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.

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.

Be Careful When Granting the Power to Terminate a Contract Early

It seems quite often you see contracts that contain provisions similar to the following:

Either party may cancel this contract at any time by giving the other party 60 days written notice.

This always sounds like a good idea when you discuss it. Basically it is the back-out provision, if things are going badly, you can get out before it gets worse. While this may be appropriate in some cases, in many cases it ends up destroying the entire reason for the contract.

The point of most contracts is to set a series of provisions out defining what each party is responsible for. Most of the value comes from the fact that both parties know they are tied to each other for a certain amount of time as long as both parties live up to their end. If you provide a get out of jail free card, with one of these provisions, then you do not have a 1, 2 or 3 year contract, all you really have is a self renewing 60 day contract.

There is nothing wrong with 60 day self renewing contracts, if that is what both parties want, but more often then not, when these provisions are used it is not the case.

Always be sure that what you contract for is what you intend. As my father always said to me “Say what you mean, and mean what you say.”

The Benefits of a Joint Venture

There are many situations where two existing businesses, or two just starting entrepreneurs want to jointly take on an endeavor, but do not want to be so tied to each other as to be the same entity. This is where a joint venture can come in handy. It creates a legally binding relationship, and if done correctly all of the fiduciary duties of being in business together with out all of the red tape when it is time to go your separate ways.

Like any contract, it is important to ensure that it is well written and extremely explicit as to what each person’s duties and responsibilities are. Some more explanation of the importance of well drafted contracts can be seen in my “Anatomy of a Contract” series.

Probably the two most important things to ensure that are included, other than what the contract is about, are that each member has a fiduciary duty to the Joint Venture (this means they have a duty to put the best interests of the Joint Venture first) and that you properly indemnify all parties from each other’s potential wrong doings that occur outside of the Joint Venture. The whole point of the Joint Venture is that you are not tied, lock stock and barrel to the other party, not being properly indemnified ends up defeating that purpose.

Can I just keep the earnest money if a buyer backs out? (A recent Wisconsin Appellate Court decision gives us pause)

In an opinion that was issued last week the Wisconsin Appellate Court upheld a circuit court decision in which the plaintiff’s were not able to sue for actual damages in a failed residential real estate transaction because they did not return the earnest money to the buyer. The court ruled that they irrevocably elected liquidated damages as their remedy and forfeited their right to sue for actual damages when they refused to direct the return of the earnest money to the buyer.

What does this mean? The Wisconsin courts are saying to sellers that you need to make a choice as to whether to sue for actual damages or simply accept the earnest money, you cannot go after both when a buyer backs out of a deal. Earnest money is intended to be a form of insurance against buyers backing out of the offer. If you decide to keep the earnest money, then that is the extent of the damages that you can receive.

It seems that this decision will impact sellers in a couple of ways. One, there is now some incentive to require a higher earnest money amount from buyers. While this would not have been a problem a couple of years ago, sellers are no longer in the position to be especially picky about the offers that they will consider. The other is that we may see a chilling effect on the number of lawsuits for actual damages. This number is usually low anyway, but now that the earnest money must be returned prior to seeking actual damages many more people may choose to simply take the bird in the hand versus the two in the bush and accept the earnest money as liquidated damages and move on.

You can read the Appellate Court’s as yet unpublished decision at http://www.wisbar.org/res/capp/2008/2007ap001799.htm

Where is the real value? In the Company or the Employees?

Often, when a company is looking to acquire another business, it looks at all of its gleaming equipment and its wonderful balance sheet as the reason to purchase the company, but in reality all of that success is probably more tied to the employees that work there then the systems or equipment associated with the business. Both Buyers and Sellers of businesses need to keep this in mind from the very outset of negotiations.

A business, as a buyer, needs to be aware of where the value lies and ensure that it is receiving that value when it purchases the company. This may be through opportunities to retain the current employees as well as non-compete agreements for after the sale commences.

For sellers it is extremely important to ensure that there is an agreement that the potential buyer will not simply hire away the sellers most valuable employees. When negotiations begin the potential buyer is given access to the inner workings of the sellers company, and thus may realize that the real value lies in a handful of employees. If there is not a Letter of Intent or other agreement prohibiting the hiring away of that top talent, the buyer may simply call the deal off and acquire the most valuable part of the seller’s business without paying the seller a dime. Courts in Wisconsin will generally up-hold Non-Solicitation agreements for up to 2 years.

From a buyer’s standpoint it is important to be diligent and ensure that the valuable part of the company comes with the deal, and conversely it is in the seller’s best interest to protect that valuable commodity until the deal is finished.

Why does legal language need to be so complicated?

This is a question that is frequently asked, or thought of, even if it is not verbalized, by my clients. The lawyerly answer is because language is an imperfect medium to describe complex thoughts, ideas, and meanings. There are vagaries to every word, and every sentence written.  However, a better way to explain it may be through an example.

New legislation is passed to protect city parks. As a part of that legislation a sign which reads “No Vehicles in the Park” is put up. Now most people, on the surface, would be happy with this. It is a simple sentence, devoid of legalese, and defines its purpose. However, think about where the ambiguities come into play. Read more

Why Employee Stock Ownership Plans (ESOPs) Are Not Just for Big Companies in Wisconsin

What is an ESOP? An ESOP is exactly what it sounds like, an Employee Stock Ownership Plan, the employees literally hold the stock to the company. The better questions are how do you go about implementing an ESOP? and what are the benefits? While a small percentage of ESOPs (which get most of the news coverage) are large publicly held companies that utilize the vehicle to stop a take over or to buyout a failing company, an overwhelming majority of ESOPs are enacted by smaller, closely held companies as a contribution to its employees. This can serve to motivate and empower your employees, but it can also serve to help in the borrowing of money for acquiring new assets in pretax dollars. Read more

The Problem with On-Line Form Contracts

If you are looking to start a business in Milwaukee, Wisconsin, or already own a business in the Wauwatosa or Milwaukee area, you might think, “I can save some money on using contracts and business formation services from an on-line website.” And this is true, you will certainly get a cheap alternative. Of course, as in all things in life, you get what you pay for.

Every well written contract can be broken into three main parts. These three parts I like to call Information, Action, and Insurance. You can read more about this in the three part series of posts “The Anatomy of a Contract” The information part of the Contract simply describes what the contract is about: who is involved and what they are contracting for. The on-line contracts, with your input, can usually cover the Information portion of the Contract pretty well. At the end of the day, if you fill in the proper blanks, you have at the very least an outline of what each party is looking to accomplish. Read more

What if there was no written Contract?

This is an issue that comes up quite often in my Business Litigation Practice. When two businesses, especially small businesses, first get together they are excited to have the service/ a new client and other than maybe a written a proposal have nothing in writing setting out the terms of the agreement.

If everything does not go exactly according to everyone’s plans, this can lead to costly and frustrating litigation. Read more