Michigan Business Lawyer Blog

As we all know, any prudent business person will get any important agreement in writing. But in this day and age what does it mean exactly to get something in writing? Many businesses do much of their communication electronically, and may exchange physical paper documents only on a very rare occasion. Can these businesses enforce agreements that are documented and "signed" only in electronic format?

The federal Electronic Signatures in Global and National Commerce Act (E-Sign Act) went into effect in 2001. This law facilitate the use of electronic records and signatures in interstate and foreign commerce by ensuring the validity and legal effect of contracts entered into electronically. One of the main purposes of this law was to ensure that electronic contracts would be given the same weight and authority as paper contracts. Under this law, an electronic signature is broadly defined as any mark or sound.

Michigan has also adopted legislation that provides for the enforcement of electronic agreements and contracts. This law is known as the Michigan Uniform Electronic Transactions Act, also known as UETA. UETA establishes rules to govern electronic commerce transactions. The law establishes a legal foundation for using electronic communications and record when the parties have agreed to deal electronically. UETA is designed to foster electronic commerce by placing electronic commerce and paper-based commerce on the same legal footing when it comes to enforcing agreements.

It is possible to for Michigan businesses to engage in enforceable electronic transactions. However, it is important for any business that is doing business electronically to consult with a Michigan business lawyer who is familiar with the laws governing e-commerce and electronic transactions to ensure that its electronic business activities are on the same legal footing as its paper-based transactions.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Contracts

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Many people assume that when they have a written contract with someone else that any disputes about their agreement will be resolved simply by reading the contract itself. Sometimes this instinct is right. Indeed, Michigan state courts and federal courts applying Michigan law have generally ruled that the most reliable indication of the parties’ intent is the language of the contract itself.

It is basic Michigan law that courts must avoid allowing into the evidentiary record outside evidence of the parties’ intentions because this often leads to contract interpretations that are contradictory to the parties' true intent. This means that when the language in a contract is unambiguous, the parties’ intent is to be discerned from the actual language used in the contract. Court use an objective standard to evaluate the meaning of the contractual language.

However, if a court declares a provision in a contract to be ambiguous, then outside evidence may be allowed to prove the parties' intent. Michigan law further provides that an ambiguous provision in a contract is to be construed against the party who drafted it.

The rules that Michigan courts use to interpret contracts are meant to accomplish one thing: figure out what the parties intended when they drafted their contract. All important contracts should be prepared or at least reviewed by an experienced and knowledgeable Michigan contracts lawyer. Involving an attorney early in the contract preparation/review process could mean the difference between having a contract that is enforceable according to the parties' expectations and intent, and one that could lead to totally unpredictable results if there is a dispute.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Contracts , Litigation

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Arbitration agreements are becoming more and more common in a wide variety of Michigan contracts. The reason why arbitration is becoming so popular is that it is seen as generally being a faster, cheaper and less disruptive method for resolving business disputes than traditional litigation in the courts.

Although most lay people think that an arbitration agreement will automatically keep them out of court, that is true only if the arbitration agreement contains some statutorily required "magic" language. Michigan courts recognize two different types of arbitration agreements. The first is a "common-law" arbitration agreement, which is revocable by either party until the arbitration award is rendered. The second is a "statutory" arbitration agreement, which is non-revocable and binds both parties to the arbitration process.

Most lay people (and, I suspect, more than a few lawyers) are unaware of the differences between these two types of arbitration and do not know the "magic" language that is required to ensure that their arbitration agreement is of the "statutory" kind. Obviously, it is important to understand the requirements for invoking "statutory" arbitration, otherwise a party could find themselves having to litigate a dispute in court when they had been banking on resolving their dispute in an arbitration proceeding.

To be a "statutory" arbitration agreement, the arbitration clause must specifically state that "a judgment of any circuit court may be rendered upon the award made pursuant to such agreement." This requirement is found in the the Michigan Arbitration Act (MCL 600.5001). If that clause is included, neither party has the power to revoke the arbitration agreement unless the other party also agrees. But, if the arbitration clause does not include the "magic" statutory language, then it is a "common-law" arbitration agreement, which can be unilaterally revoked by either party up until the arbitration award is issued.

Every entrepreneur and small business who wants to be able to enforce their arbitration agreements should have a competent Michigan business lawyer review those agreements before they are signed. This will help to ensure that any arbitration provisions are properly drafted, thus preventing nasty surprises if and when it is necessary to invoke the arbitration process.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Contracts , Litigation

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How many times has this happened to you? You've deftly negotiated a terrific deal for your small business with a very tough adversary. The time has come to put your deal in writing. Your adversary generously offers to have his or her lawyers handle the first draft (after all he or she says, it's only the first draft, and this will save you legal fees). What do you do?

Many small business folks will accept their adversary's offer, all the while planning to have their legal counsel review the final draft, just to make sure everything "legal". But, if you're smart, you will insist that your lawyers handle preparing the first draft.

Why? Because it is well known by good business lawyers that the party who prepares the first draft of an agreement generally has better leverage in the negotiations that are sure to follow. This is because the first draft of an agreement invariably provides the framework, defines the issues, and sets the tone for what will be the final version of the agreement. When a party responds to a first draft of an agreement, their response is almost always a reaction rather than a proactive engagement of the issues.

Having your lawyer prepare the first draft of an agreement is definitely more expensive than waiting to involve them until the last minute. This is especially true when you consider that the first draft of any legal document is almost always the most difficult to prepare, and therefore, can be the most expensive part of the process in terms of legal fees. It definitely is more expensive than having your lawyer merely review a draft agreement prepared by the other side.

But, the sooner you start thinking of your legal fees in terms of expense versus cost, the better off you will be. Many small businesses try to skimp on legal fees by only involving their lawyers when absolutely necessary. But, often by the time the lawyers get involved, enough damage has been done that more is spent on fixing the problems than if the lawyers had been involved early enough to help their clients prevent the problems in the first place. It's called being penny wise and pound foolish.

Getting your legal counsel involved early in a transaction and having them prepare the first draft of important agreements wherever possible is so important in determining what the final agreement will look like. I really think you are doing yourself a true disservice if you pass up the opportunity to have your legal counsel prepare that first draft.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Contracts

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Under Michigan law, a contract for the sale of goods over $1000 must be in writing to be enforceable. The Michigan law covering this topic is known as the statute of frauds section of Michigan's Uniform Commercial Code (UCC). The specific requirements are:

1. Some sort of writing indicating that a sales contract has been made. Fortunately, this writing does not have to contain every term of the parties' agreement. It is enough if the writing provides a basis for believing that any oral evidence that might be offered to prove the contract rests on a real transaction.

2. The writing must be signed by the party (or its authorized agent) against whom the contract is being asserted.

3. The agreement is enforceable only up to the specific quantity of goods actually contained in the written agreement.

There are a number of special circumstances in which a contract may be enforceable even if it doesn't satisfy the requirements of Michigan's Uniform Commercial Code. These circumstances may include those where (1) goods are specially manufactured for the buyer; (2) the party against whom enforcement is sought admits that the agreement is valid; (3) the disputed goods were delivered and accepted or payment was received and accepted.

Whether buying or selling, it is very important for Michigan businesses to involve a good Michigan business lawyer in any important sales contract to make sure it is enforceable and provides those businesses with the benefit of their bargain.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Contracts

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Many Michigan businesses use contracts to stipulate with certain workers that they are independent contractors and not employees of those businesses. But, businesses using contracts in this way need to be very careful. Contracts classifying workers as independent contractors instead of employees have no tax effect. The IRS can still reclassify those workers as employees if the business has enough control over them.

In Peno Trucking (TC Memo. 2007-66), the Tax Court addressed the case of a trucking company who used contracts to say certain workers were independent contractors and not employees. Peno Trucking's truck drivers had no investment in the trucks and were directed where to drive. Also, the trucking company paid all the costs of operating the trucks. The Tax Court determined that the drivers were actually employees -- despite their contracts to the contrary -- because the company controlled their work.

Businesses who have issues related to worker classification should consult with a knowledgeable business attorney to ensure they get it right and avoid any nasty IRS surprises.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Contracts , Employment Law , Tax Issues

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You've negotiated an important agreement, you've reduced it to a written contract, and now you are ready to sign on the dotted line. Most people think that actually signing a contract is a mere formality. However, it is important not to let your guard down at this point. Whether you properly sign the contract may make the difference between a smooth business transaction or a messy court fight.

The following steps should be followed when signing any contract:

1. Make Sure the Contract You're Signing Is the Contract You Agreed to Sign

If the contract has gone through a number of rounds of negotiations or revisions, don't just assume that the copy put in front of you to sign is what you think it is. Before you sign it, be absolutely sure that you fully know and understand the terms of the document. Under Michigan law, you are generally bound by a contract that you sign even if you have no knowledge of its contents. Unless you can prove that the other party engaged in fraud or other wrongdoing in preparing the contract or inducing you to sign it, you will be required to abide by it.

2. Date the Contract

While a contract does not have to be dated in order to be valid and enforceable, it is a good idea to do so. Dating a contract will help you to positively identify it later if you need to and will help you place it in its proper chronological context. Also, it is legal in Michigan to predate a contract. In other words, you can provide that your contract is entered into "as of" or "effective" a date earlier than the date of the contract is actually signed. If that is done, the contract will be effective retroactively "as of" or "effective" that earlier date.

3. Make Sure Both Parties Sign the Contract

This may seem like a basic (and it is!) but you'd be surprised at how often this slips by in the hustle and bustle of getting on with business. Although you don't necessarily have to sign an agreement for it to be valid, why would you want to take that chance? There is absolutely no better way of proving that a party intended to be bound by a contract then by whipping it out and displaying their signature on the document. If it is possible that the parties to a contract will not sign it at the same time, you might consider adding a section in the contract providing that the contract will not be legally binding unless it is signed by both parties.

The parties do not necessarily have to sign the same copy of the contract in order for it to be binding. If the parties do sign different copies of the contract, they must agree that each of their signature pages together constitute a complete executed agreement. That's why contracts often contain a provision stating that "the parties may execute this contract in counterparts, each of which is deemed an original and all of which constitute only one agreement."

4. Make Sure Any Last Minute Changes to the Contract Are Initialed

The best course of action is to have any changes included in the signature version of the contract. This will help ensure there are no misunderstandings as to what the parties intended to sign. However, if it is not possible to have have a contract revised and reprinted before it is signed, make sure that any changes made to the contract by hand are initialed by each party to the contract.

5. The Parties Must Sign the Contract in Their Correct Capacity

If an entity is a party to a contract, it is imperative that the signature block properly identifies the party signing on behalf of that entity. For example, if someone is signing as president of a corporation, the signature block should look something like this:

Acme Widgets, Inc.

By: _________________
John Doe

Its: President

Why is this so important? Because signing correctly on behalf of an entity will prevent any later claims that the person signing the contract is personally liable for the entity's contractual obligations.

6. Make Sure the Other Party Has Authority to Sign the Contract

The importance of this cannot be over emphasized. Obviously, you do not want a company to claim that it doesn't have to abide by the contract because it was signed by someone who was not authorized to do so. Thus, if the other party to the contract is a corporation, you need to be sure that the corporation is actually in existence, that the person signing on behalf of the corporation has the authority to do so, and, that the contract was approved by the corporation's shareholders or directors.

7. Keep an Original Signed Copy of the Contract in Your Files

Each party should get an original signed copy of the contract for their files. That means if there are two parties to the contract, two identical contracts must be signed. One original copy of the contract should go to you, and one original copy should go to the other party.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Contracts

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In a contract, a liquidated damages clause simply limits the amount of damages that one party to the contract will be liable for in the event that they breach the contract or somehow cause harm to the other party to the contract. This type of clause is appropriate when the circumstances are such that it would be difficult to determine how much the actual damages suffered actually are, or if the damage amount would be purely speculative in nature. In that kind of case, the parties can stipulate in their contract what the amount of damages will be. This type of stipulation will be enforced by Michigan courts so long as the amount agreed upon by the parties is reasonably related to the actual damages that might have been expected for a breach or other harm.

Michigan courts have been enforcing liquidated damages clauses for a long time. For example, in one 1908 case, the Michigan Supreme Court stated: “In cases where it is difficult to accurately determine the damages which one party may suffer by the failure of the other to perform his contract, the parties themselves may agree upon such sum as in their judgment will be ample compensation for the breach.”

However, Michigan courts will not enforce a liquidated damages clause if the amount of damages can be readily determined or if the clause appears to impose a penalty instead of truly trying to fix a reasonable damage amount.

Having an enforceable liquidated damages clause can be a real lifesaver if you have been sued and there is a potential for a large damage award. These kinds of clauses can also cut the other way as they can allow a party to recover damages in a specified amount even if their true damages are not as much as the damages provided for in the liquidated damages clause. Either way, it is imperative that an experienced Michigan business lawyer review your contracts to make sure that any liquidated damages clauses will be to your benefit should you need to rely on them in the future.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Contracts , Litigation

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