The Covenant Of Good Faith And Fair Dealing Can Turn A Small Case Into A Big One.

Most non-lawyers understand the basics of a breach of contract claim. The two sides make a deal, and if one side does not honor his obligations, the other side can sue for damages.

The problem with a contract claim, from a practical point of view, is that the damages are limited. Basically, you can get what you lost based on the contemplation of the parties at the time the contract was formed. For instance, if you contract to provide a service, you provide it, and the other side does not pay, you can sue for the value of those services. Depending on the contract, you might get interest on that money, and you might get back some or all of your attorney’s fees.

But that’s it. If the contract provides for future exchanges of services for money, which are now lost to you, you might or might not get something for that. You don’t get money for pain and suffering. You don’t get damages for the ripple effect that runs through your business. You can’t get punitive damages, even if the other side’s conduct was particularly egregious. Sometimes, the result of all this is that, from a cost-benefit point of view, it doesn’t make sense to file your lawsuit. The attorney’s fees and costs may even exceed what you stand to win.

However, most non-lawyers do not know about another legal concept that arises in a contract setting. Every contract includes an implied term – in other words, not an express term of the contract – requiring compliance with the covenant of good faith and fair dealing. The covenant says that neither side can do anything, whether expressly prohibited in the contract or not, which destroys the other side’s fundamental reason for entering the contract.

For instance, we are doing a case right now regarding an employment-type contract gone bad. A ran a series of stores offering a service. A wanted to open a new store. So A entered a 2-year contract with B under which, if B made the new store successful, B would get a 49% interest after two years. The store was successful. But after one year, A terminated the contract with B. The termination was arguably permitted by the express terms of the contract, which required no reason for termination. But the effect of the termination was to deprive B of his main reason for entering the contract, namely, getting the vested ownership interest after two years. This amounts, potentially, to a breach of the covenant of good faith and fair dealing, even though permitted by the express terms of the contract.

The real significance of the resulting claim for breach of the covenant is that, increasingly under Arizona law, B can now claim not just contract damages, but what are called tort damages. In other words, he can claim future lost profits, pain and suffering, and even punitive damages. Suddenly, a lawsuit that might not have been worth bringing becomes more than worth it.

This is not something that laymen would know about. But both A and B would have benefitted by going to see an attorney specializing in fraud or business litigation at the very outset. There, they would have learned about the covenant, which may end up determining the outcome of this case.

Four Magic Words That Could Wipe Out Your Credit Card Debt

(Reprinted from The Oxford Communique at oxfordclub.com)

There are “four magic words” you can say if a collection agency ever comes after you for any unpaid debt. You say the words . . . and your debt can get eliminated all at once.

I know that sounds unbelievable, but NPR did an investigation of this for its show This American Life. In it, a couple got a $3,762.20 credit bill instantly wiped out because of this special sentence.

Here’s how the scenario unfolded . . . It involved a couple named Frederick and Keanne. Fred was buying houses, rehabbing and selling them, which was going great until the housing market fell apart in 2008. As a result, the couple ended up taking on some debt.

Ultimately, they got a notice in the mail saying they owed $3,7672.20 to a company called LVNV Funding and were being summoned to appear in court.

Frederick and Keanne knew nothing about LVNV. The main reason they went to court was to figure out what was going on.

At the court hearing, they learned that, when they failed to pay off their American Express bill, the credit card company sold that IOU to LVNV. Obviously, those kinds of sales to collection agencies make for big business. There are lots of companies that do this.

But here’s where it got interesting . . . Fred and Keanne wanted to know what the specific unpaid charges were, so they said four words that turned out to be magical.

“Show me the evidence.”

It turns out the lawyer representing LVNV didn’t know what the specific charges were . . . which isn’t unusual. When uncollected debts are turned over to firms like this, they often only receive a statement giving the total amount owed, no specific transactions. Nor does the collection firm have the original contract from when the credit card was initiated.

The bottom line is: If you show up in court and say the magic words, and the collection firm can’t come up with it, the case is dismissed. The debt is expunged.

So when these companies take people to court, they’re betting you won’t show up . . . because people usually don’t. The no -show rate is between 80% and 90%.

What that happens, you lose. But when you do show up and say the magic words, there’s a good chance you’ll win.

TIPS FOR LANDLORDS WITH NEW TENANTS

Some landlords hold multiple properties and have been doing so for years. These individuals often know the law as well as most landlord-tenants lawyers.

But the greater number of landlords own one or two rental properties, and this number will grow as the economy declines, making purchase and sale of homes more difficult. This group lacks the sophistication of the first group and is much more likely to walk into rental traps. I have both represented and litigated against these individuals, and this article represents my attempt to identify some of their more common problems.

Let go of the attitude of many inexperienced landlords, especially those who used to live in the rental home, that the house belongs to them and they can darn well do what they want with it. For instance, you cannot just go on the property when you want to. You must give 48-hour notice, except in the case of emergency or requested repair or clear abandonment. You have no other right of entry, and there are sanctions under the Landlord-Tenant Act.

Be sure to take photos of the premises before the new tenants move in. And make sure you give them a move-in inspection list. If you do not, you will have a difficult time attributing end-of-term damage to the tenants. It would be wise to take your own photos of the damage the tenants allege in their inspection list, and if you repair any of that damage, make sure you retain proof of doing so.

If the tenants attempt to exercise any of their rights under the L-T Act, be careful about trying to evict them, because the sanctions for retaliation are substantial. If you attempt to evict, make sure your case against the tenants is slam dunk.

At the end of the term, when you do your inspection, make it as close to the move-out date as possible and be sure to give the tenants notice so that they can attend.
If the tenants demand their security deposit back, make sure your response is postmarked no later than 14 days thereafter. Some judges require that the tenants’ demand be written, but the statute does not say that, so the wise move is to honor any demand for the deposit. You must move quickly so that the estimates for repair of damage are dated prior to your response.

If there are clauses in the lease that call for the parties’ initials, make sure those places are initialed. For instance, I’ve seen more than one landlord lose the right to attorney’s fees he/she would otherwise have had because these boxes were not initialed.

This is not a complete list. The wise moves would be to have a L-T lawyer review your lease before using it and to keep that lawyer on retainer for future questions.

HOW AGGRESSIVE SHOULD YOUR LAWYER BE?

Most people looking for a lawyer, because a fight is brewing, have never had any prior involvement with a lawyer. You would be surprised how many of these new litigants come in with impressions formed from movies and TV. But the media depiction of lawyers is about as accurate as the media’s depiction of everybody else . . . not very accurate.

So what should you be looking for when you think you might need a lawyer.

Many think they should be looking for the most “aggressive” lawyer they can find. After all, “litigation is war”, right? And you need a ferocious warrior. At some point, litigation does become war, so it is true you need someone who is capable of taking the gloves off when that time comes.

But it is well into litigation before the process becomes war-like, and very few cases get very far into that stage of the process. For the most part, litigation is more about relationships than it is about war, and your lawyer, if he/she is going to be effective, must be capable in that area as well.

So take a look at the relationships in your life. What works and what does not? Do you vibe to people who are extremely knowledgeable, able to talk at length about any subject, and always sounds right? Or do you gravitate to the person who listens to what you have to say and then speaks to what you have to say rather than just his/her own thoughts? If your lawyer cannot hear you, and feel your situation, get away, even if that person is “impressive”.

And when confrontation arises in life, what seems to work? If you want someone to do something for you, does it work better to pin that person in a corner and browbeat them? Or is it more effective to stand by your position but back off enough for the other person to have the freedom to make his/her own choice about what you want? Not many – or any – people respond well to being cornered. It is the same in law: unless your goal is simply to get your rocks off, you’re far more likely to get the result you want by respecting the other person’s point of view as well. Good lawyers know this.

Law is a people business. Both between attorneys and their clients, and between opposing parties. Pick your lawyer like you pick the people you want to keep around you in life.

WHAT DO YOU DO WHEN THE OTHER GUY BREACHES YOUR CONTRACT

WHAT DO YOU DO WHEN THE OTHER GUY BREACHES YOUR CONTRACT

When the other side breaches its contract with you, what are your legal remedies? There are three. Breach of contract, rescission and specific performance. Which one or ones are available to you depend on circumstances and the value of the subject of the contract.
Breach of Contract
The contract you signed to buy the car said the car had 30,000 miles. It turns out the car has 45,000. This is not enough of a discrepancy to want to unload the car, but it does mean the car has less value than you paid for. Or your company buys 1000 widgets. 90 of them are defective and unusable. There is no point in sending back all 1000, but you want to be compensated for the 90 bad ones. In short, situations where you don’t want to repudiate the whole contract, but you want to be compensated to the extent the other side fell short on some portion of its promised performance.
Your remedy is breach of contract. What can you recover? The value of the defective items, interest if it applies, consequential damages (like the costs of shipping back the 90 bad widgets and possibly lost profits), reasonable attorney’s fees and court costs. You cannot recover for any emotional distress or inconvenience caused by the whole incident.
Rescission
Let’s say the car you bought which you thought had 30,000 miles actually has 100,000 miles. Now the discrepancy is so great that you effectively received an entirely different car than you thought you were buying. You don’t want money for the difference: you want the car returned to the seller and all your money returned. Or let’s say there are 600 faulty widgets, you were buying them to resell to a regular buyer, but that buyer refuses to receive lots of less than 500. Effectively, the 1000 widgets are useless to you. You want them all sent back and all your money returned.
This total repudiation of the contract is called rescission. Because the remedy is more extreme than breach of contract, you will have to show the court that the value of the deal has been completely or almost completely destroyed for you. If you win, you get back all your money, minus any damage you may have done to the car or widgets, plus interest if it has been a while, consequential damages, reasonable attorney’s fees and court costs.
Specific Performance
Let’s say you ordered 1000 widgets, but the seller, citing some excuse, only provides you with 400. You still need 500 at least to satisfy your buyer. You don’t want to just rescind because that would not enable you to satisfy your buyer. Rather, you want to force your seller to provide you with the other 600 widgets.
What you want is specific performance. Essentially, you are asking the court to issue an order forcing the other side to fully perform. In addition, you can get your consequential damages (which may or may not include costs incurred with your buyer) along with reasonable attorney’s fees and costs.
Understand that this is a very elementary explanation. Do not try to pursue any of these claims without a lawyer. The short term savings of doing it yourself will undoubtedly result in a much larger loss in the long term when you lose.

JUST WHAT IS FRAUD?

JUST WHAT IS FRAUD?

“Fraud” is one of those words that gets thrown around a lot. When something goes wrong in dealings with another person, and you feel like you weren’t treated fairly by the other person, you’re likely to assume what happened was fraud.
But in the law, fraud is a little more than you probably think it is. In fact, it is probably one of the hardest cases to prove. Why? Because it involves deciding what was going on in the other person’s mind when they said or did what they did. A person who does wrong is not likely to admit it out of his own mouth. So you have to find other ways to prove what he was thinking at the critical time.
So in the law, what constitutes fraud?
First, the person (or company through its agents or, maybe, its advertising) has to say something untrue. Second, and this is where it gets difficult, you have to prove that that person knew, when he made the statement, that it was untrue.
And sometimes it gets even harder because the statement in question is actually a non-statement. This is when the circumstances required that the person say something, and he doesn’t say it. This is called material omission, and it is also fraud. It’s just hard to prove. For instance, the owner of the used car had been told by his mechanic that the car only has a few hundred miles to go before it dies, and then the buyer asks if the car is drivable. If the owner responds that the car is just fine, this might be a material omission and, therefore, fraud.
Third, the person making the statement must know that the other person is relying on him for the truth. The car owner above knew that the buyer was relying on him, as the only person who knew the condition of the car, to tell the truth.
And there is another aspect to this reliance which also makes fraud hard to prove, namely, the person who relies on the statement must be justified in that reliance. For instance, if that buyer is a certified mechanic and would have been able to tell just by driving the car a few miles that something was not right, but he didn’t take the test drive, the reliance might not be justified.
Fourth, the misrepresentation, or the problem that was the subject of the misrepresentation, must be the proximate cause of the damage to the buyer. For instance, if the buyer takes the car and it is badly damaged in an accident before dying, the misrepresentation may not be the cause of the damage, or not all of it anyway. The accident would.
And finally, there must be damage to the buyer. There is no lawsuit if there is a misrepresentation but no damage is done. If the car ends up lasting for a good while, it may be that there was no damage from the misrepresentation.
One more thing . . . in Arizona, there is also a consumer fraud statute. It is a powerful weapon because it removes the reliance requirement. If someone lies, and that lie or the problem becomes the proximate cause of damage, there is a claim whether your reliance was reasonable or not.
The only problem is that the consumer fraud statute requires you to bring your action within one year from the time you discover or should have discovered that you’ve been lied to, as opposed to the three years you would have with non-statutory fraud.
Finally, because fraud is so complicated, do not try and litigate it without the help of a lawyer.

A COUPLE TRICKS YOU CAN EXPECT FROM VALLEY CAR DEALERS

A COUPLE TRICKS YOU CAN EXPECT FROM VALLEY CAR DEALERS

Recently, I’ve received more calls about car purchases gone wrong than any other subject.  These are calls I did not receive before the economy began to suffer.  But some car dealers have, unfortunately, resorted to taking advantage of the consumer in response to the recession.

I will tell you about two such practices.  The purpose of both is the same: getting the consumer into the car, allowing her to drive it for a few weeks until she is attached to it, then calling the car back citing some problem, in the hope that the buyer will have become so attached that she will comply with the new condition, which usually means paying more money.

The first practice is informing the buyer, a few weeks after the transaction, that the dealer could not get financing from the usual sources, and that the buyer must come in to sign a new contract, which invariably will include tougher terms, usually regarding interest rate.

At first, dealers were doing this without the support of any language in the contract.  But once lawyers started getting involved, the dealers started including language with the other boilerplate saying that the deal is contingent on the dealer finding appropriate financing.  The language was usually too small to read and incomprehensible even if you could read it.  Consumer lawyers got involved, claiming this practice was unconscionable and possibly fraudulent.  So the dealers finally went to their lawyers who drew up a separate document that had the contingent language in bigger, more readable print and requiring the buyer’s initials.  This document is probably enforceable in court.  So when you’re handed a sheet calling for your initials, be sure to read it closely.

One more thing . . . If you decide to let the deal go and demand your trade-in back, and the dealer says it is already gone, know that the dealer has broken state law, which requires it to keep the trade-in available until all contingencies are met.

The second practice – less frequent and more justifiable – relates to your trade-in. The salesman will usually ask you a number of questions about the car, which you should answer honestly.  But what about the things they don’t ask you about.  Are you off the hook?  No.  That same list requiring your initials which I discussed above will also include a provision stating:

“I understand that the amount showing as Trade Payoff is my responsibility, an estimate only, and subject to verification by my lien holder for a minimum 10-Day payoff.”

This means that, if the dealer within the first 10 days discovers a problem with the car which it believes affects its value, it can rescind the transaction unless you pay for that difference in value.  Since you probably made the deal only because of the amount you were getting on the trade-in, this can be a big problem.  You may love the car enough to pay the difference, but before doing so, require the dealer to verify his assessment of the decrease in value.

It may be possible for you to handle this negotiation on your own, but I don’t advise it. The dealer will be more responsive to a lawyer’s letterhead.

BUSINESS CONTRACTS: GIVING YOUR CLIENT LEEWAY COULD COST YOU BIG TIME

The Businessperson’s Dilemma In A Recession

Especially in a tough economy, it is understandable for a businessperson to give a client who is under contract a little leeway on his obligations, for fear we might lose him otherwise.  Conversely, it is also understandable to provide a little extra service when that client insists on it, for the same reason, namely, keeping the client.

But be careful.  That little bit of leniency could cost you the protections you thought you had by virtue of your contract.

An Example Of The Problem

Let me illustrate by telling you the story of one of my clients.  (The names have been changed, but the facts have not.)

Client was a landscaper/gardener.  After years of work, he had broken into the world of maintenance for large developments, a far more lucrative line of work than residential gardening.  He wrote his own contracts (his first and biggest mistake), which provided for a set fee for basic maintenance work but called for additional payment as to work not specifically designated as maintenance.

The HOAs always have a professional property manager, and that person deals with contractors on behalf of the HOA of the development.  Property managers are notoriously disreputable, and the property manager which Client had to work with with respect to most of his developments was no exception.

One of the major categories of work needed by all Arizona developments but specifically placed outside the scope of maintenance in Client’s contract was fire clearance.  The property manager began insisting that Client do this work for free, despite the language of the contract.  She threatened to take away all of his development jobs if he did not comply.  Hoping not to lose most of his business during a recession, Client did that work for free, though he made it clear that he expected to be paid at some point.

Eventually, Client realized he could no longer survive under this arrangement and billed the HOAs for the fire clearance.  He was promptly fired by the property manager from all his developments.  That move destroyed Client’s company, which had become dependent on the work that was taken away.

Client sued the HOAs and the property manager, but he ran into a number of arguments stemming from what he thought was his wise business decision to give the property manager and the HOAs leeway.  The other side’s main argument was that Client had waived his right to bill for the fire maintenance by doing the work without insisting on payment.  Client is no longer my client, but the case continues.  But he probably has no better than a 50% chance of getting by the waiver argument.

How Do I Prevent This From Happening To Me?

Two answers . . . My personal experience in my business is that, during this recession that the press would like us to believe is over, even good people are reneging more and more often, and the other not-so-good people are coming out of the woodwork.  As a  result, I stopped allowing accounts receivable, and I stopped allowing clients little dispensations.  In my experience, once it starts going bad, it’s only going to get worse.  So stop with the special favors.  They will come back to bite you.

But for those of you who insist that your business cannot work that way, then you need to insert language into your contracts that, if you allow the other side to get away with not honoring its obligation on one occasion, you have not thereby waived your right to enforce that obligation in the future.

That is one of the many provisions that seems to appear in very few contracts but which a good contract drafter will put in your contracts.

LITIGATION: If I Hire A Lawyer and Bring a Lawsuit, What Will Happen?

Most people have never hired an attorney or gone to court for anything more serious than a traffic ticket. The process of litigation looks as mysterious to most people as fixing a car or coaching a chess team looks to me. Maybe this will help a little.

 

A civil case usually has six main stages: (1) pre-litigation negotiation; (2) the filing of initial pleadings; (3) disclosure and discovery; (4) dispositive motions; (5) trial; and (6) appeal. This process can be stopped if the parties settle which, statistically, happens more often than not.
Pre-litigation Negotiation
Because litigation is burdensome, not only financially but in other ways as well, most lawyers will attempt to negotiate a settlement before filing the lawsuit. In my experience, these attempts succeed well under 50% of the time, generally because both parties are still emotionally upset about what was “done to them”. I will sometimes forego this step in those instances where the other side seems to be a bully or a conman: those parties generally have to be punched with a lawsuit before they will take my client seriously.
Initial Pleadings
The plaintiff (the party which initiates the lawsuit) files a Complaint stating why the court has jurisdiction, alleging the key facts underlying the dispute, and the legal claims those facts give rise to.
The defendant (the other party) must then file an Answer which answers the statements made in plaintiff’s Complaint. The defendant may, at the same time, allege any claims he has against the plaintiff. Because you know the facts, you will have to work with your lawyer during the pleading period.
Disclosure and Discovery
A little over a month after the pleadings are completed, both sides have to file their mandatory disclosure. This is a process pretty much unique to Arizona. Both sides are required to state their legal claims, describe their factual position, state their position with respect to damages, identify their witnesses (lay and expert) and any witness statements, and produce all relevant documents. Again, you will have to work closely with your lawyer with respect to the disclosure.
Then, the parties enter the discovery period during which both sides use various discovery tools – interrogatories, requests for admission, requests for documents, request to inspect, depositions – to gain evidence for their own case and to force the other side to expose its case before trial. This period can be lengthy as the two sides fight over what they have to produce. This period can also get expensive if there are numerous depositions, especially if those depositions involve expert witnesses.
Dispositive Motions
In most cases that have gone this far, one or both sides will file a motion – usually a motion for summary judgment – which basically asks that Court to hold that the evidence so favors the moving party’s case that there is no point in letting the case go to the jury. This might be because the evidence is overwhelmingly one-sided or because some point of law prohibits the other side from winning under the facts that have surfaced during discovery. Many times, these motions end the case (except for appeal), even though most judges are reluctant to take a case away from the jury.
Trial
This is when you get to see the samurai in your lawyer. I have done trials as short as a few hours and as long as two months. By the time you get out of discovery, your lawyer will have a good idea how long trial will go, but it is impossible to tell now with any certainty. The keys to that trial will probably be your lawyer’s preparation (I find I spend 3-5 hours on preparation for every hour in trial) and the relationship you establish with the jury (do they like, trust, and believe you?).
Appeal
If you lose at trial or in summary judgment, your attorney will discuss with you your prospects on appeal. There are many bases for appeal, so we cannot generalize now. Depending on the case and the complexity of the issues, it could take quite a while before you get a ruling on your appeal.

Settlement
Increasingly, courts are ordering mandatory settlement conferences after a certain number of days have passed since the pleading stage. This is not bad: you are not forced to settle, and the settlement judges are often very experienced and qualified. Sometimes, the parties will on their own, especially early in the case, seek out mediation before an experienced lawyer or retired judge at which the mediator will take turns talking to the parties and their lawyers in an effort to settle the case. We have had a lot of good experience with mediation.