Dan
Welcome to sound business insights. I’m Dan Watkins. This episode is about understanding contracts. This podcast is not intended to provide legal advice.

Neil
Well, Dan, I think the simplest question to start with would be what’s a contract?

Dan
Sure. Sounds simple, but it really isn’t. If it was simple, there wouldn’t be volumes and volumes of code section in California. Law on what’s a contract. That’s true. Generally speaking under common law, a contract is an offer acceptance with some consideration. We don’t have too many contracts that operate under common law because there’s usually a statute. If you want to buy a car, you want to buy a house. You want to buy goods from another merchant. You want to, uh, enter into a service agreement to sell a house. You want to sell stock. You want to do almost everything we’ve got to code section for. So basically though, if you want to talk contracts, you got to talk meeting of the minds. Two people having an understanding that’s the same, who agree on something. Then we go to written partially written and oral contracts. So where do you want to go from there?

Neil
You’ve often told me a contract is kind of like a roadmap. It guides the parties through the transaction, and if something goes wrong, it says, here’s what we’re going to do about that. Is that how you see contracts?

Dan
Absolutely contracts are essential to staying out of court. if you have it in writing between the parties and all of the, what ifs are covered, you got it made. If you don’t and something happens in one of those areas you didn’t think of, then people are going to say, well, I remember this and I remember that we have something called the parole evidence, rule it, not about going to court. It’s about a contract and what is within the four corners of that agreement is all we can rely on. And if it’s there’s something that’s missing from that, that time is when we can go outside and hear testimony and emails and bubblegum wrappers that people wrote things on. And we have a fight. So getting your contract written by an attorney or using the proper approved forms for the state is really important to avoiding these types of disputes.

Neil
So we’ve often spoken about contracts and people who download them off of websites, or worse yet, they go into a contract from a previous job and then they kind of modify it to fit whatever they’re trying to accomplish. We also start with template Dan, but it’s about customizing the contract to make sure it says what it needs to say and anticipates what might go wrong. Can you talk about the art of what you take a client through as you’re preparing contracts and why it’s important to have it drawn by an attorney instead of trying to do it yourself?

Dan
Well, believe it or not, some lawyers do that too. they’ll copy templates without doing any research, but, um, if I was going to trial, I would look up the latest law and that applies to drafting agreements. We have programs, we pay thousands of dollars a month for that keep us aware of when our templates are not in compliance with the law, or there’s been new cases. Because every time someone goes to trial and then loses and takes it upon appeal, some appellate court changes the law or the legislature, the State of California comes up with a new law and a new type of business that applies to the contract. So our templates are based on programs that are updated with new laws to consider when preparing our agreements for our clients and some law firms don’t have that. And they just go by general research. They do freehand and old forms, which is, can be scary.

Neil
Yep. And starting from a template does save our client money as opposed to writing it from scratch.

Dan
Well you, if you wrote it from scratch, you would be, uh, not doing your client of service. You have to do the research, right? And you also have to remember, the client has an idea of what they want to do. They come to you to say, okay, make this happen. We have to go through our checklists of what ifs and things they should consider before they enter into the agreement. So if they tailor the template to their they’d have to be situation, they’d have to be a transactions lawyer on their own. Otherwise we talk about being on the seller side and on the buyer side and the advantages and the strategies. And we go through a checklist that we have a research program for. Although we have other agreements we’ve used in the past for that we have appellate decisions and new laws that we want them to consider. We go through that checklist and ask them, what do you think about this? What about that?

Dan
And that’s how we come up with an agreement. That’s a little different than if you did it on your own, right? Cause not every one of the what ifs are that important.

Neil
Mm-hmm

Dan
They mean nothing. Most of the time to the client, they just want to do the deal. But it’s nice to have someone ask you because you might not have told your attorney, oh, you know what? I actually did that before. Do I need to disclose that to the buyer?

Neil
And some of those nuances might be worth hundreds of thousands or even millions of dollars.

Dan
That’s correct.

Neil
Dan, the law also contains a couple words of caution, which I’m going to butcher here – Contra proferentem. What does that basically mean for those that write their own contracts?

Dan
It’s a common law principle that says if you are the drafter of the agreement and there’s an ambiguity or dispute and they can’t find it within the four corners of the agreement and resolve it, it should be interpreted against you. And if you didn’t know this and you didn’t have that other clause, it says both parties stipulate that the agreement will not be interpreted against the drafter then you would be in trouble. So those are one of the tiny little what ifs we put into our agreements that your average person might not consider.

Neil
Great

Dan
Good example.

Neil
Let’s look through a couple examples of important contracts we handle every day, corporate documents. One of the most important contract documents business professionals need to consider.  Can you tell us a little about corporate documents and why they’re so important to review with an attorney?

Dan
Yes. Corporate documents means this living, breathing entity, the corporation, has to have agreements with its employees, has to have agreements with other corporations, merchants, vendors, labor force. All these things have to be contained by a properly formed corporation. But if the corporation directors or officers are not authorized under their own corporate documents, then you can have trouble all the way down the line on your agreements. Because your warranties and representations that you have authority to sign, the agreement could be taken away, are disputed. And you have a real mess. When the shareholders find out that the board of directors did something or that the officers did something, and everybody says, who gave authority, where are those formal legal minutes and orders and actual evidence that resolutions were passed, giving this living creature, this corporation, the right to go forward and do things.

Neil
So this operating agreement, if you’re an LLC or the bylaws and shareholders agreement in a corporation, these are one of the first contracts of a company. And what they’re really doing is governing the relationships of those who are going to own the company.

Dan
That’s the framework, that’s your building blocks. It gives life to this corporation.

Neil
And then the next step in the process is often a contract between your company and the vendors and suppliers who provide you with the goods and services you’re going to sell. What do those look like?

Dan
Well, the uniform commercial code governs most of the states in the United States on how they can do business with each other and buying and selling goods. We’re both merchants at that time and drafting contracts in that situation completely different than drafting contracts and non-merchant situations. You know, you want to buy a building that’s different than you want to buy a freight load of this or a freight loader that you have to have UCC language.

Dan
You have to have UCC understanding. And you also have to have agreements that are fast, where your client can actually take an agreement with boiler plate on the back, which normally wouldn’t be allowed and have it be legally enforceable under the UCC with 10 day deadlines to inspect and object to goods. So having the agreements explained to you, prepared for you, customized for you, your business and your people being taught, how to use them is important. When you’re doing business in the purchase and sale of goods.

Neil
UCC is a federal law?

Dan
No, it’s not. It’s a state law that’s uniform between all the states. Uniform commercial code is uniform because most states have the same code section enacted into law. 99% of them. I’m thinking of one state and that state has a similar code, but it’s not identical to the uniform commercial code.

Dan
So you have to research that if you’re doing business in that state, can you gimme an example, an example, you ship several freight loads of things from California to New York and it breaks down a Denver. What do you do? Who’s responsible. Parts are broken. It’s no good. It doesn’t pass inspection. Well, you got to look at your shipping order to see what language was used to do, determine who’s responsible and who’s not.

Neil
So Dan, what is boiler plate?

Dan
When you’re thinking about UCC, in the UCC context, it’s the terms and conditions in the back of the invoice. We can’t have a lawyer come in every time we want to buy a freight full of this or stack full of that. We have agreements that say, you slap it on your product. You send it to the buyer and the buyer has 10 days to look at it per your agreement on your invoice.

Dan
So in the terms and conditions in the back of your invoice become law. In your matter terms, if they turn around, expect a turnaround, inspect or reject and send you an invoice saying different things and you have 10 days to change the terms and whoever changes the terms last has the controlling agreement. It can get crazy sometimes, but business moves so fast. This has proven to be the most efficient way to get products between merchants. And because they’re doing business with each other, it’s the best way.

Neil
Is there a moment in that kind of back and forth where you want your clients to think, okay, I really need to talk to Dan about this.

Dan
Well, I just want to educate them. The uniform commercial code takes a lawyer that understands business and the sale of products and having your agreements reviewed to make sure that the risks and allocations and your own insurance, shipping insurance, all those things are considered when drafting your agreement.

Neil
So that business operations go smoothly.

Dan
There’s going to be breakage. There’s going to be problems in shipping. And if it’s all covered with the terms that most merchants understand, most people who ship product understand and understand what they will and will not accept. If it’s a glass load of China, they’re going to have different UCC terms versus if it’s just anvils. So yeah, if you know, and your clients know the terms to use and how to put them on their invoices and all their shipping clerks are, you know, our buyers understand what they want to say and do, then there’s no problem. And if you have the right, some people call it boiler plate, I just call it terms and conditions. You’re good. Now, if you have boiler plate, when you’re selling to customers, that’s a different thing.

Neil
Speaking of customers, Dan, What type of things are important in an agreement between a company and their customers?

Dan
That’s scary. selling products to the general public in California is scary. Yes, it is because it’s truth in advertising. So you normally have these terms and conditions and they become law. If you have anything that is mislabeled or said incorrectly, there are lots of law firms out there reading vitamin bottles, reading lotion bottles, and having things tested and then filing a class action on behalf of all the consumers in the state of California or wherever sometimes in federal court. And you end up in a big lawsuit because you didn’t describe, well, we do. We defend those kind of cases all the time. We have strategies for that. But I would say first things first, get your labels looked at, make sure you’re, you’re not saying anything inaccurate and keep an eye on what’s going on in the trade.  If someone in your trade had been sued by some or more law firms, yours is probably being looked at, jump on it, come call your lawyer. Have it looked at, see if you can fix it.

Neil
So in your experience are most sales contracts straightforward or are they each tailored to that specific company and what they’re doing?

Dan
Merchant to merchant, custom selling to the general public, you have to follow all the different laws and regulations of what’s going on. We did a consumer class action a long time ago involving the cellular phone companies in the nineties. And it just spiraled out of control. I mean, it was just technicality, lots of law firms involved very difficult and it can happen to any business. And now that I’m on the defense side all the time, I’m always worried for my clients to going to make sure they’re not subjecting themselves to risk. And if they do, I want them to call us right away so we can take action that will save them in, in liability and attorney’s fees and everything.

Neil
And just because they hear the words, class action, they might get a letter or notice from a law firm. There are strategies we can deploy, which will break up a class action or prevent it from ever becoming a class action in the first place. Right?

Dan
The sooner we act, as soon as they get that the very first notice or anything letter, not lawsuit, that’s when we want to take action, have a strategy session, look at the facts and try to head that off at the pass. Don’t let it go forward. And if it does go forward, we want to be ready to stop class certification.

Neil
Yep. So if they see the words, class action, you want them to read “call Dan?”

Dan
well or call any good business defense lawyer.

Neil
Yes. So one of our favorite topics my friend, is how hard it is to be an employer here in the state of California. So the contracts between a business and its employees have got to be a nightmare to stay on top of and to enforce. How do you advise our clients in that realm?

Dan
Of all the contracts we deal with that’s the one type of contract that we have to take continuing education classes on. The thing is this: the law changes all the time. We have a lot of small business clients. We have large clients who have their own HR people. We have HR administrators here trained to advise our clients to act as sort of outside HR council. All the attorneys here are well educated in employment law. There’s so many notices that you have to have up at work. So much training you have to have, depending on how many employees you have to do certain things education every year.

And that requirement seems to change every year with new laws. So yeah, that’s the hardest thing to do our agreements, our employment agreements have to make sure they do not violate any of their rights under the law. In fact, having them there, we also have a lot of employment manuals we do, right? The place them on notice. We do a lot of those every year that just basically make everybody know. We all understand the law. We’re all going to comply with it. And we’ve all been placed on notice because a lot of these lawsuits are based on, I never was told this or my pay stub, didn’t say that, or you didn’t give me my time off or you didn’t let me do this, document it. If you have a question and you don’t have your own HR person, you can come to ours.

Neil
Can a well crafted contract, prevent employer related disputes like discrimination, retaliation, or even wage in hour issues?

Dan
Well, technically it would be illegal to have such a contract, but on the flip side, have an agreement that states all the things the company’s going to do to comply with the law and has been doing to comply with the law can be turned into evidence that you comply with the law. So if you know, one of these cases are going to be coming your way and they are they’re coming your way. All of the laws to help employees are crafted to turn plaintiff’s lawyers into bounty hunters that go after employers. So any employee that comes into one of these guys’ companies or gals companies is going to be seen as I believe everything you say, let’s follow a lawsuit and get some money from that company. So yes, you need to have these things done ahead of time. Because when the facts are presented, you’re going to look like a company that follows all the technical laws and rules

Neil
because you did.

Dan
Yes. Well, here’s an example. Most people don’t know this, but if you are accused of discrimination, sexual harassment, and it’s found that you didn’t do that, but that when you were notified about it, you didn’t do the proper investigation. You didn’t discriminate, you didn’t sexual harass, but you messed up on the investigation. You’re liable for all the attorney’s fees because you didn’t follow the technical rules in the code section, the government code section that seems unfair, but it’s a bounty. They want employers to know this law and to comply with it or else be held liable.

Neil
And that’s part of our responsibility to our clients as their business coach and advisor and lawyer is to guide them through these laws.

Dan
Yes, actually some of these rules help me defend these cases, help me give clients amazing results because saying that we’re going to do an investigation, gives us an opportunity to gather evidence. We get to get to the evidence before anyone else. That’s our statutory requirement. I take that very seriously. I want to talk to all the witnesses before anyone else does. And if I’m your lawyer, you want me to talk to all the witnesses before the plaintiffs lawyer does, you want us to get in there and talk to them. Because we’ve been talking to them for 35 years and we know how to ask the right questions and we know how to get to the bottom of things. We know what will be important in trial and we’ll go out and we’ll get that information. Make an honest, fair determination of whether there was or was not discrimination, resolve the matter. Stop the harassment if there was any, but also gather evidence to help our clients. If the other side wants to play hardball and protect their interests.

Neil
Well, we’re an advocate.

Dan
That’s what I say about agreements. You want an agreement drafted by an advocate, a fighter for you. And then, you know, as a trial attorney, you want someone who’s going to fight for you. Same as your agreements, an employment law. When we go in to represent you, we represent you.

Neil
Dan, a contract conversation, wouldn’t be complete without discussing the issues of distribution and licensing. So if I want to grow my business into a new vertical market or geographic market, would you share a little about licensing or distribution agreements versus franchise agreements?

Dan
There are so many terms, dealer, distributor, licensee, franchise, joint venture joint venture, member of a limited liability company, limited liability partnerships. All these can involve products or services and some can have territories. Some can have geographic locations. In fact, this makes it more enforceable, if you have a well defined location in your agreement.

Dan
So we draft all those types of agreements. They all have different kinds of laws. Even if you want to, for example, a SAMP, if you want to sell a SAMP, which is a seller assisted marketing plan that applies to a vending machine route, right? That’s a whole set of laws for that too. We draft so many different types of agreements that have different types of laws and regulations and we buy and sell them too. Because they become valuable. You get several locations in a franchise or dealership or licensing for certain products, services, technology. You you’ve got it made.

Neil
While we don’t practice franchise law. We do handle licensing and distribution agreements.

Dan
Well we don’t prepare franchise agreements because franchise agreements are prepared by law firms in house. Usually that just do franchise law all day long. You want to go find a specialty? We would do it, but we’d be charging more than the market.

Neil
And that wouldn’t be fair to our client, right?

Dan
If there’s a dispute about your franchises, getting ripped off, we’ go to court for you. It’s just, you don’t want us drafting your, uh, your franchise. For example, we don’t draft CC&Rs and real estate development, right? We farm those out to one of several companies in town that that’s all they really do is draft and create these long form boiler plate. If you might call them CC&R forms that are cheap for them to do and you save money.

Neil
So to sum it all up, the quality of the contract, Dan is going to have a lot of impact on the quality of the outcome.

Dan
100%! You enter into business and your business contracts to make money. That’s it. So if you only want to make a little bit of money, go spend 50 bucks on an internet contract but if you think you’re going to do a lot of money over the years, go in and meet one of the wrinkled faith gray-haired lawyers at the Watkins firm and have them tell you about stories of success. Three, four decades old and counting based on all the what ifs and things they think are important to watch out for and consider putting in your contract, get something custom based on your vision. That will be there in case you’re successful. No one’s going to fight you if you fail, but if you’re successful and you spent a little bit of money getting a custom foundation in the form of a contract built, you’ll be happier, sleep better, and you’ll have a good business.

Neil
Thank You

Dan
Thank You

Dan
Learn more about the Watkins Firm at watkinsfirm.com or call our office at (858) 535-1511.