CALIFORNIA EMPLOYMENT LAW UPDATE 2019

Even though we are well into 2019, it is important for employers to be aware of and understand the importance and ramifications of the changes to California’s employment law landscape, which can affect their day to day operations. Some highlighted changes in California law are discussed below. The experienced employment law attorneys at Gehres Law Group are ready to assist employers in navigating the sometimes confusing and ever-changing employment laws in this State.

Wage Law Changes

First up is a reminder that California’s minimum wage went up to $12.00 per hour for employers with 26 or more employees, and $11.00 per hour for employers with 25 or fewer employees.  Minimum wage increases will continue at the rate of $1.00 per hour until January 1, 2022 for larger employers, and January 1, 2023 for smaller employers. See California Labor Code Section 1182.12. Higher rates may be in effect for employers located in certain cities which have enacted their own minimum wage rates.

Exemptions for agricultural workers relating to overtime and other working conditions have been repealed or changed.  Beginning January 1, 2019, agricultural employees must receive overtime at one and a half times the employee’s regular rate of pay for all hours worked in excess of nine and a half hours in one workday or 55 hours in one work week.  The overtime threshold is reduced by one-half hour per day or five hours per week every year until January 1, 2022 when the threshold matches the eight hours per day/40 hours per week requirements applicable to most other workers. The double-time threshold will be set at 12 hours per day beginning January 1, 2022. The timeline for compliance is delayed by three years for small employers–those with 25 or fewer employees.

The labor code was also amended to clarify that an employer may ask applicants their salary expectations for the position applied for. The law also authorizes employers to make compensation decisions based on employees’ current salaries, only if any wage differential is justified by one or more specified factors, including a seniority system or a merit system. See California Labor Code Sections 432.2 and 1197.5.

Under the State’s paid family leave law, employers are now allowed to require employees to take up to two weeks of earned, but unused, vacation leave before, and as a condition of, employees receiving paid family leave benefits.

Although not set into effect yet, beginning January 1, 2021 California’s existing paid family leave program will expand to employees who request time off related to their own active duty military service, or that of a close family member.  Current law only provides partial wage replacement to employees who take off due to the serious illness of themselves or a family member, or to bond with a new child.

Finally, employers are now required to provide copies of an employee’s payroll records within 21 days of the employee’s request. This new law involves a change in the language to ensure that employers understand they are required to make and provide the copies itself, as opposed to making the records available for the employee to copy.

Sexual Harassment

A new law in California requires employers with five or more employees to provide sexual harassment training to their employees by January 1, 2020, and then every two years after that. Specifically, employers must provide supervisors with two hours of training and nonsupervisory with one hour of training. Previously, only employers with 50 or more employees were required to provide the training. The new law also requires the Department of Fair Employment and Housing to develop compliant sexual harassment training courses.

An amendment to the FEHA made clear that a single incident of harassing conduct is sufficient to create a triable issue of hostile work environment, if the conduct interfered with an employee’s work performance or, otherwise created an intimidating, hostile, or offensive work environment.  The law explicitly overrides the prior standard for hostile work environment set by the 9th Circuit in Brooks v. City of San Mateo, 229 F.3d 917 (9th Cir. 2000), which held that a single incident of sexual harassment did not support a cause of action.

Also, as a part of the amendments to the FEHA, California Government Code §§12900 – 12996, employers are now clearly liable for any unlawful harassment by non-employees, not just sexual harassment as was the previous case. Non-employees include applicants, unpaid interns or volunteers or persons providing services pursuant to a contract in the workplace. With few exceptions, employers are now prohibited from requiring or inducing employees to release a claim or right under FEHA or require employees to sign non-disparagement agreements which prevent the employee from disclosing information about unlawful acts in the workplace, including sexual harassment.

Finally, FEHA now authorizes courts to award prevailing parties in civil actions, under the FEHA, reasonable attorney’s fees and costs including expert witness fees. It restricts courts’ ability to award reasonable attorney’s fees and costs to prevailing defendants to only those times when the court determines the action was frivolous, unreasonable, or groundless when brought, or that the plaintiff continued to litigate after it clearly became so.

Other Discrimination and Accommodation Issues

Lactation accommodation rules were also modified for 2019. Existing law requires employer to provide a location, other than a toilet stall, to be used for lactation (or at least make reasonable efforts to do so). The location should be permanent, unless the employer is unable to provide a permanent location and the temporary location is private and not used for other purposes while being used for lactation.  There is some flexibility for agricultural employers, allowing them to comply by providing an air-conditioned cab of a truck or tractor. See California Labor Code Section 1031.

The statutes governing employee criminal background checks and hiring/employment decisions under The Fair Chance Act were also amended. Except in specific situations, employers have previously not been permitted to use in hiring or employment decisions, information disclosed an employee concerning the employee’s participation in a pretrial or posttrial diversion program or concerning a conviction that has been judicially dismissed or ordered sealed. The new law makes changes to the specific situations when the general prohibition does not apply. These exceptions to the general prohibition include situations where (1) the employer is required by law (State or Federal) to obtain information regarding the particular conviction of the applicant, regardless of whether the conviction has been expunged, judicially ordered sealed, statutorily eradicated, or judicially dismissed following probation, (2) the applicant would be required to possess or use a firearm in the course of his or her employment, (3) an individual with a particular conviction is prohibited by law from holding the position sought, regardless of whether the conviction has been expunged, judicially ordered sealed, statutorily eradicated, or judicially dismissed following probation, or (4) the employer is prohibited by law from hiring an applicant who has that particular conviction, regardless of whether the conviction has been expunged, judicially ordered sealed, statutorily eradicated, or judicially dismissed following probation.

If your business is in need of further clarifications, updates or just a review of your employment practices and policies, please contact our experienced Employment and Business Law attorneys at the Gehres Law Group PC for a consultation.

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HOW DOES PAGA EFFECT EMPLOYERS IN CALIFORNIA?

Introduction

This article provides guidance to employers in understanding and defending against claims brought under California’s Private Attorneys General Act of 2004 (“PAGA), Labor Code § 2699 et seq. Under PAGA, aggrieved employees are allowed to step into the State’s shoes, specifically California’s Labor & Workforce Development Agency (LWDA), to bring legal actions against employers for alleged violations of California Labor Code that would otherwise, absent this statute, be limited to the LWDA. It is a unique mechanism through which employees can file suit on behalf of other similarly situated “aggrieved” employees without bringing claims as class actions, which can be a very unwieldy and difficult legal process.

PAGA Claims and Penalties

The potential recovery in a PAGA claim can be mindboggling. PAGA divides Labor Code violations into three categories: 1) Serious Labor Code Violations; 2) Health and Safety Violations; and 3) Other Labor Code Violations. If the Labor Code provision underlying the PAGA claim already provides for a civil penalty, then an employee may seek to collect that penalty for themselves and, on behalf of other aggrieved employees. In cases where the underlying Labor Code section does not already provide a civil penalty, the PAGA penalty is equal to $100 for each employee per pay period for the initial violation, and $200 for each employee per pay period for each subsequent violation, of which an aggrieved employee may keep 25% of the penalties recovered.

Moreover, PAGA provides for the recovery of costs and attorney’s fees, which are often a significant percentage of a judgment in such cases, so there is an incentive to settle such claims promptly if they have any merit. While the statute of limitations period is only one year, that merely dictates what the timeline for filing suit is, and doesn’t limit the damages, which continue to run for any violation that is continuing after suit is filed. In other words, if a wage and hour violation continues to run throughout the course of the litigation, then the recovery will be based on the full period starting from when the violation began to when the finding on behalf of the plaintiff is entered. See Williams v. Superior Court of Los Angeles, CASC, DAR p. 6879.

The legislative intent behind the law is to allow employees to bring to light blatant and broad violations of labor laws by unscrupulous employers. The result though has been to punish employers who may not be aware of their requirements under California Labor Code and regardless of how small, technical, or short-lived the alleged violation. All hope, however, is not lost as there are some technical, in addition to factual, defenses available to employers in a PAGA claim.

Defenses to PAGA Claims

Over and above any factual defense the employer may have, PAGA requires employees to notify the LWDA (and the employer) describing the specific provision alleged to have been violated, including the facts and theories to support the alleged violation.  Then, only if LWDA chooses not to pursue a Labor Code violation claim, or issue a citation against the offending employer, is the employee allowed to proceed with the PAGA suit. Because the notice is required before bringing the PAGA claim to court, a PAGA claim can be dismissed outright if the notice is deficient. In other words, if an employee fails to provide proper notice to the LWDA or fails to file the PAGA claim within the one-year statute of limitation period, then the PAGA case will fail. Additionally, although no specific defenses to this statute are set forth in the law itself, normal defenses to claims of underlying alleged violations of the Labor Code are available. Click here for the notice requirements.

Unfortunately, both the California Supreme Court and the Ninth Circuit Court of Appeals have ruled that PAGA claims may not be waived as a part of an employment arbitration agreement. See Smigelski v. PennyMac Financial Services, Inc., CA3. On the positive side, it is settled in the California courts that the nonparty employees who were included as other “aggrieved” employees, as well as the State (LWDA), are bound by judgments in PAGA claims. In other words, if the original plaintiff settles or obtains a judgement, or there is a dismissal with prejudice, the facts may not be re-litigated by any of the parties. See Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court (2009) 46 Cal. 4th 993.

Conclusion

It is imperative, though, that an employer consult our experienced Employment Litigation Defense Attorneys if they have any questions about compliance with California Labor Code or if they receive notice of a PAGA claim in any form. By far, an employer’s best defense in avoiding significant exposure under a PAGA claim is to regularly review and update internal policies, handbooks and procedures, to ensure their business practices comply with the ever-changing California employment and labor laws. The sooner our experienced Attorneys at Gehres Law Group get involved, the more likely we will be successful in assisting your Company in avoiding the worst possible outcome. Contact us today for a complimentary consultation.

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Corporate Leaders’ Duty of Loyalty and Conflicts of Interest in California

This article outlines the duty of loyalty imposed on corporate leaders, how the business judgment rule provides protection against liability for directors if they act with reasonable care, and how conflicts of interest should be handled by corporate leaders.

I. Duty of Loyalty

California law imposes certain fiduciary duties on officers and directors of a corporation, duties which are owed to the corporation’s shareholders and to the corporation itself. One such duty is referred to as the duty of loyalty, which requires that officers and directors act in the best interests of the corporation and its shareholders. Any breach of this duty by corporate leaders exposes them to civil liability, and can expose them to criminal charges as well, depending on the circumstances.

Guidance on how to interpret this duty of loyalty is provided by the California Corporations Code, which provides, in part, that a director of a corporation operating in California has a duty to act “in good faith…in the best interests of the corporation and its shareholders,” with a level of care, “including reasonable inquiry, that an ordinarily prudent person in a like position would use.” Cal. Corp. Code § 309(a). See also Small v. Fritz Companies, Inc., 132 Cal.Rptr.2d 490, 499 (2003).

II. Conflicts of Interest

Self-dealing, such as when an officer or director has a conflict of interest with the corporation and acts in his or her own interest, and against the corporation’s interests, is a frequent example of a breach of the duty of loyalty. California law states that an interested director can avoid violating the Corporations Code if he or she discloses to the other directors the material facts of any transaction in which they have a conflict of interest, and a majority of the non-conflicted directors approves the transaction. Cal. Corp. Code § 310. It is important to note that the fact that a conflict of interest is present does not prevent a director from fulfilling his or her obligations to the corporation, but the director should act with the utmost candor concerning the facts of such transactions and abstain from voting on such matters.

III. Business Judgment Rule

Where a conflict of interest is alleged to have occurred, the business judgment rule will often come into play as well. Courts will not typically intervene in corporate decisions if the decision-makers acted in good faith and with the reasonable belief that their actions were in the corporation’s best interest. However, pursuant to long-standing legal precedent, this protection is NOT extended to corporate officers, who must act with a higher level of prudence and should carry adequate insurance to protect against the possibility of civil liability being imposed for their business decisions. See Gaillard v. Natomas Co., 208 Cal.App.3d 1250 (1989)

For further discussion on the business judgment rule, both statutory and common law, see our article:How Does the Business Judgement Rule Protect Corporate Executives?

Summary

In determining whether a decision-maker has violated his or her duty of loyalty or otherwise engaged in conduct for which legal action may be instituted, the interplay between the various legal duties and protections often involves a complex analysis in applying the law to the facts of each case. As such, it is important to reach out to an experienced business attorney to assess such situations. The trusted team of lawyers at Gehres Law Group, P.C. has the expertise to advise corporations of all sizes on such matters. Contact us today for a complimentary consultation.

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PROTECTING PERSONAL ASSETS AGAINST LIABILITY FOR BUSINESS DEBTS IN CALIFORNIA

Although no business owner ever wants to consider the likelihood of being sued for unpaid business debts, breach of contract, or damages caused by their employees, business activities, or the like, these events do happen. What’s more, if businesses do not plan properly, owners may become personally liable for the debts of the business. This article discusses some ways to avoid personal liability in the unfortunate case that a business’s activities results in litigation.

The business attorneys at Gehres Law Group often recommend a three-pronged approach to aid clients in ensuring they are protected from personal liability for their company’s debts. The first step is to make sure that the business itself is structured as a business entity that protects and separates personal assets/liability from business assets/liability. The second step is to enter into agreements in a manner which will limit a business owner/officer/director’s personal liability. As a final step, obtaining appropriate insurance coverage, over and above what is required by law, that covers common business risks in the company’s specific industry, is also important in controlling personal liability exposure.

BUSINESS ENTITY CONSIDERATIONS

If you’re operating a business as a sole proprietorship, you and your business are, from a legal perspective, the same entity. That means that you personally, in addition to being entitled to the income of the business, are liable for all of your business debts. It also means that all, or most, of your personal assets can be attached, or considered for collection, by your creditors. Likewise, in a general partnership each partner is personally liable for 100% of the business’s debts. Therefore, if there aren’t enough business assets to pay the partnership’s debts, and your partner is broke, creditors can come after your personal assets to pay all of the business’s debts, not just your pro rata share of the debts.

On the other hand, if your business is formed as a corporation or LLC, you and your business are separate legal entities. As such, assuming that you do not otherwise expose yourself to personal liability, and your corporation or LLC is properly formed and maintained, you would have no personal liability for the debts of the business, even if the business can’t pay them. Our highly experienced San Diego Business Attorneys can assist you in determining not only the best type of entity structure for your specific needs, but also in preparing your corporate and other legal documents in a manner which provides you with maximum protection against personal liability for business obligations.

Maintaining corporate compliance once an entity is formed is also critical, such as preparing annual corporate minutes, ensuring the entity is adequately capitalized as required by the California Corporations Code, as well as addressing other compliance issues is also critical to ensure business owners are well protected. See our related articles on this topic here and here.

ENTERING INTO AGREEMENTS ON BEHALF OF YOUR BUSINESS

Once you have settled on the proper structure of your business ventures, it is important to also be cognizant of potential situations where your actions might undermine the protection you have tried to maintain by that formation against personal liability for the business’s debts.

One way that you may inadvertently waive your right to personal liability protection is to sign a personal guarantee for a business loan or line of credit. Any debt that you obtain using this method is yours personally should your business assets not be sufficient to satisfy the debt.

The next way that you might unknowingly expose your personal assets to attachment for business debts is by signing a contract or agreement in your personal name versus on behalf of the Company. For example, John Smith, who is President of ABC Corporation, would need to sign John Smith, President, on any documents related to the business/corporation when he is representing that business. If he simply signs John Smith, without including his capacity as an officer or agent of the Company, he may have just set himself up for personal liability for that debt. Seems harmless, but it could be an expensive mistake.

An additional way for a business owner/officer to subject themselves to personal liability is to use personally owned collateral or credit cards (not in the business’s name) to underwrite or accumulate debt on behalf of the Company. It is very important to remember not to comingle personal assets and debts with business debts.

Finally, along these same lines, if a business owner personally misrepresented or lied about any facts when applying for a loan or credit on behalf of the corporation or LLC, they could be held personally liable for the debt, as well as potential personal exposure for fraud, both civil and criminal. Also, as touched on previously, if a business fails to maintain a formal legal separation between the business’s and the owner/officer’s personal financial affairs, creditors will likely try to have a court hold those owners/officers personally responsible for the business’s debts under a theory known as “piercing the corporate veil.”  

INSURANCE CONSIDERATIONS IN PROTECTING THE ASSETS OF THE BUSINESS AND THE OWNERS/OFFICERS

Over and above the necessity to ensure that a business entity is complying with both statute and contract by maintaining the required insurance coverage, such as workers compensation, vehicle coverage, general liability, including “acts and omissions” when appropriate, and property (real and business). An umbrella policy is often a good choice when underlying liability insurance may not be enough to cover a catastrophic loss or claim. This provides an added layer of protection for your company, and potentially the owners/officers if there is an attempt to obtain personal liability against them for the company’s debts.

Along those lines, obtaining a management liability policy could be invaluable for the following types of situations: 1. Directors and officers — basically this protects directors and officers, as well as the business entity, when there are allegations that their decisions resulted in the mismanagement of the company, causing a loss to others. 2.  Employment practices liability —coverage that protects the directors, officers and the entity when there are allegations of discrimination, harassment and failure to promote and similar employment legal issues. 3. Fiduciary liability — If an officer or director acts in a role for example, the entity’s investment advisory board and there is a loss for the investors or employees, as in the case of a 401(k) plan, this type of insurance generally operates to protect the plan fiduciaries when there are allegations that they failed to fulfill their duties to the plan participants, assuming that there was no fraudulent intent or gross negligence.

In summary, taking steps to limit personal liability when starting and running a business provides peace of mind for a business owner and it is vital to consider at the beginning of the business cycle. Our San Diego Business Attorneys can discuss your concerns and options with you as well as assist you in setting up and maintaining your business entity in a manner designed to ensure the least amount of personal financial exposure possible in your circumstance. Contact us today for your complimentary consultation.

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ISSUES OF FRAUD IN BUSINESS CONTRACTS

Contracts are the foundation that businesses, small or large, depend on daily to carry out their mission.  Most businesses exist by virtue of contracts, agreements of mutually dependent promises and obligations such as partnership agreements, articles of incorporation and shareholder agreements, limited liability operating agreements, service agreements, licensing agreements, and many others.  Businesses hire their employees by contract, or quasi contract, either in writing or orally.  And, of course, business suppliers and customers supply and purchase in conjunction with purchase and sales orders/contracts.  So, it is not surprising that business litigation, for the most part, is centered on the interpretation and enforcement of these agreements, and the recovery of damages for alleged breaches of contract, issues of their formation, or execution of the duties under these agreements. 

As a major subset of contract law are cases where fraud is alleged, either in the formation of a contract or later in the delivery and execution of the terms of the contract–or, in some cases, where an agreement doesn’t rise to the level of a contract, but fraud in the inducement is present. In essence, “fraud” is present when there is dishonesty or deception at some point in the business relationship which is material to the terms of the contract or transaction. Experienced business litigation lawyers know that, when suing for compensation for breach of contract, the addition of legitimate fraud claims can make their client’s case much stronger, especially from a damages perspective. 

In California, for example, to prove a fraudulent inducement claim, a plaintiff must prove the following elements:

• At least one misrepresentation — false statement — was made or at least one important (material) fact was concealed by the defendant, or their agent;
• The falsity/concealment was known to the defendant, or their agent, at the time it was made;
• The party making the false statement made the false statement in order to induce the other party to enter into the contract;
• There was justifiable or reasonable reliance by the other party; and,
• No contract would have been entered into had the truth been known.

The Law of Damages for Breach of Contract vs Damages for Fraud

Breach of Contract:

When contract disputes cannot be resolved by negotiation, our San Diego business lawyers often find themselves having to file or defend lawsuits for breach of contract.  California Civil Jury Instruction 350, which is used by California courts to instruct juries in such cases, provides a good summary of the types of money damages which may be awarded for breach of contract:

350. Introduction to Contract Damages

If you decide that [name of plaintiff] has proved [his/her/its] claim against [name of defendant] for breach of contract, you also must decide how much money will reasonably compensate [name of plaintiff] for the harm caused by the breach. This compensation is called “damages.” The purpose of such damages is to put [name of plaintiff] in as good a position as [he/she/it] would have been if [name of defendant] had performed as promised.

To recover damages for any harm, [name of plaintiff] must prove that when the contract was made, both parties knew or could reasonably have foreseen that the harm was likely to occur in the ordinary course of events as result of the breach of the contract.

[Name of plaintiff] also must prove the amount of [his/her/its] damages according to the following instructions. [He/She/It] does not have to prove the exact amount of damages. You must not speculate or guess in awarding damages.

Notably, as our contract lawyers or business attorneys can tell you, contract damages are limited to compensating for harm which the parties knew or could reasonably have foreseen.

Damages in Fraud Claims Cases:

There are various types of fraud in law, however the principal statute that applies to business contracts is set California Civil Code section 1572, which provides:  

Actual fraud, within the meaning of this Chapter, consists in any of the following acts, committed by a party to the contract, or with his connivance, with intent to deceive another party thereto, or to induce him to enter into the contract:

1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

2. The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;

3. The suppression of that which is true, by one having knowledge or belief of the fact;

4. A promise made without any intention of performing it; or,

5. Any other act fitted to deceive.

Fraud is also considered a Tort (a civil wrong that can be found even if a “contract” is not found to exist), and the general “tort” measure of damages is set forth in California Code of Civil section 3333, which provides:

For the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.

The difference between alleging a breach of contract or the tort of fraud is significant under California law since punitive damages are allowed under tort law whereas they are not under contract law and, in addition, the damages do not have to have been foreseeable.

See California Civil Code Section 3294, which provides, in part:

Exemplary damages; when allowable, definitions

(a) In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.

…

(emphasis added).

This opportunity to plead and prove punitive damages, which are typically a percentage of the defendant’s revenue or profits, and meant to punish the defendant, can provide significant leverage for a business litigation lawyer to negotiate a larger settlement on behalf of their client.

If you believe that your business may have been the subject of a fraud, or if you are being sued for fraud, contact our experienced business litigation lawyers today to assist you. There is no charge for an initial evaluation of your case.

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PARTNERSHIP DISPUTES AND HOW TO AVOID THEM

Our San Diego business lawyers have previously written about corporate governance and compliance issues and the many benefits to business owners of addressing their Company’s corporate compliance.  In this article, we focus on another reason to engage in best practices when it comes to corporate governance—Partnership Disputes and How to Avoid Them.

Many clients contact our business litigation attorneys after a dispute arises. When that happens, the costs and stress of resolution, including possible litigation, can mount. Here are some relatively simple and cost-effective measures to help you avoid a partnership dispute down the road.

Planning to Avoid Partnership Disputes

As an initial matter, if you have either no agreement, or one that is silent about how, where and when disputes are resolved, you and your partners will be left to resort to the remedies and relief offered by the various California statutes and case law that govern partnerships in this State. Unfortunately, in most cases, the relief and remedies provided by statute are relatively weak, “one size fits all” provisions designed to provide a minimum standardized set of rules. In contrast, our business law attorneys are adept at preparing customized remedies and processes you and your partners can agree to from the outset, those which clearly define how you want the business to operate and how you will resolve any disputes which may arise. If the partners haven’t agreed to such terms beforehand, then once there is a disagreement, resolution is often hard to come by and costly litigation is more likely. Therefore it is imperative that you plan ahead for disputes.

As we all know, most relationships between people, whether family, friends or business partners, will involve disagreements now and then. It is a reality that is easy, but potentially expensive, to overlook in business. If business owners accept this reality and commit to determining how partnership disputes will be resolved from the outset, they will be driving the train and not vice versa. For instance, the partners should discuss the possibility of including mediation or arbitration provisions in their governing documents, whether that includes an Operating Agreement, Partnership Agreement, Shareholder Agreement, a Buy Sell Contract, or a combination of governing documents. Mediation and arbitration are typically far more cost-effective options than litigation. Without mandating this resolution in a dispute in governing/formation documents there will be no requirement for the parties to engage in alternative dispute resolution.

Other important issues to discuss in the planning phase include what will happen in the event one of the key owners becomes unable to perform his or her obligations to the business partnership, or decides to sell their interest in the business. If your business’ controlling documents don’t provide a roadmap to address these and other common issues, then you could end up with a new partner in the business that you can’t work with, don’t want to work with, or even worse, one who’s interests are not aligned with the well-being of the business. Many business partnerships have failed because of completely foreseeable events simply because the partners did not plan for worst case scenarios.

One additional consideration your business law attorney may recommend that you address includes how to value shares or partnership interest in the company. The governing documents can be very detailed at assisting partners in determining how their interests will be valued when it comes time to sell or transfer them, without having to resort to a lawsuit. This could include language providing non-selling partners, or the partnership itself, with a right of first refusal to purchase a selling partner’s interest.

Hiring an Experienced Business Law Attorney to Avoid Partnership Disputes

Once you have started thinking about and discussing your options for addressing your partnership issues, it is in your best interest to hire an experienced business law attorney to help you reduce your agreements to writing, in order to ensure they are legally enforceable and meet your company’s particular needs. The key to lasting continuity of your company’s operations, and its continuing success, often lies in well-drafted legal documents, from Partnership Agreements, Operating Agreements, Shareholders Agreements, Buy/Sell Agreements, or other documents as your company’s needs dictate.

Then, if disputes arise, as they often do, the partners can look to these documents for guidance; they should inform the owners of the process by which they are bound to resolve their disputes, for example mediation and arbitration, as we previously referred to. Our business law attorneys usually do recommend mediation provisions, at a minimum, as well as language that permits the prevailing party to recover their attorney’s fees and costs in the event of a dispute. Without them, potentially destructive litigation is often the result.

In summary, planning ahead for partnership disputes is what business lawyers are trained and experienced in handling. Put our experience and knowledge to work for you and let us help you avoid a costly partnership dispute. Feel free to contact our business lawyers for a free evaluation or browse our website for more information.

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Formation of Contracts in California

Introduction

San Diego business law attorneys and litigation lawyers alike regularly deal with the law of contracts. Whether you are negotiating a contract or have hired a trial lawyer to pursue a breach of contract lawsuit, it is helpful to know some of the basic principles and laws governing contracts. In this article, we’ll discuss the elements required to form an enforceable contract, express versus implied contracts, and written versus oral contracts, as well as the covenant of good faith and fair dealing.

What is a Contract?

In its most general broad terms a contract is an agreement among two or more individuals or entities to do something, or to refrain from doing something, that they don’t have a legal duty to do or not to do. Civ. Code §1549. For a valid enforceable contract to exist, what the parties have agreed to do or refrain from doing must be legal; otherwise, the contract is void, or to put it another way, there simply is no contract. R.M. Sherman Co. v. W.R. Thomason, Inc. (1987) 191 Cal. App. 3d 559, 563. An example our Gehres Law Group business litigation attorneys like to use on this point is one where there is an agreement among competitors to fix prices at a certain amount, which is a violation of both California and Federal antitrust laws and is, therefore, illegal and void.

It is essential to the existence of a contract that: 1) Parties are capable of contracting (age, mental capacity, agency issues apply to this requirement); 2) The parties consent to all of the terms must be clear; 3) The subject of the agreement must be lawful (as discussed above); and, 4) There is something of value given that is not illegal and for which there is not already an existing duty to provide.

How is a Contract Formed?

There are four requirements for the formation of a contract: (1) a lawful object, (2) an offer, (3) an acceptance of the offer, and (4) “consideration.” Civ. Code sec. 1550.

An offer is a promise to do something or to refrain from doing something. For instance, “I will pay $5000 for your car,” is an offer to do something, namely, purchase a car.

Contracts may be “bilateral” or “unilateral.” A bilateral contract is one in which contract is formed by mutual promises made by each party to the other. A unilateral contract is one in which one party makes a promise in exchange for an expected act by the other, rather than a promise by the other.

If a buyer says to a prospective seller, “I will pay $5,000 for your car,” and the prospective seller replies, “Okay, I will sell you my car for $5000,” the seller has made a mutual agreement (accepted the offer) by agreeing to sell his car to the buyer, and a bilateral contract has been formed; each party has agreed to do something for the other.

If person A says to person B, “I will pay $500 to anyone who finds my lost dog,” and B finds and returns A’s lost dog, B has accepted the offer by doing the thing requested, namely, finding (and returning) A’s lost dog, and a unilateral contract has been formed. Acceptance of the offer is by the act of finding and returning the dog not by a statement of agreement.

If courts have doubts as to which type of contract was formed, the presumption is that it was a bilateral contract. The reason that matters is mostly in when the contract becomes enforceable. With a bilateral contract it is enforceable immediately. However, with a unilateral contract, it isn’t enforceable until the condition precedent to payment, for example finding the dog and offering him to person A, has been performed.

The last requirement for formation of a contract is “consideration.” Lack of consideration is a defense often asserted by our San Diego business litigation attorneys in contractual disputes. Consideration can basically be viewed as a quid pro quo — you do something for me, and I will do something for you.

Any benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time of consent lawfully bound to suffer, as an inducement to the promisor, is a good consideration for a promise. Civ. Code §1605.  In the above examples, for instance, the person making the offer and the person accepting the offer are each doing something for the other. A party to a contract provides “consideration” by providing the other party with something of value. In the above examples, the car, the payment for the car, and the finding and returning of the dog, are all things of value.

Express and Implied Contracts

Contracts may be either express or implied. Civ. Code §1619.  An express contract is one in which the parties’ agreement is expressed in words. Civ. Code §1620.  An implied contract is one in which the agreement of the parties is shown by their conduct, rather than by their words. Civ. Code §1621.

Implied contracts may be either implied-in-fact or implied-in-law. An implied-in-fact contract is one in which the parties’ conduct has created a reasonable expectation of certain performance by both parties. Consider this example from our San Diego business litigation attorneys: Farmer and grocery chain enter into several express contracts over a period of time for the sale of bushels of apples by the farmer to the grocery chain for $22 a bushel. Thereafter, the grocery chain orders 100 bushels of apples from the farmer, and the farmer ships 100 bushels of apples to the grocery chain, with an invoice for $2200 ($22 a bushel x 100 bushels). Even though the farmer and the grocery chain have not expressly agreed that the grocery chain will pay $22 per bushel for one hundred bushels shipped to it by the farmer, based on the parties’ former dealings, an implied agreement was created that the grocery chain would pay the farmer $22 per bushel for all apples shipped by the farmer to the grocery chain at the grocery chain’s request.

An implied-in-law contract is sometimes referred to as a “quasi-contract.” It is not a real contract, but is one implied by law to prevent unjust enrichment of one party, at the expense of the other party. When one party has conferred a benefit on the other, which the other has knowingly accepted in circumstances in which it would be inequitable for the other party to retain the benefit, without paying for its value, the law implies the existence of a contract.

As an example, in Halperin v. Raville (1986) 176 Cal. App. 3d 765, Plaintiff was friends with father who owned a business, and made various loans to father to help father keep his business going. Son assisted Plaintiff in liquidating Plaintiff’s assets so that Plaintiff could loan money to father. Son worked for the business and also loaned money to father to pay the business’s debts. Son referred to the business as a “father and son” business or “our” business. Plaintiff sued the son as well as the father for failure to repay the loans he had made to father. Although it was clear that Plaintiff had not loaned money to son, and there was no contract between father and son, the court found son liable, ruling that son had benefited from the loans and would be unjustly enriched if he were not required to repay the loans. This case underscores the importance of having a local San Diego law firm like the Gehres Law Group review your business arrangements with you and recommend and draft express contracts that will protect your interests and help you avoid implied terms and conditions and contracts that might not be in your business’s best interest.

Written versus Oral Contracts

The general rule is that contracts may be written or oral, and an oral contract is just as enforceable as a written contract. Of course, as with the issue of implied contracts, it is better practice to reduce oral contracts to writing, so that there can be no dispute at a later time as to what the terms of the contract are. However, certain oral contracts are not enforceable, either because of the significance of the type of contract, or because the contract is of a type conducive to fraudulent claims. For a list of these contracts, click here.

It is important to note the distinction between a contract that is not valid or void and a contract that is simply not enforceable. As a business litigation lawyer will tell you, a contract that is not valid, or is void, if it is missing an essential element, which can be legality. In other words, no contract is legally formed. On the other hand, a contract that is unenforceable appears to contain all of the essential elements of a contract but because of vague language, the statute of limitations, the term limit of the contract, or a superseding law that overrides it, a defense that the contract is unenforceable is available to the parties.

A contract may not be void, but could be voidable. With the latter it means that one of the parties can, because of the operation of fact or law, choose to unilaterally cancel the contract. For example, a minor who enters into a contract, can, because they are not old enough to enter into a contract, choose to cancel the contract. The differences between a void contract and a voidable contract can be significant in other ways as well. For instance, the law prohibits third parties from interfering with contracts.  Herron v. State Farm Mut. Ins. Co. (1961) 56 Cal. 2d 202, 205. If a contract is void, it is invalid and does not exist. Therefore, a third party cannot interfere with it. However, if the contract is merely voidable, it is a valid contract, and a third party may not interfere with it – i.e., cause a party to the contract to refuse to comply with it. Buckaloo v. Johnson (1975) 14 Cal. 3d 815, 824.

The Implied Covenant of Good Faith and Fair Dealing

Finally, although not technically an element of a contract per se, in California there is an implied covenant in all contracts, whether written or oral, that neither party will do anything that would deprive the other party of the benefit of their bargain. Pasadena Live, LLC v. City of Pasadena (2004) 114 Cal. App. 4th 1089, 1092-1094. This is known as the implied covenant of good faith and fair dealing.

Consider this example: Seller and Buyer agree that the Seller will sell his car to Buyer for $5000. Buyer needs time to obtain the money to purchase the car. Seller and Buyer agree that Buyer will bring a check for $5000 to Seller’s office no later than noon on a specified future date and states that they will take payment any time by or before that time and date. Buyer then arrives at Seller’s office at 10 AM on the specified date, but the office is closed. Consequently, Buyer is unable to pay Seller for the car by noon on that date and Seller refuses to sell Buyer the car stating that payment wasn’t made within the specified time. In this instance, Seller has breached the covenant of good faith and fair dealing. Implied in the parties’ agreement is the Seller’s promise that the office will be open during the morning on the specified day and the Seller will be in his office on that day, so that the Buyer can make payment for the car within the time agreed upon. The Seller’s breach of the implied covenant renders Seller liable to Buyer for breach of the contract.

While these are some basic principles of contract law, your business litigation lawyer or business law attorney can explain how some of the finer points of contract law may affect your particular situation at any stage of forming or enforcing a contract.

 

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