Is My Automatically Renewing Contract Enforceable?

The Wisconsin legislature, effective May 1, 2011, has implemented strict notice requirements for any automatically renewing “Business Contracts” entered into after May 1, 2011.

The rule is codified through Wis. Stat. 134.49, and sets forth that any automatically renewing contract that does not make the following disclosures, will be held to be unenforceable as to the renewing term.

1. A statement that the contract will be renewed or extended unless the customer declines renewal or extension.
2. A statement indicating the duration of the additional contract period that would result from an automatic renewal or extension period.
3. A statement indicating whether an increase in charges to the customer will apply upon an automatic renewal or extension.
4. A description of action the customer must take to decline renewal or extension.
5. The date of the deadline for the customer to decline renewal or extension.

The statute also imposes new obligations on contracts in existence prior to May 1, 2011 that have an initial term of more than one year. If your business utilizes, or intends to utilize automatically renewing contracts, you should contact a Wisconsin Lawyer to ensure that they are in compliance with Wis. Stat. 134.49 and that they will be enforceable.

There are two purposes for a contract: 1) is to make sure the parties understand the deal, and 2) make sure one party or the other can enforce the deal if need be. If you don’t have a well written contract, you may not accomplish either of those goals.

Can I just close my doors if my business is sued?

Unfortunately, as is the case with many legal questions, the answer is maybe. There are a number of factors to look at before that question can be answered, and most likely you would need to see a lawyer to evaluate each individual case.

Generally speaking a party suing your business, if they obtain a judgment against your business, is going to be able to collect against the assets (or at least the unsecured assets) of your business.

This can vary from getting a receiver appointed to force the liquidation of company assets, to freezing business bank accounts, or even having the Sheriff go in and collect cash directly from the cash register to help satisfy the judgment. Thus, if your business has more value in assets than the potential judgment amount, it may be worth contesting the lawsuit or trying to reach a settlement. If not, then you can explore whether you can simply close up shop and move on.

Under Wisconsin law you are not allowed to simply close up shop and raid all of the assets of the business just to avoid a creditor. Neither are you allowed to sell all of the assets to a friend or relative (or anyone for that matter) for a severe discount just to avoid creditors. For example, if your business was Bob’s cleaning Company Inc. and your business were sued, you cannot simply sell all of your business assets to your brother for $1 and open up Joe’s Cleaning Company Inc. This would be known as a “fraudulent transfer” and is covered by Wis. Stat. Section 242.04

242.04 Transfers fraudulent as to present and future creditors.

(1) A transfer made or obligations incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(a) With actual intent to hinder, delay or defraud any creditor of the debtor; or

The statute provides some guidelines for determining “intent to hinder, delay or defraud any creditor of the debtor.” Some of those include:

  • The transfer or obligation was to an insider;
  • The debtor retained possession or control of the property transferred after the transfer;
  • Before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit;
  • The transfer occurred shortly before or shortly after a substantial debt was incurred; and
  • The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

Additionally, it is considered to be a fraudulent transfer if the transfer is made:

242.04(1)(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
1. Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
2. Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.

Not only does this statute prevent you from intentionally disposing of assets to avoid creditors, it also raises issues if you are intending to legitimately sell your business’s assets and you have been sued or you have outstanding creditors. You need to ensure that the transfer cannot be categorized as a fraudulent one.

In any event, if you or your business is sued it is best to immediately see a lawyer who can explore your options with you. If you play your cards right though, one of those options may be to simply close your doors and move on to your next, hopefully more successful, venture.

What happens if I get sued? – Part 4 Mediation

While mediation is voluntary, in most counties in Wisconsin, including Milwaukee and Waukesha County, the Court will order the parties to attend mediation. This does not mean that the parties must settle at mediation, only that they will attend.

What Happens at Mediation?

Mediation usually takes place after most of the discovery has been completed in the case, but before final pre-trial hearings or preparations have been done. The idea is that when you go to mediation, both parties know about the other parties case, but still have not made the final investment for their attorneys to get ready for trial.

Each party to the litigation, along with their attorneys, and the agreed upon mediator meet at a location they all agree on (usually one of the attorney’s offices or the mediators office) to discuss settling their case.

Each party usually submits a mediation report to the mediator, setting out the key high points of their case and the low points of the opposing party’s case. The mediator is not there to render a decision, but rather to encourage the parties to settle their dispute. This does not mean that the mediator will not express his/her opinion, or indicate how s/he thinks s/he would have decided the case. Most mediators are lawyers, and many are ex-judges.

By the end of the mediation session, the parties have either reached a voluntary agreement to settle the case, or they continue with the litigation and most likely begin preparing for trial. There are varying statistics, but various reports indicate that mediation is successful more often than not. From an attorneys standpoint mediation is always worthwhile, it either results in a settlement of the case or at the very least you get to learn something about the other side, and their position in the case.

Part 3 of 5, “Motions”

What happens if I get sued? – Part 2- Discovery

After the initial pleadings are entered, there will generally be a scheduling conference between the Attorneys and the Judge to set the schedule for the case. Part of that schedule will include a date in which all discovery must be completed.

Litigation has been described as playing poker with everyone’s cards face up. While this is a decent analogy, I would say its more appropriate to say you get to see the other person’s cards only if you ask the right questions. Discovery is the opportunity for each party to ask questions and demand documents from the other side. In this way it is up to the attorneys to ensure that they ask the right questions and in the right way to ensure that they get everything they want. Conversely, it is the responding attorney’s job to comply with the requests in a way that reveals what is required, but does not give away more than what was requested.

This creates a back and forth situation where each attorney is trying to get as much information from the other side as possible while at the same time trying their best not to reveal more than the other side actually asked for.

The Discovery process includes interrogatories, requests to admit, requests for production of documents, depositions, and various other means of finding out information. While all of these methods of obtaining information are used by attorneys with varying frequency, if you, or your business, is a party to a litigation, at some point you will almost certainly be deposed.

In a deposition the other party’s attorney gets to ask you whatever questions they like (within reason, but they are given a lot of leeway) about yourself, your business, and the events surrounding the dispute. Unlike in trial where there are rules regarding hearsay or relevance of questions, in a deposition, even if your attorney objects to the question, you generally are still required to answer. You are put under oath and there is a court reporter there to take down in writing everything that is said.

After depositions there may be additional interrogatories (written questions) or document production requests, but at some point each party will be satisfied that they will have obtained all of the information they can reasonably get about the case. As the discovery process winds down either party may choose to amend their pleadings and add allegations, or file a cross or counterclaim, but once the pleadings and discovery process winds up, it is time for any motions to be filed.

Part 1 of 5, “Pleadings”

Part 3 of 5, “Motions”

What are my damages in a breach of contract lawsuit?

In many litigation cases, the question is not, “was there a breach”, but rather “what are my damages.” As smart business people, the decision must always be what is my likelihood of success combined with my likely award. Unfortunately, there are many times when one party is as right as rain, but if the damages are not sufficient to support the litigation, it may not be worth filing the complaint.

To determine what damages you may be entitled to, first we look to the Wisconsin Standard Jury Instructions: “3710 Consequential Damages for Breach of Contract.”

The law provides that a person who has been damaged by a breach of contract shall be fairly and reasonably compensated for his or her loss. In determining the damages, if any, you will allow an amount that will reasonably compensate the injured person for all losses that are the natural and probable results of the breach.

This leaves us with the instruction that damages are “all losses that are the natural and probable results of the breach,” but what does that mean? To figure that out, we look to the relevant case law to see how Wisconsin Courts have interpreted that term.

The Wisconsin Courts have really focused on “foreseeability” as the main component of determining damages. The Court, in Thorp Sales Corp. v. Gyuro Grading Co., 111 Wis.2d 431 held

An injured party is only entitled to the benefit of his or her agreement, which is the net gain he or she would have realized from the contract but for the breach. Thorp Sales Corp. v. Gyuro Grading Co., 111 Wis.2d 431, 438-39, 331 N.W.2d 342 (1983).

The Court has also explained how prospective profits, not prospective revenues, fall into that determination:

The long-established rule in Wisconsin, stated in Buxbaum v. G.H.P. Cigar Co., 188 Wis. 389, 392, 206 N.W. 59 (1925), holds that “prospective profits are a legitimate item of damages resulting from a breach of contract when the circumstances are such that the future profits may be computed with some reasonable certainty.” See also 2 The Law of Damages in Wisconsin § 26.16 (Russell M. Ware ed., 2d ed.1995).

The key is that the potential revenues must be shown and offset by the potential costs.

Prospective profits must be diminished by charges composing an essential element in the cost of manufacture or service. Schubert v. Midwest Broad. Co., 1 Wis.2d 497, 503, 85 N.W.2d 449 (1957).

Wisconsin Standard Jury Instruction 3735 “Damages: Loss of Expectation” sets out the standard described in the case law above:

The measure of damages for a breach of contract is the amount which will compensate the plaintiff for the loss suffered because of the breach. A party who is injured should, as far as it is possible to do by monetary award, be placed in the position in which he or she would have been had the contract been performed. The fundamental basis for an award of damages for breach of contract is just compensation for losses necessarily flowing from the breach. A party whose contract has been breached is not entitled to be placed in a better position because of the breach than the party would have been had the contract been performed. The injured party is entitled to the benefit of his or her agreement, which is the net gain he or she would have realized from the contract but for the failure of the other party to perform. Wis JI-Civil 3735 (emphasis added).

Thus, while it is going to differ in every case, and depend on the specific facts and the nature of the breach, it is important to realize that the only consequential damages that Wisconsin Courts are likely to award are those which you can prove were foreseeable losses and missed profit due to the breach. If you believe you may have a claim for a breach of contract, be sure to contact an attorney right away, as the statute of limitations may started to run sooner than you realize. (See “What is the statute of limitations for my business lawsuit”)

Karma applies in Contracts as well- Fraudulant Contracts will not be upheld

The Wisconsin Law Journal brought a recent case to my attention about a man who wrote up a contract with his brother to try and cheat his now ex-wife out of some of the family assets.

The terms of the contract were that Stanley, who was thinking of getting divorced, transferred 20 acres of land to his brother at a steep discount to prevent his soon to be ex-wife from getting any of it. The deal was that after the divorce, Thomas would transfer the property back. Only, Thomas decided to keep the property instead. When Stanley sued to enforce the contract, the Court’s refused to uphold it and assist Stanley with his fraud.

The opinion stated,

Because the court does not reward the perpetrator of a fraud upon the court, we affirm the trial court’s decision to void the contract and permit the parcel to be titled in Thomas’ name.

Oddly enough this leaves the now ex-wife with no ability to recover for her half of the property. Perhaps she could go after Stanley for her half through Family Court.

Either way, it just goes to show that what goes around comes around, and if you intend to create fraudulent contracts, don’t expect Wisconsin Courts to help you enforce them.