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.

When the service you need gets switched from one provider to another

Occasionally, I will get a call from someone who has purchased a service from one provider and is then told that another provider has taken over the contract.  Might be a pool service, or a security system provider, or a marketer, or a lawyer.  I don’t get more calls because a lot of people don’t care.  But the ones who call are the ones who do care. 

They usually want to know how to get away from the new provider.  Maybe the new provider does not have a great record.  Maybe the new provider starts deemphasizing or taking away aspects of the service that the customer liked. 

My answer usually contains three parts . . .

First, what does the contract say about “assignment” from one provider to another?  If it says nothing, you can just leave.  If it gives the provider the right to assign his interests, you are stuck. .

Second, . . . unless the new provider breaches the contract in some way.  Those services the new provider is cutting back on?  Check the contract.  If those services are provided for in the contract, refusing to provide them constitutes a breach, and the customer can walk away.

Third, do not sign a contract in the first place without first at least skimming that fine print to see if there is an assignment section giving the provider the right to assign the contract. 

And, of course, I will always recommend that you spend the few dollars needed to get a consultation with a lawyer who does contract litigation, because every situation is different, and sometimes the difference matters.

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.

LIABILITY OF EMPLOYEE WHILE ON OUT-OF-TOWN ASSIGNMENT

LIABILITY OF EMPLOYEE WHILE ON OUT-OF-TOWN ASSIGNMENT

Who bears the burden when an employee is working out-of-town and gets in trouble in some way? If the employee commits an intentional tort of some kind – for instance, an assault – he is on his own. But what about something less egregious, like a car accident?
In one fairly recent case, a DPS officer who normally worked in Phoenix, was assigned to work for a period of time in Douglas. The distance required him to live in a Douglas motel. After work, he asked for a restaurant recommendation, and left for dinner with his temporary supervisor. On the way, he negligently ran into the plaintiff, causing injuries. The officer made a motion to get himself out of the case, saying he was working for the State when it happened, and that any liability should fall on the State, not him. The trial court granted his motion, and the Court of Appeals agreed.
The Court of Appeals held that the employee was acting for the employer if, at the time of the accident, he was “doing any reasonable thing which his employment expressly or impliedly authorizes him to do or which may reasonably be said to have been contemplated by that employment as necessarily or probably incidental to the employment.” The court listed three factors to consider when deciding whether the employee was acting for his employer.

  • Was the activity the kind the employee was authorized to perform?
  • Did it occur substantially within the authorized time and space limits?
  • Was the employee acting for the purpose of serving the employer?

The Court held that going for a meal on an out-of-town assignment was expected and incidental to the assignment. The Court also held that, if the trip was for the dual purpose of serving the employer and the employee, the employee would still be protected. But the Court also held that, if the employee had already eaten but was then making a second trip to a bar for entertainment, there would be no protection.

What does this mean for you?

For the employee, this means that she needs to remember this distinction between expected actions within the assignment (e.g., meals) and those which serve just the employee (e.g., the bar). Of course, the distinction is not always clear. For instance, what if the employee is a salesperson and is going to the bar, at least in part, to drum up customers?
For the employer, this means that your employee manual should clearly delineate what activities are considered authorized by the assignment and which are not.

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.

CONTRACTS: WATCH OUT FOR ARBITRATION CLAUSES: THEY’RE EVERYWHERE AND THEY’RE DEADLY

They’re Everywhere

If you ae a normally active adult, then you sign a document containing an arbitration clause at least once a week, and probably more often than that.  Virtually every time you sign a business’ form contract, it is pretty safe to guess that the boilerplate on the back, which you never read, includes an arbitration clause.  If you are a small businessperson, it is a pretty safe guess that all your contracts with your suppliers and servicers included an arbitration clause.

So What?

“So I sign them all the time. I admit I didn’t know that, but what’s the difference?”  In most cases, it makes no difference.  Few transactions get out of control.  Even where there is a problem with what we buy, it’s often not enough of a problem for us to make a fuss, and the seller, using good business sense, will often correct the problem.  But not always: sometimes the problem is expensive and sometimes the seller isn’t willing to just make it right.  So you want to fight for your rights.  And that’s when you run smack into the arbitration clause.

They’re Deadly

You’re thinking, “I’ll just go to court and get a judgment from my peers and get compensated.”  But not if you signed an arbitration clause. First of all, the arbitration clause is mandatory: if you signed, you don’t have a choice between court and arbitration . . . you must go to arbitration.  And unlike court, there is no right to appeal from arbitration: if the arbitrator is biased, too bad.  And most importantly, to my mind, you give up your basic constitutional right to a jury.

What do you get in place of a jury?  A professional arbitrator who is agreed on by the parties.  Most of them are former lawyers or judges with considerable legal experience.  That’s good.  The problem is that arbitration is their living.  They will not make a living on your case alone.  Rather, they must have continuing business. You’re going to be in arbitration once in your life.  The company will be in arbitration repeatedly and, therefore, represents the possibility of ongoing business for the arbitrator.  Conversely, if the arbitrator holds for you against that company, do you think that company will ever allow that arbitrator to work again in their arbitrations?  It is for that reason that the little guy in the arbitration — maybe a consumer, maybe a small business — so rarely wins.

How did this happen?

Very simply, many large corporations decided they just could not entrust lawsuits to juries because juries kept holding for victims, and sometimes in large amounts.  They tried many things to cut back on these verdicts.  They instituted what they called Tort Reform, which their media associates said was to cut down on “frivolous” lawsuits – i.e., lawsuits against business.  In some states, they put huge amounts of money into electing sympathetic members of the Supreme Courts, who would in turn cut down on those verdicts.  But the best way to cut down on the problem was to keep victims out of court altogether.  So they instituted arbitration clauses, claiming that those clauses were an improvement over “expensive” litigation in courts.  And this last strategy has succeeded remarkably well.

So what do we do?

The long-run soluton is for all of us to stop believing what we hear.  Everything we see on the internet or in the media is not true.  Remember who owns the media and what is in their interest.

For the present, look at the boilerplate on the documents you sign, rathe than just signing blindly.  The arbitration clause will not be set out to attract your attention, but it will be labeled “Arbitration”.  My suggestion is to draw a big X through the clause and put your initials in the margin.  “That doesn’t sound like lawyer advice.”  Well, it is.  When the issue of the clause’s enforceability is litigated, the company can never argue the fairness of the clause; so they argue that there was a “meeting of the minds” about the arbitration clause (even though you did not know it was there), and you are therefore bound.  The Xing out which I recommend raises serious questions – legally – about that meeting of the minds.

There may be other ways to contest the applicability of the clause, depending on the particular facts.  That is the reason you need to see a qualified and experienced lawyer as soon as possible.

LANDLORD-TENANT: When Is It OK For The Tenant To Leave Early?

Most tenants move fairly often.  There are no real roots holding the tenant where she is, and lots of reasons arise to move on.  A bad apartment . . . a new job . . . a new boyfriend . . . you name it.  Few tenants who come to see us have been in the premises for even a year before they want or need to leave.

But be careful why and how you leave.  Do it for the wrong reason or in the wrong way and you are liable to leave wearing a judgment in the thousands which will haunt you for some time, as well as a black mark on both your credit and the landlord lists (which will make it difficult for you to rent again).

The instances when the Landlord-Tenant Act clearly permits you to leave early are when the condition of your living space falls in violation of building codes relating to health and safety (e.g., mold), or when your living space is not “fit or habitable” (e.g., overrun with scorpions or bedbugs), or when the common areas outside your living space are not “clean and safe”, (e.g., broken glass and gangs), or when basic services (electric, plumbing, heating, A/C, etc.) are not in “good and safe working order”, or when there are not “appropriate receptacles” for trash, or when there is not a “reasonable” supply of running or hot water.

But watch out for two things . . .

First, you cannot leave without giving 5-day, written notice to the landlord of the problem and your intent to leave.  You can go only after the landlord fails to remedy the problem in those five days.  But if you have done it right and for the right reason, your rental obligation ends on the fifth day, and you are entitled to the return of your security deposit (less acceptable deductions).

Second, notice that the events justifying your leaving are not matters of convenience but rather matters of urgency, like losing your air-conditioning in the summer or being overrun by bedbugs (which chemicals can’t kill).  Every woman should be able to have a working refrigerator, but the lack of one does not make the premises uninhabitable.  For this sort of thing, you will have to use the self-help statute, which lets you subtract for this sort of problem after notice and up to a certain amount, but does not allow you to leave.

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.