The BUSKLAW July Newsletter: The "Inside Baseball" Business Litigation Stupid Strategy Post

There's baseball and there's inside baseball. The former brings to mind Detroit Tigers baseball and the legendary Ernie Harwell. In the early 60s, my father and I would camp out on our porch during the summer months and listen to Ernie's play-by-play over the recently-invented portable transistor radio. Late games were punctuated by euphonious crickets and frogs, some of whom resided in or around our cement-pond swimming pool. This chorus - combined with Ernie's sonorous narrative - often sent me off to dreamland. 

But "inside baseball" is different. The term implies knowing something that is beyond ordinary understanding. Esoteric even. More effort is required to grasp "inside baseball" information, but the payoff is greater: you become smarter! So bear with me.

This blog has often cited business cases decided by Kent County (MI) Circuit Court Judge Christopher Yates. Judge Yates not only writes opinions with brevity and wit; he's a modest soul who invites lawyers to call him "Chris" outside of the courtroom (a judge with humility? - what a concept).

In the case of Young v Vandermeer, Judge Yates was presented with the messy aftermath of a business falling out. The corporation was Grand Connection, Inc. ("GCI"), and its two shareholders were Amy Young and Teresa Vandermeer. Five years ago, Judge Yates order GCI dissolved after Young and Vandermeer couldn't agree on how to run the operation. But now the parties were back before Judge Yates to decide the fate of eight claims brought by Young against Vandermeer. 

Let's set the stage. Trial lawyers make claims for their clients. That's what trial lawyers do. And trial lawyers are prone to make claims that have little or nothing to do with the facts or the law of their case, thinking that if you throw enough mud (or a more disgusting substance) against the wall (here defined as the Court), some will stick. But judges take a dim view of peppering them with unfounded claims; the reputation of the lawyer bringing these claims may suffer - and rightfully so. Fortunately for Young's lawyer, Judge Yates was tolerant, stating in a footnote that:

A hallmark of the Kent County [MI] Specialized Business Docket is numerosity of claims. The instant case surely does not disappoint in that regard, so the Court must engage in its usual practice of plowing, claim by claim, through the plaintiff's overstuffed pleading.      

Here are the eight claims against VanderMeer that Young pitched to Judge Yates, the required elements of each, and why they failed: 

Claim Description	Required Elements (MI law)	Why The Court Rejected
1. Statutory Conversion  of Money	(1) Money must amount to personal property; and (2) VanderMeer must have had an obligation to return that money to Young.	There wasn't any actual money that could have been converted. Unrealized profits are not personal property, so they couldn't have been converted.
2. Misappropriation of Corporate Opportunities	VanderMeer must have been a corporate officer or director who appropriated a corporate opportunity for her own benefit, thereby breaching her fiduciary duties to the corporation.	Young has no standing to assert this claim because she isn’t the corporation that was allegedly injured, and she can’t assert the claim as a GCI shareholder because she doesn’t meet the statutory requirements for a derivative shareholder suit.
3. Fraudulent Misrepresentation	VanderMeer must have misrepresented a past or existing fact.	The alleged fraudulent misrepresentations were made by the court-appointed receiver who wasn't even a representative of VanderMeer.
4. Silent Fraud	VanderMeer must have suppressed a material fact that she was legally obligated to disclose, rather than making an affirmative misrepresentation.*	No evidence that VanderMeer's action in renewing an essential GCI software license without informing Young was fraudulent.
5. Shareholder Oppression	(1)  VanderMeer must have engaged in fraud, illegality, or oppressive conduct. (2) Young must have been a minority shareholder in GCI who was abused by “controlling” persons.	Young was an equal GCI shareholder with VanderMeer so the minority shareholder requirement wasn’t met.
6. Tortious Interference with Business Relationships & Expectancies	VanderMeer must have done something illegal, unethical or fraudulent.	Young failed to prove that VanderMeer did anything illegal, unethical or fraudulent.
7. Civil Conspiracy	Requires a combination of two or more persons, by some concerted action, that accomplished a criminal or unlawful purpose, or that accomplished a lawful purpose by criminal or unlawful means.	Young failed to prove that VanderMeer engaged in criminal acts by dealing with GCI's customers.
8. Unjust Enrichment	For an unjust enrichment claim to succeed, there must not be any express contract covering the same subject matter.	There was an express contract between the parties.

*Further, Young must show some type of representation by words or actions that was false or misleading and intended to deceive. 

For my trial lawyer audience, does it make good sense to allege these claims when there was no legal or factual support for any of them? Are you worried that making unsupported claims tarnishes a lawyer's credibility in arguing future cases before the Court? 

For my business audience, now that you know about these somewhat esoteric causes of action, if you find yourself in a nasty dispute with a fellow shareholder, you can alert your lawyer to give them due consideration. Perhaps you will fare better than Ms. Young - or not! 

Cue music: And it's one, two, [NO] eight strikes you're out at the old ballgame!

If you find this post worthwhile, please consider sharing it with your colleagues. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. And my email address is busklaw@charter.net. Thanks!

The BUSKLAW February Newsletter: "What's in Your Contracts?" The Case for Auditing Your Contracts (Part 2)

In last month's newsletter, we discussed the importance of auditing your business contracts and pointed to five potentially troublesome provisions: identification of the parties, agreement term, payment, intellectual property rights, and confidentiality. But there are additional provisions that deserve careful scrutiny:

> Indemnification. To understand this concept, start with three players: the parties to the contract (call them Able and Baker) and a third player who isn't a contracting party (call him Charlie). Let's say Able manufactures widgets, Baker sells them in its retail stores, and Charlie is a customer who purchases an Able-produced widget from Baker. The widget injures Charlie. Charlie's lawyer sues Able and Baker because Able produced the widget and Baker sold it to Charlie. Baker's only involvement was selling the widget, so he tells Able to take care of it, i.e., defend him in the lawsuit and pay the settlement or the court judgment if the case goes to trial. The extent to which Able must protect Baker from Charlie's lawsuit is what indemnity is all about; chances are that the sales contract for the widgets between Able and Baker discusses indemnification. Lawyers love to fight over indemnity, including whether the buyer's negligence is covered, i.e., if Charlie's injuries from the widget didn't result from a manufacturing defect but because Baker damaged the widget before it was sold to Charlie and thus created the hazard that caused Charlie's injury.

The proper drafting of indemnification provisions is crucial, and exceptions or conditions to the duty to indemnify should be carefully stated. And indemnification should always relate to third-party claims and not to damages between the contracting parties for breach. Do the indemnity provisions in your contracts pass this test? 

>Insurance. Insurance provisions are vital in business contracts, but in my experience, transactional lawyers don't always understand the various insurance coverages available and how they relate to other contractual provisions. Using the above example, Baker may require to Able to maintain contractual liability insurance (and Able may want this as well) to fund (or "insure over") Able's obligation to defend Baker from Charlie's product liability suit. And cyber-risk insurance has become available that should protect a company from claims resulting from data breaches. Companies that handle customer data should seriously consider obtaining that insurance, and a savvy information technology/business lawyer can add value to that process. Is your insurance coverage adequate and complete? Is it properly described in your contracts? What about the other party's insurance?  

>Limitation of Liability and Exclusion of Certain Damages. These are key provisions that must be carefully considered unless you don't care about "betting your company" by having unlimited liability when you sign a contract. To simplify a bit, there are three major points to ponder: first, whether there should be a cap on direct damages resulting from a party's breach of the contract; second, whether a party's indirect damages should be entirely excluded from available damages resulting from a breach; and third, whether a dollar cap should apply to a party's obligation to indemnify the other.  Do your contracts contain understandable limitation of liability and damages exclusion provisions? And are they consistent with all of the other contractual provisions?

>Governing Law, Jurisdiction, and Venue. What State's laws govern your contract? If you're a Michigan-based company doing business with a California-based company, you probably shouldn't agree that California law governs the contract. And where would legal action under the contract occur? Would you rather litigate in a Michigan court or in a California court? Your decision could make the difference between driving to court proceedings in downtown Grand Rapids  - or lengthy plane trips to and from a California court. Do the governing law, jurisdiction, and venue provisions in your contracts prevent you from being dragged into a faraway court? 

>Litigation or Arbitration of Contract Disputes. Arbitration proceedings are private; court proceedings are not. Would you care if the news media attends court hearings about your dispute? And court proceedings may be more expensive than arbitration and may involve a jury trial. But if your arbitration provision isn't carefully drafted, you may wind up spending just as much for arbitration than litigation. Do you know if your contracts contain litigation or arbitration provisions? If arbitration, is that provision carefully drafted to ensure that arbitration would indeed be less expensive than litigation? 

>Legal Jargon. I've already posted about lawyers and their goofy words. But some legal jargon should simply be removed from your contracts: "and/or;" "execute" to mean "sign;" vague pointing words such as "aforementioned," "foregoing," or "below;" confusing phrases such as "including but not limited to," "in witness whereof," and "for the avoidance of doubt;" and such verbs as "may," "must," "will," and "shall," that can be confusing when used in the wrong context. And the stupid yet common practice of writing numbers in both words and digits, e.g., "thirty (30)." All it takes is a contract containing "fifteen (30)" to land you in court. Have you detected and removed all legal jargon from your contracts? (If your lawyer uses legal jargon, best get a new one.)

And what about words or phrases that sound like legal jargon but aren't? Two examples: first, there's definitely a need to insert "hereby" in some cases. Second, "according to" isn't necessarily the same as "in accordance with." And to further complicate matters, some apparent legal jargon should be retained as terms of art. Do you know what specialized legal language should remain in your contracts - and why?   

When Ben Franklin said that "an ounce of prevention is worth a pound of cure," he didn't have contract audits in mind, but his logic holds true. You can hire me to find and correct these potential problems in your contracts for a modest fee. Or you can wait until they blow up and you're forced to hire a litigator to sort them out - at a much greater cost.

2019 is here. What's in your contracts?

If you find this post worthwhile, please consider sharing it with your colleagues. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. And my email address is busklaw@charter.net. Thanks!

The BUSKLAW October Newsletter: Do Your Contracts Discourage Litigation?

If you are a business person working with contracts, you probably already know that lawsuits - regardless of their outcome - are expensive and time-consuming. And "alternative" dispute resolution procedures such as arbitration don't fare much better if standard arbitration clauses are used. (I use a unique arbitration clause that streamlines the process.) It's better to avoid litigation or arbitration altogether; the best way to do that is to have a contract with provisions that discourage one party from filing suit - or an arbitration petition - against the other party. 

What might these anti-litigation, anti-arbitration contractual provisions be? Several come to mind:

1.  A provision that in any lawsuit or arbitration between the parties, the losing party must pay the winning party's attorney fees and court costs. As Attorney Stephen Hulst points out in his Michigan Business Court Blog (9/1/2015), "It's a good piece of leverage to have, to be able to say at the outset of a case, 'you signed this contract, and the contract language is clear that you are going to pay for my legal fees and costs if I prevail in this case.' " But to be effective, this provision must be carefully drafted or there may be problems in making it stick. For example, what does "prevail" mean? To win the case by a verdict of a judge or jury? What if there is only a partial victory? Does that mean that the victorious party has "prevailed"? What if the case is settled before or during the trial but before a verdict is rendered? Did the party receiving the "benefit" of the settlement "prevail" over the party being "hurt" by the settlement? Also, unless the provision is carefully drafted, a judge may interpret it as applicable only to a lawsuit, not an arbitration.

2. A shortened period for a lawsuit or arbitration petition to be filed. If the contract is for the sale of goods, the Michigan Uniform Commercial Code permits the parties to agree to a limitations period of not less than one year after the breach. If the parties don't include this provision, the period within which legal action may be filed is extended to four years. Why does a one-year limitations period discourage legal action? Because if the legal action is not filed within one year after the breach of contract, the non-breaching party arguably has no remedy against the breaching party. 

3. The requirement that legal action must occur in a particular city, county, and state. If I'm headquartered in Grand Rapids, Michigan, and I'm contracting with a company located in San Diego, California, I'll ask the California company to agree that the only proper forum to hear a dispute will be state and federal courts (or arbitration panels) located in Grand Rapids, Michigan. This provision discourages litigation because the California company will understandably be reluctant to give the Michigan firm a home-town advantage for a lawsuit or arbitration proceeding involving the contract.  

4. A provision that the contract be governed by a particular state's laws. Going back to our contract between a Michigan company and a California company, I'll ask the California business to agree that the contract must be interpreted under Michigan law, not California law. The provision increases the chances that if there is a contractual dispute, the California company will hire a Michigan lawyer to represent it; this may increase the time and expense that the California company must bear to communicate with their lawyer. Avoiding legal fees is a great incentive to settle a dispute short of filing a lawsuit or arbitration claim. 

5. A time restriction on invoicing, including appropriate waiver and release language. I had a client who was invoiced by a supplier several years after the goods were allegedly received by the client. A lot of the documentation proving non-receipt of the goods was archived and had to be retrieved at a substantial cost. So after that experience, I drafted a provision for my client's sales contract requiring suppliers to invoice my client within one year after the goods were shipped, and if they failed to do so, the suppliers waived their right to receive payment for the goods - and released my client from all liability to pay for the goods. While this provision has never been considered by a court or arbitration panel, again it serves as a legitimate incentive to settle a dispute without litigation or arbitration.  

6. But the best way to discourage litigation or arbitration is to sign contracts written in plain language. Traditional legal jargon in contracts creates ambiguity that leads to disputes. Examples include here- and there- words such as herein and thereby, according to Joseph Kimble, a professor emeritus at Western Michigan University–Cooley Law School. "Not only are they stuffy and archaic, but they can be ambiguous," he says. "You sometimes don't know whether herein means in this paragraph or in this entire document, and there's lots of cases out there that center on the meaning of the words herein, or therein, or hereby, or thereof.” 

There is no guarantee that these six steps will avoid a contractual dispute resulting in painfully expensive and time-consuming litigation or arbitration, but they increase the odds that the dispute can be resolved on a business level, without calling in the lawyers to bandy about arguments and threats that will likely create an atmosphere hostile to a prompt resolution. And those lawyers will bill their clients for those arguments and threats. 

And my final piece of advice? If you and your business counterpart on the other side settle a contractual dispute, make sure that your lawyer drafts the appropriate "release and settlement agreement" (in plain language of course) so that a presumed-dead and buried controversy stays that way!