate for the trouble (because the buyer is not well-served by terminating for default in such cases).

JUST PICK ONE, OR BOTH?

Because these remedies are used against seller, seller will want to clearly state which remedy is being agreed and exclude other remedies so that the seller won’t pay any damages or related costs twice.

Some sophisticated contracts will contain both LDs and termination for default. If you’re feeling this fancy, it will require careful drafting to avoid ending up in a situation where buyer is charging LDs to the seller while buyer is also taking steps to terminate the deal for default (because these steps toward termination will cost the seller money later). A properly negotiated contract will allow LDs to be collected for an agreed time, and will not allow buyer to terminate nor incur costs to pass through to seller during that time, and in orderly fashion, if seller has not caught up the schedule, the LDs period will then give way to a termination for default. This can be an elegant solution offering protections for both buyer and seller when drafted well.

10/14/2016

Sellers, Get Yourselves Paid. Buyers, Don’t Overpay.
Cautions About Termination for Convenience.

WHAT IS TERMINATION FOR CONVENIENCE?

A termination for convenience clause is the part of the contract that describes what happens when one party no longer wants to be in the deal, and it’s not the other party’s fault.

A termination for convenience usually occurs when the buyer: runs out of money, has a project that has been suspended indefinitely or cancelled; has suffered a major setback or accident and can’t or doesn’t want to complete the current project; or no longer needs the quantity or type of goods or services they ordered. These situations don’t sound all that “convenient” for buyer, but just go along with me, because that’s what it’s called.

Note I don’t describe the common circumstances during which a seller will terminate for convenience. It’s because this situation is uncommon because sellers want to sell, and once seller has an order, seller wants to keep it. There are limited instances in which a seller may want to back out of a deal: buyer is habitually very late in payment and seller has had enough of that; buyer has assigned the deal to someone else and seller doesn’t want to do business with that other party; or there’s been a merger or acquisition to which buyer is a party and the seller doesn’t want to work with the new entity. Sellers have to ask for these protections, but generally, termination for convenience clauses dictate what happens when buyer wants out of the deal.

WHY SHOULD I CARE ABOUT TERMINATION FOR CONVENIENCE?

Both parties need to pay special attention to the clause because when it is not negotiated prudently, sellers don’t get paid for work performed, or buyers pay for work they didn’t receive. If sellers did not have the protection of a properly negotiated termination for convenience clause, sellers might decide it’s better to perform late and wait and see how things go to ensure conditions like a changing economy or buyer’s financial position don’t jeopardize seller’s payment for work performed. As for buyers, when these clauses are negotiated properly, the buyer gets to keep what they’ve paid for so they can use it later. The typical clause will also allow a quick and easy escape without a penalty if the buyer suddenly wants out of a deal.

YES, I SHOULD PAY ATTENTION TO TERMINATION FOR CONVENIENCE. HOW DO I KEEP FROM GIVING AWAY THE FARM?

This sounds like a win for everyone, and it is, if the deal is negotiated correctly, but as always, traps abound for all of us. In order to be paid properly for the deal, sellers need to ensure that they do not have to deliver the goods, complete the services, or wait for buyer’s acceptance of goods and services. If seller has to deliver the goods or complete the services, then seller won’t be paid for work in process. If seller has to wait for buyer’s acceptance, that is easily withheld, along with seller’s money. Seller should also ensure they are paid for “soft costs,” like reasonable profit, overhead, and engineering, if applicable. Seller may also have spent some time and money on procuring goods and services for the cancelled part of the project, and seller should be paid for these as well, regardless of the fact that this portion of the project is terminated.

Buyer is responsible for many types of costs under a properly negotiated termination for convenience clause, and this is as it should be, because buyer is generally the one who broke the promise to complete the deal. But there are some standard precautions that buyer can take to ensure the costs are reasonable, and standard in the industry. Most buyers will want to cap their overall costs so that the costs don’t exceed the value of the order. Buyer should also ensure that buyer has the right to possess and use everything that they’ve paid for without restriction, so they can resume the project later with a different seller. The buyer will have to consider whether they need drawings if engineering is involved, and ask for these too.

Buyer should also expressly disclaim some costs that seller may want to recover, for instance, seller might say to buyer “hey, I passed on a huge deal to do business with you, and now after your termination, I don’t have your business or the business I passed on. Pay me a lot of money for both because this is all your fault.” The sentiment is true and understandable, and this is a seller who is trying to recover for “loss of anticipated profits” and “loss of business opportunity.” We call this loss the seller’s “cost of doing business,” and buyer should not be liable for these costs, but buyer might be if buyer did not carve these out of the clause. Buyers should also watch out for return of their deposits and advance payments during termination for convenience. When I was in college, back before I knew anything about any of this, I put a deposit down on my first apartment, failed to read the T&Cs, and the apartment manager tried to keep my deposit when I wanted out of the deal. An alarming event happened at the complex that made me change my mind, and I got some of the money back after a big hassle, but not all of it, and the business relationship was ruined (I had to see the apartment manager in other settings because it’s a small world and it was really awkward). You don’t want to rely on chance when business and relationships are at stake. You want to rely on knowledge, industry standards, and negotiation skills.

We strive for good contracts instead of trying to get everything we want at the expense of the business relationship. A good contract is one in which neither party gets everything they want, but both parties get everything they need. Most items in this summary belong on your list of needs.

09/19/2016

A big deal for musicians and songwriters...
http://www.digitalmusicnews.com/2016/09/16/bmi-prevails-doj-100-licensing-dispute/

Performance rights organization BMI has now triumphed over the Department of Justice in its 100% licensing dispute, creating a new precedent.

09/04/2016

A good example of why small businesses should pay attention to the details of their contracts at the beginning of thier relationships - they might become really big businesses.
http://www.forbes.com/sites/shawnsetaro/2015/05/05/baby-money-inside-the-early-years-of-birdmans-cash-money-records/

VideoBryan “Birdman” Williams, “Baby” to his close associates, is a regular presence on Forbes lists like our new run down of hip-hop's wealthiest artists. His exploits as the co-founder of Cash Money Records, and as a rapper, solo and with the Big Tymers, his duo with Mannie Fresh, are well [...]

09/04/2016

This is a concise explanation of the DOJ's proposed ruling on the BMI and ASCAP consent decrees. If you are a songwriter, worth the read.

https://www.indieonthemove.com/blog/2016/07/5-things-songwriters-need-to-know-about-the-consent-decree

**Guest post written by Brian Penick as featured on the SOUNDSTR Blog.   "What is the Consent Decree, and why are people talking (and so upset!) about it?...For songwriters, one of the least discussed (yet most important topics) is music licensing. But major changes to the consen...

08/28/2016

Contracts usually say “time is of the essence,” but no, it’s not!

Here’s what time essence means in a contract, at its simplest: the time of performance of the deal is so important that the promising party must do what he promised to do on the appointed day and time, and if the promising party is delayed, the deal is ruined, and the other party can opt out of the deal entirely by terminating the transaction immediately, and trigger the remedies and costs that were agreed in the contract. We leave out here the several other interpretations of time essence language because they’re beyond our scope, but this is a typical outcome, and it’s quite radical.

We call the parties “promising party” and “other party” above because the party that promises to do something timely is not always a seller, for instance, in a real estate transaction where the buyer breaches by failing to pay the earnest money for the property on time. In that case, the breaching party is the buyer, but to make it easier to talk about this topic, let’s take the typical situation where the seller needs to perform on time and a buyer would then pay for goods or services after timely performance.

If the seller is a stock broker, or someone who transports organs for transplantation, surely a delay can be costly or even ruinous to the transaction, but this phrase appears in most of the contracts that we’ve seen, regardless of the subject (and no, we’re not reading a lot of deals for brokering stocks or transporting organs for transplantation!).

Even if the seller is certain that he can perform timely, and so is inclined to allow time essence language, the problem with the time essence clause is that even if the performance is only a little late with no significant harm to the buyer, the term can trigger “repudiation,” meaning the buyer can immediately terminate the transaction, and obtain whatever remedies and costs that were agreed in the contract, or the buyer may be able to declare that the contract is dead because it failed its “essential purpose,” and claim that he has no obligation to the seller at all and can walk away from the deal, even if the seller is almost done with his obligations. The seller surely doesn’t want this, but in many cases, the buyer doesn’t actually want this either, as we explore below.

Generally, following late performance, the buyer doesn’t want to sue for breach of contract and damages, or walk away from the deal as if it was never signed, because the all-important schedule is already running late, prices may have increased, the cost in terms of time it takes for re-procurement can be high, and re-procurement is generally an inefficient remedy.

If there is no time essence language in the contract or any other similar term of art (“time is a material term”), then it’s assumed that the seller has a reasonable period of time to perform, and this or something similar can be written into the contract instead. Omitting time essence language from the deal doesn’t mean that the seller can perform whenever the seller feels like it. It means that buyers have to understand what they want and then say what they mean. But what does a buyer usually want and what is a seller generally willing to give?

Now we look at solutions. What a buyer wants when the seller performs late, or what a seller may offer to a buyer who is concerned about late performance, might be: a discount, free goods and services, a free add-on or enhancement to the goods or services that are late, liquidated damages for every day or week that the seller is late, an extended warranty, a performance improvement plan, or an amount to compensate the buyer so the buyer can go elsewhere and get set up with a different seller for the next deal.

Also consider that prevention is often easier than the cure, so if the deal is of the type that can be monitored, you can incorporate into the deal regular progress reports, site visits, proof of life for the project (drawings, photos, test modules), a bonus for early performance, or progress payments that are conditioned on meeting milestones that show the project is progressing as planned. This will allow the parties to anticipate issues and solve them together, while keeping in mind that using a lawsuit as the tool to remedy a failed transaction is usually the costliest way to address late performance.

We suggest that you carefully consider whether time essence language is getting you what you really want, and if it’s not, work with someone who can help you fix it.

07/11/2016

In the first part of this topic, we talked about the procedures that should be in place within your company to protect it from possible nullification of its agreements, but I also counsel clients to know and ask questions of their business partners that will sign the contracts on the other side. Asking questions helps you discover potential trouble spots because the same issues you face in your company leading to difficulty of enforcement of your deals can also plague your counter party, which puts you in the paradoxical position of being in a deal that may not really exist.

If you ever read case law on these issues (yes, these matters are litigated), some of these cases might make you laugh because they feature outlandish scenarios, like one company approaching another with an important, high-value contract for signature, but they approach employees in positions like gardener or dock worker. In such cases, the party asking for that signature should probably have known that these employees were not appropriate signatories to bind their company. Admittedly, this can get murky when, say, the agreement is for commercial landscaping equipment and the head groundskeeper signs the deal. But the basic legal premise is that if the deal goes sour after signature, you may have some difficulty later in enforcement of the deal if you knew or should have known that the other party’s representative who signed your contract did not have authority to do so. This “knew or should have known” idea is a common legal standard that appears in many areas of law, and it isn’t incredibly helpful for our murky case of the head groundskeeper who signed up for landscaping equipment, but in any case, that’s the standard we have, and knowing your business partner, and using your best judgment and sense of fair play will take you far.

You should also watch out for contracts that actually contain the position or title of the person within the organization that is allowed to sign agreements to bind the company. This is difficult because it puts much burden on one party to know many details, and this one party is also the one who is least responsible for employees of the other party, has the least control over the other party, and has the least information regarding the organizational structure of the other party. Still, many companies will add a clause to their contracts requiring the other party to know: this special signature clause exists, who is signing the agreement on the other side, that the signatory is who they say they are, and that this person truly possesses the title or position as required in the contract. These are important clauses because they usually go one step further so as to nullify the contract if anyone other than the designated person has signed the contract. I think this goes too far because at law, companies are generally required to police their own staff and will have to deal with whatever shortcomings they encounter with their own process, and putting this burden on the other party least able to handle it is not a fair fix, but these kinds of clauses can be enforced, and you can find yourself on the wrong end.

Regarding this, like many matters, I generally say: if there’s something dubious about what you’re about to do or are being asked to do, or something otherwise gives you pause, there’s likely a good reason for that, even if you don’t know what it is, and you should stop what you’re doing, and ask someone you trust for help. Here at VxM, we can see deals through from inception to litigation after something goes awry, and we find, repeatedly, that it’s easier, less expensive, and causes overall less friction in business to do the prudent thing at the outset, even if it may lead to short-term nuisance.

07/11/2016

Don’t get your contract thrown out! Check those signature blocks, one, two, and three times…

I’m going to confine our remarks to issues arising during the signature process that can go REALLY wrong, and can lead to nullification of your contract. This is serious because nullification means that a court can make it as if your contract was never signed, and if your contract was never signed, then you can lose your rights under the contract. I’m breaking this topic into two posts because it’s an important topic, yet it doesn’t get much attention.

To keep on the right side of things, you want to ensure:
1) Your company has a policy describing who is allowed to sign agreements.
2) Those people approved to sign agreements are the only ones who actually sign the agreements.
3) Your company name is stated fully and correctly in all of your agreements.

There’s also one bonus item that we’ll address in part II of this topic: who is signing your agreements on the other side?

These issues are easy to overlook because they’re relatively boring details that nobody wants to read, they aren’t negotiated, and people assume that either someone else is watching out for these items, or that they’re so basic that nobody could get them wrong. Though all of these are true, I want you to at least be mindful of the primary ways these signature blocks can go sideways and cause trouble later.

Formulating a plan for who is allowed to sign agreements is usually straightforward. Most companies will certainly want to allow their officers to sign agreements, but for larger organizations, this often isn’t feasible for every agreement due to the bottleneck it can cause. These organizations may want to delegate signature authority downward by also allowing senior vice presidents and vice presidents to sign agreements. When we assist companies in drafting these plans, naturally, we all want trustworthy people to be designated. Perhaps more difficult to focus, we also want people who understand the core values of the company and its tolerance for risk, and who will respect these standards in the agreements. Once you finalize the list, be sure to write out a policy and circulate it. Though the company will generally be obligated to perform what its designated signatories sign, you can also be bound to perform what other employees sign on the company’s behalf, even if they aren’t really approved to bind the company in agreements.

That leads us to our next step: if you have more than a dozen or so employees, it can be difficult to know if an employee who the company hasn’t vested with signature authority is putting pen to paper to bind the company, which can lead to trouble if the company’s senior management would not have approved that deal for signature. It’s far easier to practice preventive measures like the above than it is to remedy after it becomes a problem. We find that companies that emphasize enforcement of a designated signatory plan from the top-down, and have plans in place to bring back to the fold those employees who don’t adhere, have better overall success with their plans.

The third step to avoid nullification is to ensure your company name is stated fully and correctly in your contracts, and if you get this one wrong, but a company representative signed the contract anyway, then it can be argued that there is no agreement in place. You’ve probably seen this in action in your personal life, for instance, it’s the same reason why your correct name has to be listed on your speeding ticket, and on the closing documents when you buy or sell property. The legal reason for these is the same: an entity that doesn’t exist can’t enter a contract, nor can it have any rights, remedies, or obligations, and though the document exists and was signed, you can find yourself with a dispute on whether the agreement is legally binding later.

In this first part of this topic, we confined our remarks to the kinds of problems that can arise within your company that can lead to nullification of a signed contract. Next time, we’ll talk about what kinds of issues can arise within the company on the other side before they sign a deal with you.

06/24/2016

NeverEnding Warranties...

Let’s talk about how easy it is for a seller to get caught in a warranty that never ends. A typical seller’s warranty for goods is a set number of months from sale or from shipment, or a combination of X months from shipment or Y months from installation/first use, whichever occurs first (or later). These are good standards to use because they allow a seller to understand when his obligations are complete, and when these outstanding liabilities “drop off the books.” In contrast, a buyer wants to be able to assert his rights for as long as possible and get the help he needs when the goods don’t perform as expected.

Some common ways an experienced buyer will ask for the never-ending warranty is by asking for one that extends for X months “from acceptance” or “from completion of the order to buyer’s satisfaction.” A seller may feel comfortable with this if he can handle the number of months in the time frame, but upon closer examination, buyer and seller really don’t know how long these warranties will last.

Regarding a warranty that’s “X months from acceptance,” it’s rare when acceptance is also defined in the contract. This means we don’t know when the warranty begins, so we can’t know when it ends. We could take some guesses, and maybe the warranty begins: when customer signs a delivery form, after successful installation and startup, upon approval from the buyer’s customer, or even at startup of a major capital project that will occur years in the future when our seller here is long out of the picture. To address these ambiguities, we could define what acceptance means in the contract, and make sure seller can control it; or we could say something like “X months from acceptance, and such acceptance or objection shall occur within 10 days of delivery of the goods, or the goods shall be deemed accepted.”

Buyers may also request a warranty that begins “from completion of the order to buyer's satisfaction,” but this raises issues similar to the above. We could try here instead “from completion in accordance with the order,” where the order hopefully contains the clear, objective specifications that must be met. To be effective, this requires coordination and communication between Sales and Legal, but this standard is fair to both parties and puts equal responsibility on them to understand what they’ve asked for and what they can expect.

A seller may be satisfied if he obtains one of the sample standards above, but sometimes a warranty will treat a “latent defect” differently from a “patent defect.” A patent defect is one that is fairly obvious to an observer during a routine examination or light use. A latent defect is one that is hidden, or generally not easily discovered when examined or tested by someone familiar with similar goods. Seller and buyer are usually most concerned about latent defects because you can’t see them, and you may continue “not seeing” them until past the expiration of the warranty period! A fair fix here for seller is to ensure that all defects are treated equally, whether it’s damage from shipping that’s obvious as soon as someone opens the container, or issues in materials or workmanship that arise much later. Buyer can ask for a warranty length that’s long enough to make him feel comfortable that defects will appear during such time, and he may also want a little grace period, maybe a couple of weeks, to avoid the dreaded “oh, this thing just broke and my warranty expired last week!”

We begin our first talk here on how to start the warranty clock because that’s, well, the beginning, but warranties present many interesting issues that we’ll cover in this blog, from costs, remedies, what happens when buyer wants a remedy he doesn’t have, liability when the parties disagree on whether a problem is really a defect under warranty, what to do when agreed remedies are not honored, and oral and at-law remedies that aren’t in the contract.

Getting past these issues requires trust between the parties, but it also requires rational parties who understand that all business risks cannot be eliminated, and though we all find “risk-free” deals desirable, they’re not practical to pursue, and also, paradoxically, they’re not good for business in the long term because it doesn’t build sustainable relationships, trust, and good will, which we’ll need later for good faith problem-solving between the parties if a warranty issue arises. Though all of this may require a bit more negotiation, it’s still easier and less costly than trying to enforce or defend ambiguous warranty claims. If any of this raises any questions or comments, please let us know at [email protected].