If you write a bad one, your

Make Sure the Liquidated Damages are Not Optional

One of the most common ways that parties challenge liquidated damages clauses is by arguing that the terms are optional and not mandatory. With few exceptions, courts tend to take the perspective that optional liquidated damage clauses are unenforceable. Courts have found that enforcing optional clauses would mean that parties would only exercise them when they are to their advantage. Consequently, companies are best off avoiding the use of optional damage clauses altogether. 

Specify the Amount of Damages

Parties to a contract often fail to give adequate consideration to the type or amount of damages that will be liquidated. When fully considering the damages that might result, parties often decide to include frequently overlooked damages like reputational harm. Your business lawyer can help ensure you do not omit damages that you should be sure to include.

Include the Clause’s Rationale

Michigan courts have a long history of enforcing liquidated damage clauses. In one case from the early 1900s, the Michigan Supreme Court stated: “In cases, where it is difficult to accurately determine the damages which one party may suffer by the failure of the other to perform his contract, the parties themselves may agree upon such sum as in their judgment and will be ample consideration for the breach.” 

Breaching parties often argue that the terms of the contract were not satisfied, which is why including the rationale for a liquidated damages clause in a contract can be a powerful strategy. While these statements will not ensure that a clause is found enforceable, these statements do have the ability to establish that a clause was not reasonable at the time of contracting.

Consider including What Events Trigger the Clause

In liquidated damage clauses, it is common for parties to argue that trigger events have not occurred. The strongest liquidated damage clauses often specify exactly when they will apply. In clarifying the events that both will and will not trigger the clause, it is possible to greatly reduce disputes about whether the liquidated damage clauses should be found to apply to any given situation. 

Speak with an Experienced Corporate Law Attorney Today

Writing a strong liquidated damages clause is just one of many ways to ensure successful business contracts. No matter your corporate law question, however, a knowledgeable lawyer at Resnick Law PC can help. Contact us today for assistance.

Contracts play a critical role in nearly every aspect of our daily lives. An adult can expect to sign a contract in order to complete medical visits, get help with a business, or retain an attorney to provide civil or criminal legal advice. Unfortunately, many people make basic mistakes when it comes to contract preparation that lead to numerous problems including litigation. A seemingly minor error on a major contract can lead to disaster; it is extremely important to check all contracts you draft carefully with the help of

Little or No Due Diligence

In the heat of the moment, many entrepreneurs or stressed out professionals are tempted to base their decision to enter into a contract with a person or business based solely on that party’s appearance of reputability. Instead of conducting a thorough investigation regarding the history and business ventures of a prospective partner, employee, or contractor, a person might do a cursory internet search or perform no research at all. This opens a person or business up to the enormous risk of entering into a contract with someone who is unreliable, unethical, or simply unable to uphold their part of the agreement. When this happens, companies and individuals lose money that they may have a difficult time recovering.

No Set Terms

A person who is drafting his or her own contract may want a document that reads easily and does not contain too much legalese. While, in theory, this may seem like a good idea, especially on informal contracts, it leaves too much up for negotiation. Any vague or poorly defined terms can become a point of contention between two arguing parties. If the terms are not clearly defined, a determined individual may be able to get out of his or her legal obligations by claiming to have misunderstood the agreement or presenting an alternative interpretation to already vague terms.

Not Acknowledging the Potential to Default

Even though thousands of small businesses throughout the United States provide stable employment for tens of thousands of citizens, over half of all businesses started are forced to close their doors. This occurs for numerous reasons and one of them is an inability to acknowledge the chance that their business, no matter how well planned, may fail. When creating a contract, it is crucial to include provisions that acknowledge what happens if either party defaults on their obligations and how to handle the termination of the agreement. Setting up a clearly defined plan is easier in the planning stage than when the business is suffering and managing parties are under pressure.

Failing to See an Attorney

Perhaps the biggest mistake of all when it comes to contract mistakes is failing to see an attorney before finalizing the agreement. No matter how thorough you believe your contract is or how appropriate it is for your business venture, always consult a contract law attorney before signing any agreement. The legal team at Resnick Law is here to help guide you during the most important moments of your personal and professional life. Our lawyers are ready to answer your questions and ensure that any contract you sign protects your best interest. Contact us today to schedule a consultation so that we can begin reviewing or drafting your next contract immediately.

(image courtesy of Kelly Sikkema)

• Contracts in consideration of marriage, including prenuptial agreements.
• Contracts that cannot be performed within one year. (Contracts of indefinite duration, however, do not fall under the statute of frauds, regardless of how long the performance actually takes.)
• Contracts for the transfer of an interest in land. This applies not only to a contract to sell land but also to any other contract in which land or an interest in it is disposed, such as the grant of a mortgage or an easement.
• Contracts by the executor of a will to pay a debt of the estate with his own money.
• Contracts for the sale of goods totaling $500 or more.
• Contracts in which one party becomes a surety (acts as guarantor) for another party’s debt or other obligation.
• The statute applies to real estate sales and transfers or leases for more than a year.

So, for instance, the transaction of purchasing real estate can’t be executed by an oral agreement. In order to have a binding contract to purchase (or sell) real estate, there must be a written document.

When a potential buyer makes a written offer to purchase a house, the seller has three options:

• The offer can be accepted, in which case there is a contract;
• The offer can be rejected, or;
• The offer can be met with a counteroffer. This means the seller is interested in pursuing negotiations with the potential purchaser.

If a seller makes a counteroffer, the buyer then has the same three options.

Most real estate transactions are smooth and work out successfully. However, once in a while, a major dispute arises between the parties and litigation starts. The first thing a court will want to determine is whether there is a valid contract.

To have a binding, legal contract, three basic elements are required:

1. An Offer: Typically, the buyer makes a written offer.
2. Acceptance: This also must be in writing. In recent years, with modern technology, acceptance can be by fax or by email. However, to be on the safe side, this should be followed up with a written document containing an original signature.
3. Consideration: The third basic element of a contract is called “consideration.” This is an elusive concept, but it generally refers to money. The buyer makes a good-faith money deposit.

However, what consideration exists if no money is put down with the offer? Does this mean there is no binding contract, even if the seller signs the offer? Not really, since consideration can also be something of value. For example, the buyer has stopped looking for another house, in the belief there is a binding real estate contract, and the seller has taken the house off the market, based on that same belief. Thus, there would still be a valid contract, although it is always wise to make a good-faith deposit when you present a purchase offer.

The Takeaway

 Put everything in writing. If you, as a buyer, want certain items to convey with the house — such as the washing machine, curtains or even the lawn mower — make sure these items are specifically listed in the sales contract. Conversely, if you as a seller want to take certain fixtures with you, put that in writing, too.

Credo: Don’t leave anything to faith — or to verbal promises.

A case from last April, adjudicated in the Massachusetts Land Court, delivered a decision that could help establish a precedent for years to come regarding text messages and what constitutes a binding agreement. Specifically, a text message can constitute a signature sufficient to satisfy the Statute of Frauds and form a binding contract for the purchase and sale of land.

The case, St. John’s Holdings, LLC v Two Electronics, LLC, (available here), basically involved a buyer and seller who, through their brokers, were negotiating the purchase and sale of a commercial building in an industrial park in Danvers, Mass., about 20 miles north of Boston. After some back-and-forth on the terms, the purchaser’s broker emailed the seller’s broker a Letter of Intent (LOI), which was included as an attachment; however, the LOI was unsigned. Subsequently, the seller’s broker communicated by text with the purchaser’s broker requesting a signed LOI by the purchaser, as well as a good faith deposit. Specifically, according to what was written in the court’s decision, the text read:

“Steve [the broker for the purchaser]. [Seller] wants [buyer] to sign first, with a check, and then he will sign. Normally, the seller signs last or second. Not trying to be stupid or contrary, but that is the way it normally works. Can [buyer] sign today and get it to me today? Tim [the broker for the seller].”

The purchaser, St. John’s Holdings, signed the LOI and cut a check, both of which were dropped off with seller’s broker. That same day however, the seller, Two Electronics, accepted and countersigned a third party’s offer for the property; the seller then refused to countersign the original purchaser’s LOI and the buyer filed suit.

The fundamental issue the court focused on was whether the emailed LOI and the subsequent text message, taken together, constituted a writing sufficient to satisfy the Commonwealth’s Statute of Frauds, thus creating a binding contract enforceable against the seller for the sale of land.

In its decision, the court held that, between the LOI, which set out the terms of the deal in sufficient detail, and the text message “signed” by the seller’s broker, there could be an enforceable contract.

Mind you, this decision was only on a motion to dismiss that was filed by the seller. The decision didn’t hold there was an enforceable contract, only that, viewed in the light most favorable to the non-moving party (i.e., the buyer), there could be an enforceable contract and therefore the motion to dismiss was denied.

As to whether the case settles, goes to trial, or comes to some disposition in between, is anybody’s guess. For the sake of brevity, and without getting bogged in the weeds of detail, the most interesting line of reasoning by the court seemed to be how the court focused on the seller broker’s “signature” at the end of his text message. Sometimes both brokers signed their names at the end of text messages and emails; sometimes they didn’t. When they didn’t, the text messages tended to be briefer and more informal. The court then reasoned that, by adding their names to the end of certain (material) messages and not to other (more informal) messages, “evidenced an intent to be legally bound by the signed text messages.”

It’s important to note that what the seller did, by running two buyers in parallel negotiations, wasn’t illegal; it wasn’t even particularly shocking as a business matter. It began to look a tad sharp, however, when the seller’s broker made it sound like it was a “done deal.”

In any event, the takeaway here is pretty simple: When you’re negotiating a deal, and particularly when using electronic communications, think before hitting send. E-mails, text messages, instant messages, whatever — they all matter.

1. If it doesn’t seem right, don’t do it. If the deal (or the other party) smells rotten, it probably is. If people are asking for things that don’t make sense, or if they bluster when asked for information about their organization, there is probably a hidden agenda.

2. Keep it simple and conventional. Overly creative deal structures are fraught with difficulties.  The structures often require much more extensive legal drafting than parties may realize when they dream up the structure. Our attorneys prefer to see simple, straightforward deals that everyone understands, even if they don’t achieve all the subtle advantages (e.g. tax or liability) that are obtained by more complex arrangements.

3. Agree about the main elements of the contract before drafting a written contract. These main aspects include work and price. In essence, don’t get bogged down in details.  If you are using a term sheet, it should be no longer than two to four pages. If it gets any longer, tear it up and start again, focusing only on key points.  If presented with a lengthy term sheet that has pages of IP-related definitions, push back and go for something much simpler, or go straight to drafting and negotiating the final agreement.

4. Involve your lawyers. Successful contracts are a team effort. Choose high quality, user-friendly lawyers and involve them at an early stage. They bring useful skills, such as clear and accurate recording of the commercial terms of the deal and they may have experience that will assist you in the negotiations. 

5. Manage your colleagues. In some organizations, the leader will seek input from colleagues in different departments, e.g. finance, sales, patents, tax, et al. This may result in a shopping list of terms that the business requires, which the leader must propose in the negotiations. That is fine as far as it goes, but someone needs to ensure the company speaks with one voice and can make decisions. 

6. Think a few steps ahead. Some business leaders don’t plan ahead; others are very good at planning. If you need to have the agreement signed by a particular date, think about whether there needs to be a board meeting to approve the agreement and how much notice is required to hold a board meeting. None if this is rocket science, but mistakes of this kind happen frequently enough to make it necessary to make these obvious points.

7. Give yourself time and space to negotiate the final contract. Sometimes, a client’s commercial representative is so eager to get the deal done that they make concessions too early (assuming that the other party will reciprocate), or make other unwise decisions.

8. Try to understand the other party’s point of view. Try to work out what the other client wants from the negotiations. Ask lots of questions. Don’t assume they have the same objectives as your organization.

9. Don’t lose focus when you think the deal is done. There is a tendency when the last negotiating point has been discussed, agreed, and struck from the list, for parties to relax and start making assumptions about the contract process. If it is important, try to discuss and agree to everything, down to when the final version will be prepared for signature, who will be signing it and when. Similarly, if you don’t intend to involve your lawyers in the signing of the agreement, you need to manage the signing process with the same attention to detail that the lawyers would bring.

Having trusted legal counsel helps to protect your interests throughout the entire negotiation process. Involve an experienced attorney early on in your deal-making to avoid roadblocks, delays and unwanted outcomes later on.