When you enter into a contract (or agreement, same thing really) you cannot possibly foresee all future developments of the relationship that is governed by that contract.  As a result, you may find yourself in a situation where you have to amend an existing contract.

How do you amend a contract?  By entering into a new contract, which provides for the terms of the amendment.  Let’s say you entered into a contract on August 10, 2006, which contract provided in its Section 10:  "This contract terminates on August 1, 2010."  Now you and your contract partner decide that the contract should really go on until August 1, 2012.   You plan on amending the original contract.

The amendment of the provision should be in writing and clearly reference the agreement that is being amended.  The amendment doesn’t have to be very formal, it could be in a simple note or letter, but it should be in writing and signed by all the parties who signed the original agreement.

By way of example, the amendment could look like this:

Amendment

Joe Junior and Daphne Danzig entered into the Service Agreement dated August 10, 2006 and wish to amend the Service Agreement.

Joe Junior and Daphne Danzig hereby amend Section 10 of the Service Agreement by replacing such section in its entirety with the following:

"This Agreement terminates on August 1, 2012."

Other than as amended hereby, the Service Agreement shall remain in full force and effect.

So agreed, this ___ day of August, 2007.

Joe Junior (signature)

Daphne Danzig (signature)

There you have it.  You can do this as many times as you want, so that you may end up with Amendment No. 1, Amendment No. 2 and so forth.  However, if there are many changes to an Agreement at the same time, you may be better off by "amending and restating" the Agreement.  I’ll explain what that means another time.

**This post is for informational purposes only and does not constitute legal advice**

Who knows what fair is, anyway.  But, under certain circumstances, your terms of use cannot be completely unconscionable.

When drafting terms of use for your Website, you are probably inclined to make them as favorable to you as possible, thinking it is a "take it or leave it" proposition.  If visitors don’t like your terms of use, they can take their web surfing elsewhere.

Unfortunately, this approach may cause your terms of use to be unenforceable when brought into court by a disgruntled web site visitor.

As blogged about by E-commerce and TechLaw, Linden Research, the creator of Second Life, had to learn this the hard way in federal court recently.

The terms of use on Second Life provided that anybody who wanted to fight a legal dispute over the use of Second Life had to do it by arbitration and could not take Second Life to court.

Well, someone did take them to court and the federal court decided that the arbitration provision was unenforceable, because it was procedurally and substantively unconscionable ( Bragg v. Linden Research Inc., No. 06-4925 (E.D. Pa. May 30, 2007).

Some of the court’s reasons:

  • There is no second Second Life.  Thus, Second Life had "superior bargaining power" over its users.
  • The arbitration provision was hidden in a long provision with no descriptive heading.
  • The rest of the terms of use were  very one-sided and in favor of Second Life.
  • Second Life could not prove to the court that its one-sided terms of use were necessary for its business.

Thus, resist the urge to be a jerk and put yourself into the shoes of your web site visitors.  Clearly, you want to protect your own, but try to be somewhat fair.

**This post is for informational purposes only and does not constitute legal advice**

I guess it isn’t illegal, unless you think doing something stupid should be illegal.

But I can see how this can happen.  You are presented with the perfect business opportunity and are pressured to enter into a contract.  You know that you should probably wait until your LLC has been formed, but you cannot wait until "FileYourLLC.com"  actually gets around to doing it (you opted for the "basic" LLC formation package which indicated 2-3 weeks processing time).

So you figure, why not sign in the name of the LLC, nobody is going to ask later.  Bad idea.  If you sign for your LLC despite the fact that the LLC has not been formed, you are likely personally liable on whatever obligation you signed for.  You may or may not be able to get the other party to the contract release you once the LLC has been formed.

So, if at all possible, wait until your LLC has been formed by filing the articles of organization with the Department of State.  If you are really in a hurry and are ready to pay extra filing fees for expedited handling, you can form an LLC within 2 hours, so there is really no reason to risk personal liability on any contracts entered into before the LLC came into existence.

**This post is for informational purposes only and does not constitute legal advice**

Learn how a young startup died an early unnecessary death due to a faulty capital structure in "A Fatal Paper Cut."

Great post, but IMHO, bad title.  Had I not found it through Ask The VC, I would have never read the post based on the title.

This comes as a surprise to some people: In New York, unless there is a special law that states otherwise, you can become bound by a contract, even though you have not actually signed it.  As long as you have somehow shown that you agree to the terms of the contract, you can be on the line.

But what if a signature is required, as for example, when executing a personal guarantee?  What is a signature?

The term signature includes any memorandum, mark or  sign, written, printed, stamped,  photographed,  engraved  or  otherwise  placed  upon  any instrument or writing  with  intent  to  execute or authenticate such instrument or writing.  (See New York General Construction Law Section 46).

This now includes electronic signatures, i.e. any electronic sound, symbol, or process, attached to or logically associated with an electronic record and executed or adopted by a person with the intent to sign a record (See New York State Technology Law Section 304).

(Some exceptions apply to electronic signatures, in other words, they can’t replace hand signatures in all cases, see Section 307.)

If this is all too complicated and ambiguous for you, you can say so and state in your contract something along the lines of:

This contract is not binding on the parties unless both parties have signed their handwritten signatures on the signature lines below.

Otherwise, learn how to get your electronic signature in this post.

….keeping control by restricting the transfer of shares.

You, your best friend Jane and Jane’s cousin opened a store and online business selling luxury pet supplies under various brand names.  You run the business through a New York corporation.  Each of you has equal ownership in the corporation.  Everything goes well, your products get mentioned on Oprah and you grow beyond your wildest dreams.   One day,  Jane and her cousin can’t take the every day stress of being entrepreneurs anymore and seek for an out.   They find a buyer for all of their shares and sell their stake in the venture to Betty Buyer.  Now you are in business with Betty Buyer whom you don’t know and don’t want to share ownership of a business with.  What is worse, Betty Buyer now has a majority of the shares in your business and can outvote you on every decision.  Obviously, this could be disastrous for you and your business.

An easy and painless way to prevent this scenario from unfolding is to adopt a shareholders agreement right at the beginning of your business venture.  A shareholders agreement can put limitations on the right of shareholders to transfer their shares.  Without such contractual restrictions, shareholders can just sell their shares to whomever they want. 

However, rather than completely prohibiting any transfer of shares, many owners of a corporation opt to provide for a so called "right of first refusal."

Essentially, a right of first refusal provides that if an owner wants to sell her shares to an outsider, she first has to offer the shares to the corporation and the remaining shareholders.  If the corporation and/or the shareholders do not want to buy the shares, she will be allowed to sell the shares to the outsider.

This simple idea can be customized further.  For example, does the corporation have to buy the shares for the same price that was offered to the shareholder who wants to sell, or is there a predetermined price notwithstanding the offer?  What is the predetermined price or how should it be determined?  Does the corporation have to pay for the shares in one lump sum or over time in installments?

Despite what many lawyers may tell you, a shareholders agreement does not have to be long and complicated, so there is no real reason to avoid getting one in place early on.

When signing for a business entity, such as a corporation or limited liability company, an officer’s signing capacities can get confusing.  Is she signing on behalf of the entity only, or in her personal capacity and on behalf of the entity?

Check the following points:

1.  When only the business entity is supposed to have obligations under the agreement, the signature block should look like this:

ACME INC.

By: _______________
       Name: Jane Smith

       Title:   CEO

2.  When both the entity and the officer are supposed to have obligations under the agreement, insist on two signature blocks and put all provisions that establish the officer’s personal obligations before the signature blocks. Example:

ACME INC.                                                                        

By: _______________                                    
       Name: Jane Smith                                       

       Title:   CEO

JANE SMITH

____________________

 

3.  If you are the officer signing for the entity, carefully read every agreement you sign, despite the fact that you are only signing on behalf of the entity.  Even if there is only one signature block for the entity, you may end up having to defend yourself against personal liability, because there were personal obligations hidden somewhere in the agreement. 

With respect to No. 3 above, it so happened to a CEO of a New York limited liability company (See Integrated Marketing and Promotional Solutions Inc. v. JEC Nutrition LLC, decided December 12, 2006; via the New York Law Journal, subscription required).

The CEO signed a seven page agreement on behalf of the LLC.  The first three pages of the agreement contained the main obligations between the LLC and the other party to the agreement. The fourth page contained the parties’ signatures.  The CEO signed on behalf of the LLC only, i.e. only one signature block.   Three unsigned pages followed the signature page.  Page six of the agreement (unsigned) contained the following language:

The undersigned (that is the CEO) for the client (that is the LLC) personally guarantees the payment of client’s debts.  In the event that agency is unable to secure payment from the client, the undersigned personally guarantees all liabilities, including interest, collection costs and attorney’s fees.

The LLC didn’t pay, so the LLC and the CEO got sued.  Should the CEO be personally liable under the guarantee provision above, despite only one signature, which was clearly on behalf of the entity?

The court wasn’t in a position to decide this issue yet, but it stated the rules:

In order to determine whether the CEO’s signature on the agreement was intended by the CEO to bind the LLC and herself personally, the court must look at five factors:  1. the length of the contract, 2. the location of the provisions that made the CEO personally liable in relation to the signature line, 3. the presence of the CEO’s name in the agreement itself, 4. the nature of the negotiations leading to the contract, and 5. the CEO’s role in the corporation.  In addition, the court stated that although two signatures are not required in order to impose personal liability on the CEO, the existence of only one signature weighs against imposition of personal liability. 

The court applied the factors and found that factor 1, factor 3 and factor 5 weighed against the CEO.   The contract was only 7 pages long, the CEO’s name was mentioned in the agreement, and the CEO had a position of "prominence and control" in the LLC.  Factor 2 weighed in favor of the CEO; the provision that established liability against the CEO was located after the signature block.

Still, it will take further court proceedings and additional convincing evidence to show that the CEO did not intend to be bound by the agreement.

__________________

Related Post:  How to execute a Contract – Good Practice Checklist

In one of my previous posts I mentioned  Cori K-Base, the resource for free contract forms and research sponsored by the University of Missouri.  I just received an e-mail from them informing me that they have made some major improvements:

"First, we have partnered with QL2 Software, Inc., to enhance our ability to acquire and incorporate contracts from EDGAR and other on-line sources. Expect an explosion in the number of documents you will be able to access using our full-text search functionality! The new system will also increase the utility of Company Name searches to include all contract parties, not just the filing company’€™s name.

Second, we have created an opportunity for individual firms or for groups of firms and trade associations to maintain secured, on-line collections and archives for their firm’€™s or association members’ exclusive use. Participating members can search and retrieve contracts exclusively within their private collection or expand their search to include the public collection in order to compare private and public documents. This is an excellent opportunity for smaller companies to create a central, electronic repository of their contract agreements, or for groups of firms and trade associations to add value to their group members by creating a pool of contract resources unique to their group’s members. As an additional value added, CORI can conduct periodic analysis of contract forms and identify trends in new contract designs and prepare white papers reports those results to group members. For more information on how CORI can provide a solution for your organization, please contact us!

These are exciting milestones in the development of the CORI K-Base.  But we need your assistance to keep the K-Base available and to support continued improvements.  Please consider a tax-deductible, year-end donation to support CORI’€™s continued efforts to reduce the transaction costs of contracting and of doing research on contracts. You can even give online through the University of Missouri’s online donation! s site: http://donatetomu.missouri.edu.*  For more ideas on how you can support CORI, see the Support CORI page on our website.

Thank you for your support. We look forward to a new year of working with you to make CORI your first destination when researching contracts."

I think this is a great service.  If you have the money to spent, why not donate some towards the greater good of contract research.

   

I’ve posted on web resources for form contracts before; however, this is supposed to be a comprehensive list.

First the Disclaimers:

There is no assurance that any agreement that was not drafted for you and your individual circumstances is worth more than the paper it was written upon.

An agreement develops through negotiation.  You must be aware of the legal consequences of each and every change to your original form.  There may be major consequences to minor changes.

There is no assurance that any agreement form is of any quality, even if your circumstances exactly mirror the circumstances of the parties it was originally drafted for.  There is a lot of junk in cyberspace.

The law that shapes and governs agreements is mostly state law.  An agreement drafted for a Florida transaction may have different legal consequences for a New York transaction.

The forms you are likely to find on the internet are often taken from public filings with the Securities and Exchange Commission.  This means they have been drafted for rather large companies and may have a lot of "overkill" provisions that are inappropriate, or even harmful, for a small business.

But now, without further ado, my resources for low cost or free form business contracts (in no particular order):

1.   Findlaw

2.   Onecle

3.   Digital Contracts Library of the University of Missouri (free registration required)

4.   Creative Google Searches: do an Advanced Search for "_______ agreement" and, under file format, limit the search to word documents or pdf documents.  This will result in more relevant hits than a plain search.

5.    RealDealDocs (starting at $9.95 per day): I’ve kind of praised this one before, but it seems you can get similar results from the above free resources.

6.   The NVCA Model Venture Capital Financing Documents:  For venture capital transactions only.

As I find more resources, I will add to this list and make you aware of the update.  If you know of another resource, let me know, and I will add it with a "tip of the hat" to you.

If you are interested in my firm’s services relating to business contracts, click here.

 

You may know that non-compete agreements between an employer and an employee are problematic since there is always the real possibility that a court may find that the restrictions put on the employee in the agreement are unreasonable.  There are even websites trying to help employees break their non-competes.  Nonetheless, businesses would like to be protected from an employee leaving the job and competing with them or joining a competitor.  Thanks to a recent case* decided by the New York Court of Appeals, employers can be even more confident than before that a certain type of non-compete agreement will hold up in New York courts.  (For the scholarly article on this see Friday’s New York Law Journal, "Noncompetes With No Reasonableness Hurdles" by Fagie Hartman, subscription required).

The type of non-compete agreement is a so called "Forfeiture for Competition Agreement."  The gist of these agreements is "we’ll pay you a chunk of money and benefits to be vested at a later time, but if you leave your job with us and go to the competition, we’ll pay you nothing."  New York courts have found these agreements to be valid without going into the tedious question whether they are reasonable or not in each individual case, because they figured it was the employee’s choice whether to compete and forfeit the benefits, or take the benefits and refrain from competing.  However, this was only legitimate, if the employee left on his own devices and was not fired.

The  New York Court of Appeals cemented this favorable legal rule for employers by holding that post-employment forfeiture for competition agreements will be enforced without regard to reasonableness.  But the employee in question claimed he was as good as fired, because he was demoted and thus the employer "fired" him from the job that he was doing before and wanted to keep.  He had no choice other than to leave and that is why the non-compete agreement should be invalid.  The court disagreed.  With respect to what constitutes leaving a job voluntarily versus leaving a job involuntarily (i.e. being fired), the court said that an employee only leaves a job involuntarily if the working conditions at the time of his resignation were so intolerable that a reasonable person would have been forced to leave the job.  Whether the employee was asked to do a job that was not comparable to his earlier job responsibilities was irrelevant. 

*Morris v. Schroder Capital Management, 2006 N.Y. Slip. Op. 08638 (N.Y.Nov 21, 2006)