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Thursday, January 7, 2016

Five Things Contractors Should Know About the Notice & Opportunity to Repair Act

Five Things Every Contractor Should Know About the Notice & Opportunity to Repair Act (NORA)

By: John Avondet, Esquire

This publication is intended to notify readers of developments in the law. It should not be construed as legal advice or opinion on any facts or circumstances, nor should it be construed as insurance brokering advice on any facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you may have.

The Idaho legislature enacted the Notice & Opportunity to Repair Act (NORA)* in 2003. NORA had the full blessing of the Idaho Building Contractors Association and IBCA specifically recommended the law as a way to reduce the number of lawsuits filed against contractors. Though it is unclear whether NORA has accomplished this goal of reducing lawsuits filed against contractors, every construction defect lawsuit involving a home involves NORA. The following are five things every contractor should know about NORA and how it might affect legal rights.

1.     Residences only, please.

NORA exclusively applies to construction defects in the construction of residences. NORA defines residence as a “single-family house, duplex, triplex, quadraplex, condominium or unit in a multiunit residential structure in which title to each individual unit is transferred to the owner under a cooperative system.” This does not only mean new construction but also applies to substantial remodels of existing residences. The Idaho Supreme Court** has ruled that NORA does not apply to construction defects in a detached shop built on the same property as the residence. So, NORA may affect only some of your rights and obligations in a given project where more than one building was built on the premises. The quick test for NORA’s application is if people can live there, then it’s probably a residence and NORA applies.

2.     Don’t expect details.

NORA only requires a homeowner to provide notice of a construction defect in “reasonable detail sufficient to determine the general nature of the defect” and nothing more. The statute does not define reasonable detail but the courts have construed NORA’s language as not requiring excessive particularity. The Idaho Supreme Court explained that most homeowners won’t know the technical nature of the defects. As long as the homeowner gives some description of the general nature and location of the defect, then the homeowner has provided notice under the law. NORA only applies to claims of defects in construction. It does not apply to allegations that a contractor failed to perform under a construction contract.

3.     Timing matters.

Once a homeowner has provided notice to the contractor of the nature and location of the defect, the clock is ticking for the contractor. The homeowner cannot file a lawsuit until at least twenty-one (21) days after serving the contractor with notice of the defect. If the contractor does not respond within twenty-one days, then the homeowner may file a lawsuit on the twenty-second day. So, even if things are busy and chaotic, which often happens in the construction industry, respond to the homeowner if only to buy more time to evaluate options or negotiate a resolution.

4.     Write it down.

Any response to a homeowner should be in writing. Oral responses to notices are not enough. NORA requires a written response to the initial claim. The contractor’s written response should address one of three things: (1) propose an inspection of the property and state a deadline to complete the inspection; (2) offer to compromise and settle the claim without inspection; or, (3) dispute the claim and state that the contractor does not want to inspect and will not compromise the claim. Any other response constitutes a failure to meet NORA’s requirements and will entitle the homeowner to proceed with filing a lawsuit irrespective of any additional provisions found in NORA.

5.     It’s about the money.

There’s a daily cost to doing business and litigation will affect a contractor’s ability make a living. NORA specifically outlines the damages a homeowner may recover in a lawsuit. The law allows for a homeowner to recover reasonable and necessary attorney’s fees. This is not reciprocal for the contractor. Unless there is a contractual provision or other applicable statute providing for the recovery of attorney’s fees between the contractor and the homeowner, the contractor will be unable to recover its attorney fees against the homeowner. This is a powerful arrow in the homeowner’s quiver that should not be underestimated by the contractor when weighing options about whether the compromise, inspect, or refuse to remedy any claimed defects.

 If you’ve received a letter from a dissatisfied customer claiming construction defects, do not hesitate to contact an attorney for consultation. As noted, timing matters once you’ve received a notice from a homeowner claiming a construction defect. 

*NORA is found in the Idaho Code at §§ 6-2501 through 2504.

**As of the time of writing this article, the only Idaho Supreme Court case interpreting NORA is Mendenhall v. Aldous, 146 Idaho 434 (2008).

John Avondet at 5:08 PM No Comments | Post a Comment
Construction, Business Law
Monday, August 11, 2014

Business Defamation: Keep it to yourself

Sometimes I catch my 12 year-old daughter intensely muttering things to herself.  This typically occurs after my wife or I have committed some perceived wrong, thereby wrecking her pre-teen life.  When asked what she is saying she always says, “nothing.”  My daughter wisely knows that the things she is saying to herself will get her in trouble if spoken to her loving parents.

Things we say out loud can get us all in trouble.  Defamation is what is known in the legal world as a tort.  In order to prove defamation a plaintiff must show that (1) information was communicated concerning the plaintiff to others; (2) the information was defamatory or untrue; and (3) that the plaintiff was damaged because of the communication.  Defamation done in writing is called libel and spoken defamation is called slander.

For example, let’s say Rich Rancher cuts Fred Farmer off in traffic.  Upset at Rich, Fred Farmer tells Craig Coffee that Rich Rancher uses illegal performance enhancing drugs to beef up his beef.  As a result Rich Rancher loses his cattle contract with a major grocery chain.  Rich Rancher can sue Fred Farmer for defamation.

This example also constitutes what could be considered defamation per se.  Defamation per se removes the element of having to show specific harm or damages.  Defamation per se exists if someone spreads false information that a person or business has engaged in: 1) criminal conduct; 2) immoral acts (such as adultery), or 3) dishonest activity as a business person.

Fred Farmer has implicated Rich Rancher in a criminal offense (illegal performance enhancing drugs) and improper business dealings (using the drugs to beef up beef).  Rich Rancher just needs to prove that Fred Farmer made the statement to Craig Coffee and that the statement is not true and he can be awarded significant damages for defamation regardless of whether he can show actual damages.  Fred Farmer may have a valid defense that his statement was true, but he will be required to prove that Rich Rancher was using illegal performance enhancing drugs to beef up his beef.  The process of proving the truth of the statement can be a lengthy and expensive ordeal.

Often times, those involved in business disputes want to proclaim to others about the actions of a partner in business.  To do so runs a high risk due to the fact that these types of statements often either implicate the partner in a crime or attribute the partner with improper business dealings.  For example, saying, “my partner is a thief,” if false, is defamation per se.  Proving the falsity or truthfulness of such a statement can be a costly legal battle.  By saying those words to others, a business person involved in a dispute is giving leverage to the other side and could end up getting less out of the dispute as a result.

The best advice is to follow the example of my 12-year-old and keep it to yourself.  The appearance of schizophrenia notwithstanding, sometimes talking to yourself beats speaking your mind. 

Jeffrey D. Brunson at 8:35 AM 2 Comments | Post a Comment
Business Law, Litigation
Monday, February 24, 2014

The Business of the BBB

Jeffrey D. Brunson

Lawyers get things done.  A truism apparently learned by my 10-year-old son.  During a recent recess at school he used such knowledge in his negotiations with a local mom who was volunteering her time.  The bell had rung and it was time to go back to class.  My son decided he needed more time on the playground.  The local mom volunteer, who happens to be a family friend, gently told him he needed to go back to class.  Additional words were exchanged and ultimately my son proclaimed, “My dad is a lawyer, I can convince you!”  His genetic link to legal prowess notwithstanding, instead of more time on the playground he got a whole lot of laughter and a quick trip back to class.

While lawyers may get things done, hiring a lawyer may not be the best way to handle all disputes and issues that arise in life and in your business.  One such avenue that is not typically discussed by lawyers is the Better Business Bureau (BBB).  In the interest of full disclosure, the author is on the board of the Snake River region of the BBB. 

The BBB is a non-profit organization whose mission is “to be the leader in advancing marketplace trust.”  Its vision is to have “an ethical marketplace where buyers and sellers can trust each other.”  It accomplishes its mission by:

  • Creating a community of trustworthy businesses;
  • Setting standards for marketplace trust;
  • Encouraging and supporting best practices;
  • Celebrating marketplace role models; and
  • Denouncing substandard marketplace behavior.

While the BBB is probably not the best avenue for major legal disputes between businesses, it is a very effective way to deal with more minor business disputes.  Going through the BBB complaint process can arm a business with information and prepare it for small claims court should the need arise.  The complaint process contributes to a business’s BBB rating.  Most companies take their BBB rating seriously, which validates the complaint process and promotes the BBB mission of having an ethical marketplace. 

Responsible businesses want to know about customer complaints so they can address them and make any necessary changes.  The entire design of the BBB is to allow that to happen.  A business can become accredited by the BBB and receive additional benefits including dispute resolution services.

Businesses should give the BBB a chance to help.  The website is a good place to start:  www.snake-river.bbb.org.  Convinced yet?  You should be, I am a lawyer after all and we get things done – just ask my son.

Jeffrey D. Brunson at 9:26 AM No Comments | Post a Comment
Business Law, Litigation
Monday, November 11, 2013

The Appeal of Zeal

Jeffrey D. Brunson

Letterman or Leno?  That was the assignment handed out in my freshman year college English course.  I was to debate which late-night talk show host was better against another student. We walked to the front of the class and exchanged oratorical parries and deflections.  At the end of the carnage, my opponent said something to the effect of, “Hey man it’s not World War III; we’re just talking about late-night talk show hosts here.”   As my 12-year-old daughter says about everything, “Awkward!”   In my mind, I was passionately and zealously advancing my position.  To my fellow student I was creating uncomfortable conflict in regards to an issue that was just not that important and I should give it a rest.

This may come as a shock to some, but lawyers have ethical rules that govern their behavior.  In the preamble to the ethical rules it provides, “As advocate, a lawyer zealously asserts the client’s position under the rules of the adversary system.”  (I.R.P.C. Preamble [2].)  A lawyer has an ethical duty to fight passionately for his or her client’s position.  Too often there is a stigma attached to a lawyer who is passionately representing his or her client.  A lawyer’s primary focus should not be to make opposing counsel happy and comfortable, but instead to put his or her client in the best position possible.

Frequently, lawyers use their passion not for advancing their client’s position, but rather for forcing their client to settle the case.  While settlement may be a good result in some instances, the desire to settle should not dominate a lawyer’s efforts in handling a case.     

In a system designed to deal with conflict, conflict is going to happen.  Combatants in the legal arena should be equipped to deal with this conflict and not allow perceived discomfort to prevent them from zealously advancing the cause.   Even judges at times can seem uncomfortable with passionate representation.  A lawyer must be ready and willing to step into these situations.  In fact, a good lawyer should be causing these “awkward” situations. 

The lawyer one sees at church on Sunday should not be the lawyer one sees in the courtroom.  I am not suggesting that a lawyer should be running around the courtroom screaming “Did you order the Code Red?!” but rather that a lawyer should be passionately fighting on his or her client’s behalf.  At times the comment, “he cares a little too much about that issue” is used to characterize someone who is overly excited about a subject.  A good lawyer should “care a little too much” about his or her client’s case.

Zealous representation is not only okay; it should be desired and applauded.  A lawyer who seems checked out, distracted, or disengaged is not a lawyer worth hiring.  On the other hand, a lawyer who treats your matter like it is World War III is one worth having on your team.  A zealous advocate may not be able to solve all of your problems, but, at a minimum, should at least be able to convince you of the incontrovertible truth that what was true in my freshman English course is still true today – Letterman is better than Leno.

Jeffrey D. Brunson at 9:49 AM 1 Comments | Post a Comment
Tuesday, July 9, 2013

No Glossing Over Indemnification Provisions

When was the last time you seriously reviewed an indemnification provision in a contract? We recently had clients who were leasing a commercial building. Among other language, the lease agreement’s indemnification provision provided that our clients would be responsible for any damage that would occur on the leased property, even if our clients were not responsible for causing the damage. We wrestled with what to do—our clients did not want to be liable for any damage they did not cause. In the end, we were able to negotiate an agreement that our clients would only indemnify the landlord for damages caused by our clients. In addition, we had our clients’ insurance company review and agree to pay out on any claims relating to the indemnification provision.

Unfortunately, not all indemnification negotiations are that easy. Instead, as attorneys, we need to take time to understand the risks, duties, and strategies that are involved in drafting and reviewing indemnification provisions. This article highlights some of those risks, duties, and strategies attorneys need to be aware of when negotiating and drafting an indemnification provision.

Purpose of Indemnification

Indemnification stems from “the concept that a party should be held responsible for his own wrongs, and if another is compelled to pay damages caused by the wrongdoer, that party is entitled to recover from the wrongdoer.”[i] Indemnification is at once both a risk-shifting mechanism and a deterrent to injurious behavior on the part of the indemnifying party that could otherwise harm the indemnified party.[ii]

The obligation to indemnify can arise from an explicit contractual provision or from an implied duty based on the relationship between parties. Numerous types of agreements, including purchase agreements, business entity formation documents, construction agreements, and use agreements, have explicit contractual indemnification provisions. A contractual indemnification provision can be advantageous for both parties. For the indemnifying party, it can spell out and limit the indemnifying party’s potential liability. For the indemnified party, it may be ideal because it can provide for recovery of fees and costs associated with enforcing the indemnification.

As for common law indemnification in Idaho, “[i]t is well established that under the common law, a person who without fault on his part is compelled to pay damages occasioned by the negligence of another is entitled to indemnity.”[iii] However, there are potential problems for both parties in depending on common law indemnification. By relying on common law indemnification, the indemnifying party runs the risk that it might be obligated to provide broad indemnification for a wide range of situations.

Conversely, by relying on common law indemnity, the indemnified party risks the possibility that the indemnifying party may not be financially able to indemnify by the time of indemnification, as well as the possibility that the common law indemnification obligation may not cover all of the situations for which the indemnified party wishes to be covered. This innate uncertainty in common law indemnity for both parties can be resolved through carefully drafting a contractual indemnification provision.

Indemnification Triggers

As a preliminary matter to drafting and agreeing to an indemnification provision, both parties must understand what events will trigger indemnification. Indemnification triggers may include misrepresentation, whether negligent or contractual, such as breach of warranty; breach of contract or damages arising from work performed under a contract; tax related losses; and infringement of intellectual property. Depending on the parties’ specific contractual relationship, both parties will want to carefully consider what events elicit a claim for indemnification.

Drafting Indemnity Clauses

Because of the potential pitfalls associated with indemnity clauses for both parties, careful drafting is crucial to avoid unnecessary problems and conflict. A typical indemnity clause covers numerous topics, including the scope of indemnification, the duty to “hold harmless,” exculpation, defense costs, the duty to defend, procedures, exclusions, and the right of subrogation. With such a vast array of topics to be addressed, clarity in drafting is essential to ensure that both parties have similar understanding of potential indemnification.

Buried within these topics is the inherent conflict of interest between the parties: the indemnified party wants broad coverage for as many potential liabilities as possible, while the indemnifying party wants to limit its obligation to indemnify the other party. The parties’ attorneys can address these competing interests through careful drafting.

Drafting Concerns for the Indemnifying Party

The indemnifying party has particular concern in drafting a narrow indemnification clause to limit its potential future obligation. To address this concern, counsel should carefully define what situations require indemnification, as well as the scope and extent of the party’s obligation to indemnify.

Articulating the scope of its obligation to indemnify is always a major concern.  Indemnification provisions often include language requiring the indemnifying party to “indemnify and hold harmless” the indemnified party.

Some courts may look to this phrase as merely redundant, for “[w]hen a person promises to hold another harmless, he does not promise to prevent harm from occurring. That would be an impossible promise to keep.”[iv] This line of reasoning instead finds that by agreeing to “hold harmless,” the indemnifying party “promise[s] in the traditional and accepted parlance of the commercial world … to make things right if harm [does] occur,”[v] or essentially, indemnification.

However, other courts, including the Idaho Supreme Court, have looked at indemnification provisions with “hold harmless” language as indicating the indemnifying party is also obligated to indemnify for loss caused by its negligence: “[T]he indemnification provision contains the ‘hold harmless’ language which, although not talismanic, is nonetheless indicative of a specific intent to encompass indemnification for the indemnitee’s negligence.”[vi] Carefully consider inclusion of “hold harmless” language in an indemnification provision to safeguard against additional and unwanted future obligations.

Another related concern is to determine exactly what expenses the indemnifying party must cover. A contractual indemnification provision provides for the indemnifying party to compensate the indemnified party for “loss.” Consequently, an indemnifying party interested in limiting its potential exposure should define exactly what constitutes a loss under the agreement. Always draft the obligation to limit losses to general damages while excluding punitive and consequential damages under the indemnification provision.

Next, establish whether the indemnification provision provides for indemnification of first-party and third-party claims. A first-party indemnification claim is a claim by the indemnified party for a loss suffered directly. A third-party indemnification claim is a claim by the indemnified party for a loss resulting from a claim by a third party. If both first-party and third-party indemnification scenarios are to be addressed, do so in separate clauses of the indemnification provision. By failing to separate these claims, an indemnifying party could unintentionally expand its obligation to indemnify against third-party claims.

Address how the indemnified party is to provide notice of an indemnification claim. The provision should define at what point the time period for providing notice begins to run, whether it begins when the triggering event occurs or when the indemnified party discovers the triggering event. Include the deadline for notice of an indemnification claim, whether it is immediately following knowledge of the triggering event, with reasonable promptness after discovering the triggering event, or within some other defined timeframe. Also limit the length of time when an indemnified party can formally bring a claim for indemnification. Make sure the time period is not longer than any applicable statutes of limitations.

Finally, check with the indemnifying party’s insurance provider to make sure its potential obligations to indemnify are covered under its commercial general liability policy. Broad blanket coverage for indemnification obligations is often available under these policies, but may result in higher premiums. However, for the indemnifying party, higher premiums may be worth the peace of mind in knowing it has coverage for potential indemnification obligations.

Drafting Concerns for the Indemnified Party

Given the nature and underlying conflict of their positions, an indemnified party has different objectives and concerns regarding indemnification than those of the indemnifying party. It looks to shift risk to the indemnifying party, and therefore wants an all-inclusive indemnification obligation. Because of this inherent conflict, many of the concerns facing the indemnifying party are also of concern to the indemnified party, but framed differently—while the indemnifying party will wish to limit its obligation, the indemnified party will seek to increase its coverage.

While the indemnified party may not feel the same impetus to narrowly draft terms defining the scope and range of indemnification, it should take special care in drafting an indemnification provision to avoid unfavorable strict judicial construction. In Idaho, courts strictly construe indemnification provisions against the indemnified party, particularly in cases where it drafted the provision.[vii] This is due to the “hazardous” and “extraordinary” character of the indemnification relationship.[viii] With this warning in mind, an indemnified party must ensure that in its desire for broad indemnification, the provision is still drafted in a way that provides precise direction to any future courts interpreting the provision.

During the drafting process, define the indemnifying party’s duty to defend the indemnified party against third-party claims to address the indemnified party’s potential vulnerabilities in turning over its defense to the indemnifying party. The indemnified party must decide if it wants the indemnifying party to be the sole defender of any third-party claims against it, or if the defense approach will be collaborative. Also articulate at what point in the litigation the indemnified party will take over its own defense.

This is an especially important consideration because of the very real possibilities of the indemnifying party lacking the finances to conduct a strong defense, a breakdown in cooperation between the parties regarding handling of the defense, and unsatisfactory counsel hired by the indemnifying party. The indemnified party may determine that it will take over its defense against third-party claims if there is a “reasonable possibility” or “reasonable basis” that any of the above concerns impede the indemnifying party’s defense.

Finally, address the indemnifying party’s ability to bind the indemnified party to a settlement agreement. Because of the parties’ conflicting interests, the indemnified party will want to limit the indemnifying party’s ability to agree to a settlement without the indemnified party’s consent. Include language prohibiting the indemnifying party from entering into a settlement agreement unless the indemnified party is fully indemnified for all losses, the indemnified party receives an unconditional release for all related claims, the indemnified party does not admit wrongdoing, and there are no material effects for the indemnified party beyond the relief granted by the settlement agreement. By inserting this or similar language into a duty to defend clause, the indemnified party can protect itself from otherwise being bound to an undesirable settlement agreement.

Special Indemnification Considerations

Beyond the individual concerns of the parties, additional considerations face both parties to an indemnification agreement. One important issue is drafting reciprocity indemnification clauses. The parties may wish to include language in which each agrees to indemnify the other. For basic reciprocal indemnification provisions, one paragraph may be sufficient to address the mutual indemnification obligations. If, however, the triggering events requiring indemnification are markedly different for each party, the better approach is to draft two separate clauses, one in which the first party is the indemnifying party and the other in which the second party is the indemnifying party. Breaking a reciprocal indemnification provision into two separate clauses permits the parties to be more specific as to what triggers each party’s indemnification obligation.

Another special consideration is how to handle indemnification for known loss. This concern can arise in real estate transactions when land contaminants are discovered as the parties are drafting the sales agreement.[ix] If the parties wish to proceed with the sale, they may choose to address the indemnifying party’s obligation by adjusting the purchase price to reflect the estimated cost in cleaning up contamination. Another approach is for the indemnifying party to agree to cover any additional cleanup costs beyond an initial agreed-upon amount. Finally, the parties may agree to require the indemnifying party to purchase insurance to cover any contamination costs. Regardless of which approach is taken, both parties will want to incorporate the drafting tips discussed above to ensure their competing interests are protected.

Conclusion

Because of underlying competing interests, indemnification can be a potential minefield for both parties to an indemnification agreement. Address possible questions regarding the scope of the indemnification provision while drafting, rather than when future conflicts arise. By carefully drafting a clear-cut and precise indemnification provision, counsel for both parties can ensure the parties are better protected against the uncertainties inherent in indemnification.

Jarin O. Hammer joined Beard St. Clair Gaffney Thomson PA in 1997.  His practice focuses on business, tax, and real estate.  Jarin received his juris doctorate from the University of Idaho and his LL.M. in taxation from the University of Florida. He advises business owners on a wide array of legal issues including the formation of entities, taxation of business transactions, contract negotiations, land use and planning issues, and mergers and acquisitions.

Lindsay M. Lofgran recently joined Beard St. Clair Gaffney Thomson PA as an associate attorney. Her practice focuses primarily on litigation and education law. Lindsay attended BYU Law School where she appeared multiple times on the Dean's List and served as both an executive editor for the BYU Journal of Public Law and a submissions editor for the BYU Education and Law Journal.


[i] Chenery v. Agri-Lines Corp., 115 Idaho 281, 284, 766 P.2d 751, 754 (1988).

[ii] Throughout this article, the terms “indemnifying party” and “indemnified party” will be used to represent the indemnitor and indemnitee, respectively.

[iii] Beitzel v. City of Coeur d’Alene, 121 Idaho 709, 717, 827 P.2d 1160, 1168 (1992) (quoting Industrial Indem. Co. v. Columbia Basin Steel & Iron Inc., 93 Idaho 719, 723, 471 P.2d 574, 578 (1970)). See also Williams v. Johnson, 92 Idaho 292, 294, 442 P.2d 178, 180 (1968).

[iv] Majkowski v. Am. Imaging Mgmt. Servs., LLC, 913 A.2d 572, 591 (Del. Ch. 2006).

[v] Id.

[vi] Bonner County v. Panhandle Rodeo Ass’n., Inc., 101 Idaho 772, 775, 620 P.2d 1102, 1105 (1980) (citing United States v. Seckinger, 397 U.S. 203, 213 (1970)).

[vii] R.W. Beck v. Job Line Constr., Inc., 122 Idaho 92, 96, 831 P.2d 560, 564 (Ct. App. 1992) (internal citations omitted).

[viii] See Perry v. Payne, 66 A. 553, 557 (Pa. 1907).

[ix] See Jones v. Sun Carriers, Inc., 856 F.2d 1090 (8th Cir. 1988).

Jarin O. Hammer at 4:47 PM No Comments | Post a Comment
Business Law
Wednesday, May 22, 2013

Selling your business? Read this first!

Sooner or later, every business owner will ultimately confront the question, "Should I sell my business?" Deciding to sell your business is often a difficult decision because of the profound emotional, personal, and financial impact. You invested a great deal of your time, energy, and resources to make it what it is today.  However, succession is inevitable.  Deciding to sell is a decision that must be thought through and carefully planned.  There are many reasons business owners find themselves wanting or needing to sell…

- Retirement
- Relocation
- Dispute between partners
- Diminished interest in the business
- Illness or death
- Exposure to business risks
- Divorce
- Desire to pursue other business interests
- Lack of sufficient working capital
- A need within the company for new skills or new philosophy
- Stagnant sales and earnings

You must assess your reasons carefully and decide if selling will enable you and the company to reach future goals and objectives.  Once you have made the decision to sell your business, consider the following questions:

Who will I sell my business to? There are several options to consider.  Do you want to sell to your employees?  To a competitor?  To a larger business?  Do you want to turn the business over to your children?  Should you move on or retain a role in the business’s future? The answers to these questions may impact the long-term success of your business.

What is my business worth? Typically, a buyer is purchasing a future stream of income. If a business does not generate income the purchase price may be minimal.  In determining the value of a business you will need to gather financial information. This may include income statements, balance sheets, records of accounts receivable and payable, etc. You will want to strongly consider getting a business appraisal to determine the potential value of your business. Keep in mind, the value of your business is what a buyer is willing to pay for it.

What payment terms am I willing to accept? How the purchase price is paid may be driven by your financial needs and lifestyle.  In most cases you should insist the buyer pay the full purchase price when you transfer ownership of your business. However, if a buyer is unable to get financing from a bank or other lender for the full purchase price, you may have to finance some amount of the purchase price yourself. This means the buyer would sign a promissory note with you as the lender. You will want to be sure you have adequate security and guarantees from the buyer to protect yourself.

Are there tax savings depending on how the sale is structured? Yes. In most cases parties structure a sale as an asset sale (assets are exchanged for money) or stock sale (stock is exchanged for money). Both have advantages and disadvantages that need to be considered.

What is due diligence? It is the buyer’s opportunity to evaluate the business. Every business has skeletons.  The issue is how big those skeletons are.  As a seller you will want to be upfront about these skeletons.  If not properly disclosed, a buyer may ask for a reduction in the purchase price later on.

What documents are involved in the sale of a business? In most cases, the parties will sign the following documents: Nondisclosure Agreement, Letter of Intent (not needed in all cases), Purchase Agreement with exhibits and schedules, and Non-compete Agreement. There may be additional documents depending on the transaction.

Should I involve legal counsel?  Involving legal counsel can be very beneficial to the entire process.  An experienced business attorney can help you negotiate the purchase price, structure the sale and draft agreements, and aid in the closing. One of the biggest mistakes we see is a seller entering into an agreement that negatively impacts the seller. This includes too low a purchase price, broad warranties, and inadequate protection on default.

Jarin O. Hammer at 6:42 PM No Comments | Post a Comment
Business Law
Wednesday, May 22, 2013

How to Hold Effective Annual Meetings

 

A common and potentially costly mistake made by local business owners is not holding annual meetings.  Annual meetings allow organizations to better protect themselves from liability and position themselves strategically among their competitors.  Failing to hold annual meetings and following other corporate formalities might result in the loss of corporate/limited liability status, leaving owners and shareholders personally responsible for corporate debts, and potential loss of corporate tax benefits.  Here are a few pointers and reminders as you plan this year’s annual meeting.

Your annual meeting agenda should include the following items…

Review past year – Review financial statements, capital acquisitions, education and training, major transactions, and compensation.

Survey coming year – Plan for capital acquisitions, set goals for revenue enhancement, decide on organizational changes, and analyze new fringe benefits.

Tax planning – Plan to achieve a 10 to 15% profit to build equity and consider year-end expenses, year-end bonuses, pension plans, and fringe benefits.

Distributions planning – Plan strategy for incentive compensations, capital retention, S corp dividends, C corp distributions, and loans to shareholders.

Compensation planning – Adopt reasonable compensation and bonus programs.

Legal planning – Establish and implement policies that are designed to avoid liability and protect intellectual property.

And remember, annual meetings should …

- Be held a month prior to or after fiscal year end
- Have an agenda
- Be documentd with minutes
- Be conducted by the president
- Include legal counsel

Winston V. Beard at 6:26 PM No Comments | Post a Comment
Business Law
Saturday, January 26, 2013

Protecting your trade

Tecmo Super Bowl is the best video game of all time.  Admittedly, I do not consider myself a “gamer” or an otherwise great connoisseur of electronic games and gadgets.  It was released in 1991 and was the first football video game to use complete NFL players and NFL teams simultaneously.   It was the perfect Christmas gift for my football obsessed nine-year-old son.  Unlike the video games of today, which require mastery of sophisticated controllers with myriad buttons and triggers, Tecmo Bowl’s scaled down features and limited options make it incredibly easy to play. My son had no problem picking up the slightly used original NES controller and winning football games.  That is, of course, until he played me. 

These battles often end in tears and destruction of property, subjecting my nine-year-old to discipline from the commissioner (mom – who does not always share my enthusiasm for the greatest game of all time and its effect on my son).  Although the game is simple to play (which is part of its charm) there are certain trade secrets I acquired from having honed my skills in my youth.  These methods are valuable to me in keeping the upper hand with my son.

In Idaho a trade secret is defined as, “information, including a formula, pattern, compilation, program, computer program, device, method, technique, or process that:  (a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure and use; and (b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  Idaho Code § 48-801(5).  Translating the legalese, a trade secret is any valuable information or knowledge that someone makes efforts to keep secret.

The information you want to protect could be a recipe, a customer list, a business plan, or a method of doing business.  Many employers spend extensive time, energy, and resources perfecting the information and end up giving it away for free when employees go elsewhere.  An employer may be under the mistaken belief that because the process is simple it is not protectable.  Anybody can play Tecmo Super Bowl.  However, playing Tecmo Super Bowl at a championship level requires certain methods.  The value comes from how these methods are employed and not the physical act of employing them. 

Take a business that has repeat customers, for example.  Over time the business learns the customer’s buying preferences and practices.  Anybody can locate the customer, but not anybody knows exactly what the customer wants, when the customer wants it, how the customer wants it, or what would make the customer more likely to want it.  This is protectable information.  However, no matter how valuable this information is, if the business owner is doing nothing to protect it, it is not a trade secret.  Nothing prevents an employee from learning the information and then using it to his or her advantage to leave and compete.  If I tell my son all of my methods, it will not be long before he is trouncing me due to his younger reflexes, smaller hands, and better vision.

Consultation with a good business attorney will allow a business owner to protect his or her valuable information.  This may be accomplished with a combination of various agreements between the business and its employees and consultation on what efforts the business owner should make to adequately protect the information.  A business owner’s failure to protect his or her business information may result in “game over” for the business.  Unlike the virtual world, failure in real life has much longer lasting negative effects, and unfortunately, these negative effects cannot be overcome by merely hitting the reset button.

Jeff Brunson is an attorney and shareholder at Beard St. Clair Gaffney PA.  The opinions contained are his own and nothing written should be construed as legal advice.  Jeff's practice involves litigation, business disputes, and estate disputes.  He can be reached at his Rexburg office, 520 First American Circle, (208) 359-5883, jeff@beardstclair.com or follow him on Twitter @jeffbrunson.

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Business Law
Saturday, September 17, 2011

Signing your freedom away

“Just sign here,” my 9-year-old daughter said to her two younger siblings.  Her younger brother and sister did not think twice before signing.  My 9 year-old was quite pleased with the deal she struck.  She now had exclusive access to the optimally located desk while her younger brother and sister were relegated to sharing the older table in the corner across the room.  Two lessons can be learned from this example:  (1) I need to stop taking my work home with me; and (2) read and consider before signing.  While my wife might have something to say about the former, it is the latter I wish to focus on here.

One area in which reading and considering is paramount is non-compete agreements.  Non-compete agreements are designed to protect employers from the competitive efforts of their former employees.  Are non-compete agreements enforceable?  I will resist the urge to give the standard lawyer answer of “it depends”(although that is technically the correct answer as it is religiously taught in law schools across America that if someone asks any question about anything the answer is “it depends”).  Based on an Idaho law passed in 2008, a non-compete agreement is likely enforceable if:

  • It is limited to 18 months after separation;
  • It is limited to the geographic area where services were provided;
  • It is limited to the type of work provided by the employer; and
  • It seeks to protect customers or other business interests of the employer.

On the front-end of a relationship most employees attach little significance to signing a non-compete agreement.  Take Larry and Bob, for example.  Larry owns a lemonade stand.  Larry hires Bob fresh out of business school to sell lemonade.  The lemonade costs 25 cents a cup and Bob gets 3 cents for every cup he sells.  Larry presents Bob with a non-compete agreement which was expertly drafted by his attorney, Tommy Tort.   Bob signs the non-compete agreement without reading it.  For the next few years, Bob sells lots of lemonade.    Bob knows he could make much more than 3 cents a cup on his own and announces to Larry that he is leaving to start his own lemonade stand.  Larry pulls out the agreement and tells Bob that if he sets up shop in the community he will sue him.  Bob is stuck because he does not want to uproot his family and leave the community.  If Bob wants to challenge the agreement he will need to pay a lawyer to do so.  While non-compete litigation is common, it can be avoided.

The best time to deal with a non-compete agreement is before you sign it.  Employers can protect their interests by drafting a non-compete agreement that follows the law. By signing a non-compete an employee is giving up some freedom.  It may be worth it to sign the non-compete – the point is you should understand what you are signing.  You should not allow the joy and confidence that come from having marketable skills cause you to sign something you will regret later.  Otherwise, you may end up stuck in the corner sharing a table with the freedom of your own desk staring you right in the face from across the room.

Jeff Brunson is an attorney and shareholder at Beard St. Clair Gaffney PA.  Jeff is a trial lawyer who specializes in business disputes and estate litigation.  He can be reached at his Rexburg office (208) 359-5883 or jeff@beardstclair.com

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Saturday, March 3, 2012

Using a business lawyer without gagging

Barf.  My eight your old daughter hates everything about it.  The smell, the sound, and the consistency cause her great discomfort.  Just the thought of it causes her to tremble and brings tears to her eyes.  Many feel the same way about lawyers as my daughter feels about barf.  While I have never had anyone dry heave at the mere sight of me, I certainly have detected feelings of great discomfort in my interactions with people.  Despite their discomfort with lawyers, businesses should use lawyers. 

One time during a pickup basketball game a gentleman with a military crew cut left a lasting impact on me.  His respect for the fundamentals of basketball was impressive.  He was an effective communicator on the court, a floor general even.  When he would set a screen he would scream (not yell – scream), “USE ME!”  As a participant I did not feel like I had any choice but to try and “use him” by utilizing the precision-like screen that had been set for my benefit.  I shudder to think what might have happened had I failed to do so.  While falling short of an outright demand for use, this article contains the top four benefits of using a business lawyer regularly (as formulated by the smartest business lawyer I have met – Winston Beard).

4.  Participation in board meetings.  The best way for businesses to regularly consult with lawyers is to have the business lawyer participate in regular planning or board meetings.  Sound advice is obtained before strategies are formulated or decisions are made.  A good business lawyer will not interfere with the business but should alert the business person to potential problems or opportunities.  Some law firms offer affordable programs to allow this type of participation in a cost effective manner.    Involving a lawyer as part of the planning process makes it less likely that a business will be mired in litigation down the road. 

3.  A business lawyer has an understanding of Idaho’s complex LLC law.   The LLC is the most complex of all business organizations, and Idaho adopted a completely new LLC law in the summer of 2008.  It is easy to file a certificate of organization for an LLC, but the simplicity of merely forming the business with the secretary of state belies a complex set of tax regulations and legal rules.

2.  A business lawyer offers advice based on profitability and strategy.  A business person can get legal advice from many different sources.  However, businesses should avoid relying on improper sources for their legal advice.  It is February and my Christmas tree is still decorated and standing in my living room.  It is currently functioning as a night light.  While there may be some benefit gained from this use, its true purpose has come and gone.  Similarly, when businesses rely on accountants and trade associations for legal advice, they could gain some benefit, but these advisers may not focus on, or even be aware of, the right legal issues.

 

1. Simple and concise business documents.  A good legal document should be concise, readable, and understandable by the business person for whom it is written.  Good business documents are straight-forward, eliminating the possibility of misunderstanding down the road.  It is common for a business person to draft his or her own business documents, to copy one from another business, or, even worse, to download legal documents from the internet.  Often these documents contain arcane legalese and ambiguities, and they may even be based on another state’s laws.  These deficiencies invite disputes and costly litigation.  If handshake deals are a litigator’s dream, ambiguous legal documents pay for a litigator’s vacation home.

 

If you are a business person who feels the same way about lawyers as my daughter does about barf, the reality is you need to find a way to deal with it.  So, put on a pair of rubber gloves, keep your hand sanitizer on your person at all times, strap on your surgical mask, and contact a business lawyer.  Maybe – just maybe – it will not be as bad as you think.

Jeff Brunson is an attorney and shareholder at Beard St. Clair Gaffney PA.  The opinions contained are his own and nothing written should be construed as legal advice.  Jeff's practice involves litigation, business disputes, and estate disputes.  He can be reached at his Rexburg office, 520 First American Circle, (208) 359-5883, jeff@beardstclair.com or follow him on Twitter @jeffbrunson.

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Business Law