Much of a company’s value is contained in its contracts. Those contracts can be either oral or written. Oral contracts involve less work at the front end, but may end up costing a company more in the long run. Written contracts, in contrast, involve more work at the front end, but may end up costing a company less in the long run.

Good written contracts can help protect a company’s value by reducing risk, such as litigation risk. It’s no secret that litigation is expensive, time-consuming, and slow. It’s therefore prudent to reduce litigation risk, to the extent reasonable.

One source of contract litigation is a dispute about an issue that the parties didn’t consider. Drafting a contract, even a relatively simple one, can help the parties think through basic issues such as term, termination, payment terms, confidentiality, ownership of work product, governing law, etc. The process of committing an agreement to paper can help parties identify and amicably resolve potential problem issues in advance.

Another source of contract litigation is an ambiguous contract term. Ambiguity means that there is more than one reasonable interpretation of a contract term. The odds of having an ambiguity are much greater when there’s nothing in writing, which, in turn, increases the chances that, at some point, the parties will have a dispute about the terms of the agreement. Such disputes can lead to litigation. Not having a written contract also complicates any litigation that arises out of the ambiguity. Proving the terms of an oral contract in litigation can be a complicated and unreliable exercise. That translates into greater expense and risk.

A well-drafted written contract, on the other hand, can serve as a hedge against litigation, by discouraging it in the first place. If litigation does occur, a good contract can, all things being equal, increase the chances of obtaining a favorable result, either at trial or at an earlier stage of litigation. A court would attempt to establish what the parties intended at the time they entered into the agreement, and a written contract is usually the best evidence of that intention.

Tags: Contracts

Wednesday’s Columbus Dispatch had an interesting story about a recent meeting between Gov. Strickland and Chief Justice Moyer. The story suggests that such meetings are routine, but, against the backdrop of two pending matters that could have a big impact on the state budget, the recent meeting raised the question whether those matters were discussed during the meeting. The Ohio Supreme Court spokesman said no, as the judicial canons would prohibit that. The Governor’s spokeswoman declined to comment on what was discussed, which, in light of the Court spokesman’s statement, seems a little odd. (Hat Tip: Ohio State Bar Association website).

Tags: Ohio Government

This Wall Street Journal article, about the poor state of the economy in Ireland, reminds me of my junior year in college (the 1985-86 academic year), when I studied at Trinity College Dublin. It seemed like every Irish student I knew planned to look for work in another country, because there wasn’t any at home.

Tags: General Interest

Today’s Wall Street Journal has an interesting article about the Alien Tort Statute, 28 USC 1350, an “arcane law” dating from 1789. (I have to admit, I wasn’t familiar with it.) According to the article, the statute “has been used often in recent years to sue major companies for alleged complicity in crimes overseas, including torture and murder. Defendants need only to have regular business contacts with the U.S. to be vulnerable to lawsuits.” Here’s the Second Circuit opinion to which the article refers, for a little more background.

Tags: Federal Courts, International Law

This item suggests that some caution may be warranted in using RECAP, the Firefox plug-in referenced in the August 17, 2009 post, below.

Tags: Federal Courts, Public Records, Technology, Intellectual Property

It’s a well-settled rule of law that certain agreements must be reduced to writing and signed. Ohio has codified that rule, known as the “statute of frauds,” in Chapter 1335 of the Ohio Revised Code. For example, R.C. 1335.05 provides that “an agreement that is not to be performed within one year from the making thereof” must be in writing and signed.

What happens when sophisticated business entities enter into lengthy negotiations concerning a five-year joint venture agreement, which reach an advanced stage, including an exchange of nine drafts of a proposed written agreement, one party allegedly promises the other that the agreement would be signed, the other party relies on that statement, and then the first party indicates that it won’t go forward with the agreement? In the lawsuit that follows, can the first party raise the statute of frauds as an affirmative defense to a breach of contract claim, because nothing was signed?

Yes, according to the Supreme Court of Ohio in in a recent 5-2 decision, Olympic Holding Co., L.L.C v. Ace Ltd. (2009), 122 Ohio St.3d 89, 2009-Ohio-2057. The Court rejected the plaintiffs’ claim that doctrine of promissory estoppel (see the dissent for a fuller discussion of the doctrine) removed the agreement from the statute of frauds and barred the statute of frauds as an affirmative defense. The Court held, “‘[r]eliance on a statement of future intent made prior to the conclusion of negotiations in a complex business transaction is unreasonable as a matter of law. * * * Such a rule is particularly appropriate when two sophisticated business entities are involved in negotiations.’” (emphasis added) (citations omitted). The Court further held, “promissory estoppel is an adequate remedy for a fraudulent oral promise or breach of an oral promise, absent a signed agreement,” and that the plaintiffs could, under a promissory estoppel theory, pursue their claim for reliance damages (which represented a smaller measure of damages than what the plaintiffs sought). The majority noted the presence of disclaimers on each page of the term sheets that were exchanged early in the negotiations, that it was “not an offer of insurance,” and on the drafts that were exchanged later in the negotiations, that the document was “for discussion purposes only” and didn’t represent an offer to enter into a transaction. The majority also noted ancillary agreements that remained in draft form.

The dissent states that “an overwhelming majority of jurisdictions recognize that promissory estoppel may bar a party from asserting a defense under the statute of frauds in certain circumstances” and was persuaded that application of the Statute of Frauds in the case was inequitable. For example, the parties had reached a “mutual understanding on the essential terms of their joint business venture,” and the plaintiffs were told that the agreement was “just awaiting signature.” The dissent would have adopted a rule that promissory estoppel “‘may be used to preclude a defense of statute of frauds, but only when there has been (1) a misrepresentation that the statute’s requirements have been complied with or (2) a promise to make a memorandum of the agreement.’” (citation omitted).

Tags: Contracts, Statute of Frauds

This recent Ohio appeals court case illustrates the importance of paying attention to how a corporation or LLC signs a contract. The case involved a lease in which the tenant was a corporation. Three doctors signed for the corporation. Each of their signatures followed the name of the corporation, which was identified as an Ohio corporation, and the word “By.” The corporation subsequently dissolved with several years remaining on the lease, and the landlord sued the three doctors who had signed the lease. The trial court granted summary judgment for the doctors (because there was no genuine issue of material fact as to personal liability), and the landlord appealed. On appeal, the landlord argued that “the doctors were personally liable on the lease because they personally signed the lease.” The appeals court rejected that claim, holding that because “the named physicians are clearly signing the lease in their capacity vis-a-vis [the corporation], the only liability established on the face of the lease is liability for [the corporation]. Corporations are viewed as separate legal entities or ‘persons’ under Ohio law.” (Note: it’s not clear whether the doctors also signed with reference to their corporate titles - the contract language quoted in the opinion suggests that they didn’t - but doing so may have put the doctors in an even stronger position.) The appeals court also rejected the landlord’s claim that the court should “pierce the corporate veil,” because the landlord had not shown fraud or illegality. The landlord has filed an appeal with the Supreme Court of Ohio. The case serves as a reminder, too, that, where appropriate, it may be in a party’s interest to get a personal guarantee of a corporate obligation.

Another recent Ohio appeals court case illustrates some potential pitfalls when signing a contract in a corporate capacity. As in the case described above, the appeals court rejected a claim that an individual was personally liable on a lease, but the language at issue is far from clear. As the dissent states, the documents didn’t make clear what type of entity the tenant was, and it could have been simply a fictitious business name or a partnership, in which case the individual could have been personally liable.

Tags: Contracts

Today’s Wall Street Journal has an article about how large companies are pushing large law firms away from the billable hour model, toward alternative fee arrangements. The article serves as a reminder that, behind all the recent talk about how law firms bill clients (and there has been a lot of that), the fundamental issue is good, timely communication between the firm and the client about the work that’s being done.

Tags: Billing, Client Communication

There’s an interesting case pending before the Supreme Court of Ohio, Ohio Grocers Assn. v. Levin, Ohio Tax Commr. (Case No. 2008-2018), which involves the constitutionality of applying Ohio’s Commercial Activity Tax (“CAT”) to grocery stores. The case has important budgetary implications.

The CAT is a “tax on each person with taxable gross receipts for the privilege of doing business in this state.” R.C. 5751.02. For businesses with gross receipts over $1 million, the CAT amounts to $150 plus .26 percent of taxable gross receipts over $1 million. R.C. 5751.03(A). Ohio’s Constitution, meanwhile, prohibits the imposition of excise and sales taxes on “food for human consumption.” See Article XII, Section 3(C) and Section 13. The State of Ohio argues that the CAT is simply a franchise tax and is therefore constitutional. The grocers, in contrast, contend that the CAT is essentially an unconstitutional sales tax on food.

On August 24, 2007, the Franklin County Court of Common Pleas held that the CAT is constitutional because it is a franchise tax and “an excise tax on the privilege of doing business in the state of Ohio,” but not an excise tax “that is ‘levied or collected upon the sale or purchase of food.’” The trial court further held that “the CAT is simply not tied to a transaction, and therefore distinctly different from a sales tax.” The grocers appealed.

On September 2, 2008, the Tenth District Court of Appeals reversed. The Tenth District held that the CAT is a sales tax, “because the tax is measured solely by gross receipts and is based on aggregate sales, including those from the sales of food. . . . If the legislature is prohibited from collecting a tax on the individual sale, it logically follows the legislature would be prohibited form collecting a tax on the aggregate of those same sales.” 2008-Ohio-4420, par. 21 (emphasis in original).

The State appealed, and the Supreme Court of Ohio accepted the appeal on February 4, 2009.

Based on my initial reading of the three primary briefs (available here), I think the State has the stronger position under the language of the Ohio Constitution, although the case isn’t an easy one, as evidenced by the fact that the trial court and appeals court reached very different conclusions.

Some of the difficulty in the case arises from the fact that the relevant sections of the Ohio Constitution (cited above) use the terms “excise tax,” “sales tax,” and “franchise tax,” but don’t define them. In its initial brief, the State relies upon the Black’s Law Dictionary definitions of those terms (Appellant’s Merit Brief at 5), which is what you cite when there isn’t anything better (e.g., constitutional provision, statute, or case law) upon which to rely. The State also admits a “possible ambiguity” in the relevant provisions in the Ohio Constitution (cited above). (Id. at 28). The briefs devote a lot of attention to how excise, sales, and franchise taxes relate to one another, because it’s not self-evident.

A central issue is that the CAT is imposed on the business and not on the consumer. In its reply brief, the State frames this issue by drawing a distinction between “legal incidence” and “economic incidence.” The State argues, “[l]egal incidence involves how the statute formally imposes the tax: who pays, and how liability is measured. Economic incidence analysis, by contrast, ‘looks beyond’ legal incidence and seeks to calculate who ‘really’ pays a tax--that is, whether businesses absorb the cost or pass it on, whether to customers or others, and the relative share each party bears. On that score, the Court has always analyzed legal incidence, not economic incidence, and the Grocers offer no sound reason to inject instability into the Court’s tax jurisprudence by changing that approach.” (Appellant’s Reply Brief at 10). The State further argues that the economic incidence analysis is unworkable, because it “turns every case into a battle of experts that calls on the courts to assess whose mathematical model is the better one. That approach would make rules of law turn on matters of degree, not of kind, such as whether some disputed effect is strong enough to trigger the relevant rule of law. And worse, even after this Court or another court resolved an issue on such grounds, the result would be unstable, because the results of such formulae evolve over time as circumstances change.” (Id. at p. 12) (footnote omitted).

I like that argument, and agree that the legal incidence analysis is a more workable approach, although neither the legal incidence analysis nor the economic incidence analysis represents a complete answer by itself. It will be interesting to see what the Ohio Supreme Court does in this case. Oral argument is scheduled for September 1, 2009.

Tags: Supreme Court of Ohio, Taxation, Ohio Revised Code, Ohio Constitution

The ABA Journal has an interesting article about a clever new Firefox browser plug-in called RECAP, which is intended to expand access to federal court documents. RECAP duplicates documents that are accessed through the PACER website and stores them in a free public archive. PACER, in contrast, charges eight cents per page. The “Watch RECAP in Action” video here shows how it works. It will be interesting to see how this project progresses and whether any challenges will be raised. TechCrunch has a brief discussion of some of the issues here. As one of the commenters to the TechCrunch piece points out, one issue is the inadvertent publication of confidential information, if a document is subject to a protective order. I note also that RECAP’s terms of use purport to shift risk to the user, and that RECAP’s “About” page raises some questions as to the legality of RECAP.

Tags: Federal Courts, Public Records, Technology, Intellectual Property

There’s an interesting article in today’s Wall Street Journal about former Justice Sandra Day O’Connor serving as a substitute federal appeals judge. Additional material here. She’s a true public servant who, like Jack Borden (see August 7 post, below), loves what she does.

Tags: Federal Judiciary, Supreme Court of the United States

Jack Borden is an inspiration. Practicing law at age 101! It looks like he’s done some pretty interesting things along the way, too. I might have to switch to a country breakfast.

Tags: Practice of law

I’ve recently become aware of two handy aggregations of law firm newsletters containing updates on the law in various practice areas: Lexology and myCorporateResource.com. Lexology, for example, allows you to sign up for updates in specific practice areas to be sent to you by email, as frequently as every day. My Corporate Resource gives you the option of searching for information according to which role you serve in a corporation (for example, HR, Finance, Accounting), in addition to other options. Just another example of the Internet putting an incredible amount of useful information at your fingertips. Hat tip to the My Shingle.com and the 3 Geeks and a Law Blog websites.

Tags: Internet, Legal Information

A sales representative from the Nolo lawyer directory recently clued me in to Google Analytics. It’s a great way to monitor how many people are visiting your website, from where, for how long, and which pages they look at. It’s very easy to set up, and it’s free. Installing it simply involves pasting a tracking code in the appropriate spot in your website, as the Google Analytics site explains here. It’s a good tool.

Tags: Technology, Internet, Websites

This article in today’s New York Times contains some good intellectual property pointers for small businesses. Be sure to check out the “Quick Tips” and “Suggested Reading” links on the left-hand side of the page. These are all good things to consider.

Tags: Intellectual Property, Small Business

I use an iPhone. One of the more useful iPhone apps that I’ve come across recently is Nolo’s Plain English Law Dictionary. I think it’s useful for lawyers and non-lawyers alike. The dictionary is divided into categories such as “Bankruptcy, Foreclosure & Debt,” “Business, LLC & Corporations,” “Family Law & Divorce,” “Lawsuits, Courts & Injuries,” “Nonprofits,” and “Real Estate & Rental Property.” My own spot check suggests that it does a very good job of explaining legal terms. Best of all, it’s free.

Clicking this icon will take you to the application in the iTunes Store: .

Tags: Technology, Apple, iPhone

The Wall Street Journal has an interesting article today about buyers of condominiums in hotels filing lawsuits in which they allege violations of securities laws by condo-hotel developers. At issue is whether the sale of a unit involves the sale of a “security.”

Tags: Securities, Real Estate, Condominium

I’m a big fan of Ken Adams and his AdamsDrafting blog, which is full of excellent contract drafting tips. (His Manual of Style for Contract Drafting is on my bookshelf.) I admire his attempt to bring consistency to contract drafting and to eliminate ambiguous language, which can be a source of transaction costs, including litigation. It’s a worthwhile endeavor.

Tags: Contracts, Drafting, Litigation

Welcome to my blog. I’ll be posting links to articles and other items here, concerning business law and other topics of interest, as time permits. I hope you find it useful.