Contractually Bound, Minding My Own Business

Want Enforceable Contracts? Step One: Use written ones!

Questioning Questions??

I am asked contract questions by small business owners all the time. Basically the owner invariably wants to know, “Would my contract stand up in court if I have to sue or get sued?” My response is usually to ask (lawyers have a genetic defect that makes them answer questions with questions) if they always have a new contract signed for every job, with every customer and if they can find all their contracts when they need to? This is usually met with a long pause and then a look that’s something like, “He makes a living doing this???”


But the real reason I’m asked the question in the first place is that most small business owners (fortunately) don’t get sued, or have to sue, too often. That means they never have their contracts tested trying to enforce or defend one. Understandably, it would be comforting to know if, after all the hassle that can be inherent in getting clients to sign a written agreement, if it is even enforceable anyway.

Crystal BallFuture

Some people seem to think that if they show me their contract, I can pull out the crystal ball they give all of us in the second year of law school, and after I peer intensely into it, a before-then-unknown future is revealed to me. Of course, the future revealed takes place in a courtroom with a Judge ruling on the validity of the guy’s contract. Unfortunately, I must’ve missed class the day the crystal balls were passed out, because I don’t have one and I’ve never been able to do this.

Is that a Vulcan Thing?

I suppose it’s easy enough to just answer with a classic. Like rattling off something about a contract requires an offer and acceptance with valuable consideration exchanged and a meeting of the minds. But this answer seems to draw another look that indicates my ability to financially support myself is seriously being questioned. To avoid this constant questioning, I usually try a different approach.


I have never seen a perfect contract that will be guaranteed to be upheld in every imaginable, unknown factual situation that may come up. My prediction is usually worthless in the end (particularly when they don’t show me the contract) and I think the focus should be on a different aspect of the contractual relationship that’s controllable: It’s physical manifestation.

Get What You Pay For

Of course it is best to not use the contract you found on the internet that seems close to a good fit. Or better yet, don’t use the contract you cut and pasted together from many contracts you found on the internet. Make sure you have a solid agreement that was at least reviewed, if not written, by a lawyer with contract experience. It is a critical part of getting paid for what you do after all and not the best place to cut corners to save a little money (Grandma called it pennywise and pound-foolish).


The most important thing is to make sure you require a signed contract before starting any work on any job. Especially with existing clients. It is when you deal with people you think you know that most people get lax and don’t get a signed agreement. It is also when you will let your guard down and tend to have your larger credit lines extended. It isn’t a coincidence that people behave a bit differently when they know they have a signed agreement with you.

Don’t Trust–Verify FirstNo Deal

Because you have done business with the client before and for awhile, it is only natural to get a false sense of trust built up. Then you get sloppy (or lazy or don’t want to offend) and you’ll let them go a little longer or deeper with you on credit. But don’t do it. Guard against this.

This is when you have the most exposure. And it is when it hurts the most if a dispute comes up or the deal goes south or for some other reason the client can’t or won’t pay you. This is when you look back in the file after trouble has begun to find the contract it never seems to be there.

I Can See . . .

There is a future I can see and one I can guarantee will come to pass. Without that signed contract I”ll guarantee a future that is going to be harder and more expensive when you try to sue the contracts client. Without that signed paper, you probably lost your ability to collect the costs of collection, including recouping any of your attorney’s fees. Or worse, now you can’t prove it at all if the former client can’t seem to remember anything at all about this account or the terms you’re talking about or who the hell you even are?

diceIncreasing the Odds

My point is that no matter what type of contract you have it can be completely unenforceable if it is unused or goes unfound or is unsigned. The most important issue for a small business owner to worry about is actually using contracts religiously on every project and always requiring a signed contract for every job, from every customer, on every account and in every situation. At least this way when you do need to sue something out, or worse yet you get sued, you’ll have the best chance at prevailing. And prevailing in the most effective, efficient and economical way possible.


BTW: Yes, oral contracts are valid in Minnesota and can be (and are) successfully enforced. It is much more difficult and expensive to enforce an unwritten agreement if the other party denies the agreement or disputes the terms and conditions that you believe were agreed upon. Oral contract cases can (usually do) devolve into messy “he said-she said” situations that are decided on highly subjective credibility determinations alone. Don’t bet on that one.

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Jùdà de chénggōng–巨大的成功

Great Success

I closed the sale of a Chinese restaurant today. It was a typical seller-financed, small business sale. Actually, it even went a little smoother than usual. Just like every single transaction I have ever done, there is always something (usually plural) that complicates things. If you’re lucky, it is no more than a few minor misunderstandings that are easily repaired with a little extra time, patience and understanding.  But for this deal, there was just one. Kinda big one.

Always Something(s)

The buyer and seller only spoke Chinese. My savior (a/k/a my translator) was a Laotian-American woman who had been in Minnesota for a long time. You could hardly tell English was her third language. Problem was, she’d never dealt with legal lingo before and did not have any related business experience. I spent a little extra time when we first met so I could get all the terms and conditions thoroughly explained to me. It all went from Chinese through the lay translator person and then to me. I was more attuned to the increased possibility for misunderstanding so I double/triple checked everything and made sure I understood. Drawing pictures and hand signals seemed to help. Or maybe they were just being kind and polite? Or maybe it’s funny watching a lawyer do hand signals at a conference table? Or maybe all the above?

Meeting of the Minds

At the end of the meeting, I felt confident I understood how the buyer and seller wanted everything structured. Nonetheless, I set it up so there was plenty of time for the buyer and seller to check and question the documents before the closing with the ability to make changes and with hope it would go off as uneventful as possible. I was a little leery when I got the call to set up the closing because I hadn’t edited anything major in the documents. My first drafts are usually pretty good but there is always something that needs tweaking. Or there is something that wasn’t fully explained, understood or written clearly enough. But everything seemed fine and that made me nervous. Nonetheless, the buyer and seller said they were satisfied. They both had it all translated for themselves. They it all reviewed and thought everything was understood.  I was apprehensive, but set up the closing anyway.

ABC–Always Be Clear

As usual, I explained all the big points in each document to make sure everyone understood everything and agreed before anything was signed. The numbers were the easiest. I didn’t have to say much after passing out the amortization schedule, except pointing out where the payments, interest, maturity date, etc. were located on the page. “If there’s no payment made, then . . .”–seemed like a universal phrase. To answer the question if anything could be changed after today, I shook my head and the translator said no.  I explained (with awesome hand gestures) they call it a “closing” (clasped hands together with finality) because once it’s signed, the deal is shut tight and complete (smack open palm on table top). I seemed understood and was proud of my clarity, with the right touch of drama. But then came the hardest part. The most difficult clause.  Whether I have to explain it to a seller or buyer, a high school drop out or summa cum laude graduate, a doctor or dishwasher, a janitor or engineer I never seem to make it clear.  It’s tough enough when the client speaks English, let alone having it translated into Chinese. It was the dreaded  Indemnification provisions.

Unintelligibly Inarticulate

Because I was so nervous and had built up anticipation to a great degree, I struggled and couldn’t pronounce anything clearly: IN-DEMNE-FACI-ATION. IN-DEMN-ICTA. IN-DEM-NE-FI-CA-TION! Yes! (maybe no one will even noticed if I look stone-faced enough) I took a deep breath and slowed down.  I tried to explain it in plain English that could be translated. Once again, I stumbled and mumbled and was incomprehensible. I got frustrated.  Why words all ran togetherintoone. The frustration made me lose patience. As I was reaching for my pen and yellow pad, to draw something brilliant that would clear everything up–it felt like something snapped in my neck. I felt a spark and it all came clear in my head. I am going to always use this in every sale from here on out. I will use this no matter what the folks at the table speak as a first, second, third or fourth language. This I promise myself.

Recompensations for Indemnification

I will never, ever use the words “indemnification” or “compensate” or “reimbursement.” I will never again say “subsequent” or “consequential.” I will never speak of “preceding” or “antecedent.” I will never use these words again when explaining indemnity clauses to anyone as long as I shall live. In their stead, I will only explain indemnification by using these simple, defined key words:

Preceding means before.

So say before.

Subsequent means after.

So say after.

And indemnification?


It means protect and take care of.

So say Protect and Take Care Of. Using these terms everything went well. My words were easily translated with just one phrase apiece. So in the end, today’s closing was a Great Success (巨大的成功). I will use my new terminology from now on since today they Shǐ wǒ shòuyì fěi qiǎn (使我受益匪浅). MKT

Attorneys & Lawyers & Counselors, Contractually Bound, Litigation of Business | Business of Litigation

I Personally Guarantee It!

1-satisfactionOver the past few months, I have had a few different cases where my client, an incorporated small business, either needed help with drafting (landlords) or negotiating (tenants)  a commercial lease agreement. In each case I try to impose, or conversely prohibit, a personal guarantee being a condition in the lease.   It is so standard to see a personal guarantee included in a lease that I am always amazed when it is absent. The exception, rather than the rule.

Most personal guarantees in commercial leases are the result of the landlord trying to minimize the inherent risks involved in renting property to a small business.  Since most small businesses have few, if any, liquid assets, the personal guarantee creates an extra level of protection for the landlord and helps assure that the lease will be fulfilled. Quite simply, the landlord is trying to make the agreement as secure as possible.

When a personal guarantee is agreed to it makes the individual signing the guarantee personally liable under the lease. This is prudent for a landlord just in case the tenant goes out of business, files for bankruptcy or otherwise can’t meet its financial obligations.  It is also a slick way to sidestep the personal liability shield that would otherwise insulate the owners of an incorporated business from this liability.

A savvy tenant, with something  to offer (even services or labor) can sometimes negotiate its way out of the requisite personal guarantee. But a sophisticated landlord will insist upon something else of value be put at stake instead. You can use UCC filings that cover a tenant’s business equipment, other assets, or even personal  property, and designate the landlord as the secured party. It is also possible to successfully omit personal guarantees under the right conditions. These situations may exist where the rental property is unique, yet fit for a tenant’s particular use, when the tenant has previously honored a lease with the same landlord and, of course, when the landlord has no concerns about the tenant’s solvency.

After all is said and done, a personal guarantee won’t be worth more than the paper it is printed on unless the guarantor is financially viable.  This brings me to the “moral of the story” got from an article I read today. It demonstrated a perfect example of a landlord doing everything possible, albeit somewhat after the fact, to try to make sure he would be able to collect the losses allegedly suffered from a default in a commercial lease. This applicable law in the case is technically distinct from a personal guarantee and is due to the particularities of partnership law (and demonstrates a darn good reason to operate as a corporation or LLC rather than as a partnership).

So, yesterday, the Am Law Daily reported on a case where a landlord is currently suing 450 attorneys, who were formerly partners at a large Manhattan law firm. In the lawsuit, the landlord alleges all of the partners are personally liable for the default in a commercial lease involving six floors of a high-rise office tower.

The lease runs through 2020 and, at one point in time, the landlord believed the default resulted in a loss of more than $45.45 million. Although the landlord only claims about $1.6 million damages now, there is still a lesson to be learned. That lesson is that you can never go overboard when trying to tie people personally to a lease in order to secure it.

You can read more the whole article here:

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Contractually Bound, Litigation of Business | Business of Litigation

CONTRARY TO PUBLIC POLICY–Unenforceable and Void Contracts

“Judicial decision on one contract can rarely help us to the understanding of another.”  Lord O’Hagan, Rhodes v. Forwood, L. R. 1 Ap. Ca. 275 (1876).

contract imageI think one of my favorite contract clauses is when the drafter inserts language that tries to make the agreement exempt from any laws whatsoever. They usually go something like this:


“Party A agrees to pay this ‘service/labor/consulting/alternative/termination/whatever’ fee, despite any statutes or law to the contrary.”


When I see one of these clauses, I just know there’s something fishy in the agreement.

Why else would anyone go to all the trouble of trying to make it so no laws can apply to the contract? Or even wanting such an application? I suppose, after all, those pesky laws always get in the way and . . . just won’t let me get my way!


I have litigated a number of contract cases with similar clauses that purport to contract around the law. And not once have I ever ran across an attorney willing to argue the clause to the court. Just think about trying to make that argument with a straight face.


Courts commonly call these types of contract provisions that try to skirt an established law or statute an illegal contract or that the clause is contrary to public policy. When found to be illegal or contrary to public policy, the clause is usually found to be void and unenforceable. In other words, don’t waste your time and any ink or paper writing one of these up and thinking you can bind someone with it.


This issue does come up for me from time to time. Usually I get a situation where someone has committed a crime and wants the victim to agree to a contract prohibiting the victim from reporting the crime. I always shoot these down because I won’t draft a contract that is clearly an illegal contract, unenforceable and void anyways.


On the flip side, certain statutes specifically permit “drafting around” it. A perfect example is in Minnesota’s Business Corporation Act (“MBCA”) found at Minnesota Statutes, Section 302A.111 (2013). The first section of this statute sets out provisions that are required to be in a corporation’s articles of incorporation. Then in Subdivision 2, the statute explicitly lists particular sections of the MBCA that will apply, unless you modify them in the corporation’s articles of incorporation or in a shareholder control agreement.


So, don’t waste your time, money or energy on drafting a contract that would clearly violate a statute or other law making it contrary to public policy/illegal. After all, it will be declared void and won’t be enforceable. However, like most legal issues, there are always exception that  may apply and it could be worth it to figure that out in advance of getting into any agreements where the exception could apply.