Business Agreements in California
If you are a business owner in Los Angeles, you know that business agreements come in many shapes and sizes. There are underlying principles you should keep in mind for each agreement, no matter the type. Below are some considerations to help you ensure your business contracts are valid, enforceable and appropriate for the type of business you are conducting.
Contracts Should Be In Writing
As you may already know, it is best practice to have your agreements in writing. Oral agreements may be enforceable in court, but a detailed agreement in writing is more likely to be enforceable. Enforceability is essential in actions for breach of contract, so having a professionally drafted agreement can help limit your risk.
Negotiating business agreements can be complex and requires careful attention to detail. Negotiations occur in multiple stages. Often, parties will exchange initial offer letters or term sheets prior to settling on the minor details of their agreement. Parties usually agree to high-level terms like price, services rendered, types of goods purchased and timeline. Once the parties agree to the high-level terms, they will draft a “long-form” agreement which outlines every detail of the arrangement. Negotiating contract terms in business may involve corporate formation, business divorce, mergers and acquisitions and buying equity in a company.
The necessary elements of a contract
Mutual Consent, Offer and Acceptance
To form a contract, both parties must enter into an agreement through their own free will. As such, one party may not force or coerce the other party into entering into a contact. Further, a contract must include a specific offer and an acceptance of the offer, which may be achieved by certain conduct indicating acceptance. Lastly, there is an additional implied condition requiring both parties’ respective intent to create a binding agreement.
To form a valid contract, the parties must exchange valuable consideration. Consideration can be money, services, covenants to perform or refrain from performing and other things of value. A contract cannot, however, have consideration that is illegal (for example, drugs or the commission of a crime).
If only one party gives valuable consideration, the arrangement is a gift, not a contract. Since a gift does not create a contract, there is no legal remedy for a party who believes they have entitlement to a gift. For example, if parties agree to exchange an apple for one dollar, they have exchanged valuable consideration because each party gave and received value. However, if one party simply offered another an apple to the other in exchange for nothing, the party that should have received an apple has no legal right to the apple because the offer of the apple was a gift.
Each party must be of “sound mind” to understand the elements of the contract, otherwise the court may not enforce it. Individuals commonly deemed unable to competently enter into contracts include minors and those with a mental incapacity, such as individuals under the influence of drugs or alcohol.
Contracts That Must Be In Writing
As previously noted, when possible, all contracts should be in writing. However, certain types of contracts must be in writing. In California, these contracts include contracts for the sale of transfer of an interest in land, home improvement projects that cost over $500 in combined labor and materials, prenuptials and contracts that cannot be performed within one year of their making. Depending on the jurisdiction, the following types of contracts may also need to be in writing: sales of goods valued at $500 or more; contracts of an executor or administrator to answer for a decedent’s debt; and contracts to guarantee the debt or duty of another (such as a cosigner).
Necessary Components of an “In Writing” Contract
The “statute of frauds” ensures that certain contracts, like those with more than a year-long term or for real property, must be in writing to be enforceable. To satisfy the statute of frauds, a written contract must contain: an identification of the exchanged consideration; the parties’ identities; the terms and conditions of the contract; and the parties’ signatures.
When there is a dispute about the terms of a contract (e.g., the parties disagree on the meaning of a certain written term) courts tend to interpret the contract against the drafting party, known as contra proferentem. If you are the contract drafter, you can specifically draft the agreement to specify that the court should assign each side’s interpretation of the contract equal weight.
Types of business agreements
Partnership agreements outline the most important terms of a partnership. Your partnership agreement must reflect the special considerations of your particular arrangement. Negotiating reasonable terms favorable to you is particularly important with regard to the following:
- Decision making. When starting a partnership, it is important to spell out the roles and the responsibilities of the partners. Not only the roles, but the voting power each role has. Some partnerships make decisions by the majority, while others require unanimity. Thus, along with defining the role each partner occupies, a partnership agreement should always specify the amount of authority needed to make decisions.
- Capital Contribution. Another factor to consider is how the partners will split up capital contributions. Capital contributions can be money or labor. Labor contributions are commonly known as “sweat equity.” It is important to specifically outline the details of the capital split between the partners. That way, if there is an issue or the partnership must dissolve, it is easier to understand how much of the partnership’s assets belong to each partner. This is particularly important for partners who solely contribute sweat equity, because in some jurisdictions, courts do not allow the sweat equity partner to receive money for their services upon dissolution.
There are many legal considerations involved when creating a shareholder agreement between the owners of your corporation. A shareholder agreement outlines and defines the distribution and nature of the shares in a company. For example, the agreement will provide definitions of distinct types of shares in a company and whether some shares give the shareholder broader rights (preferred shares) than others (common stock). Preferred shares can grant shareholders more voting power and entitlement to profits or dividends.
Your operating agreement is the most important document between the owners of your limited liability company. California courts defer to, and are very shy to veer from, the terms contained in operating agreements. Operating agreements identify the individuals with pivotal roles within the company (e.g., Chief Executive Officer, President, etc.). Further, they will identify the voting power of the members in the company and decision-making power of the officers. Ultimately, because California courts rely heavily on the operating agreement, it is important to a) ensure your company has a written operating agreement, and b) carefully draft the operating agreement with current and future considerations in mind.
- Bill of Sale. A bill of sale serves two functions. First, the bill of sale transfers ownership of property. The bill of sale also acts as evidence of the contract between the buyer and the seller.
- Purchase Order. A purchase order is different from a bill of sale in that it binds the buyer to purchase a good, or quantity of goods, at a certain price point. Further, the purchase order specifies the payment terms and the delivery date.
- Security Agreement. A security agreement guarantees an asset as collateral to secure credit. If the debtor defaults on the loan, it surrenders the asset to the creditor.
It is important to carefully document the employment terms of company employees. Employers should always specifically define the following aspects of the employment relationship: compensation structure, benefits, duration of employment, grounds for termination, roles and responsibilities. Having specifically defined grounds for termination will help your business avoid suit. Further, you should review local wage and hour laws when defining compensation. It is also important to correctly categorize workers as employees or independent contractors, as California recently updated these categorizations.
Service agreements are common in transactions where one party provides a service to another for monetary compensation. The service agreement usually has two parts: the terms and conditions and the scope of work. The terms and conditions outline the ancillary stipulations of the parties, for example, intellectual property ownership, non-disclosure, non-solicitation, indemnification and choice of law. The statement of work may outline the monetary compensation, the timeline for payment, the type of services provided and the timeframe to render the services.
Non-Disclosure, Non-Solicitation and Non-Competition Agreements
Non-disclosure agreements create liability for parties that disclose information they acquire during the non-disclosure agreement’s term. A non-disclosure agreement may be a standalone document, or it may appear in other agreements. For example, service agreements may have non-disclosure provisions, so the service-providing party does not disclose information they discover about another party while performing the services. Similarly, non-solicitation agreements prevent a party from tampering with the other party’s employees while performing under an agreement.
Non-competition agreements prevent parties from engaging in a certain field of business after they have left a company. Parties include non-competition agreements in employment and partnership agreements to protect the employer or the other partners. Particularly, non-competition agreements protect employers who spend resources training an individual that leaves the company or partnership to engage in the same type of business. However, it is important to note that non-compete agreements are not enforceable in California, even when the California employee is employed by a company located in another state. California employers should not ask their employees to sign non-competition agreements and conversely, California employees should not sign non-competition agreements.
Businesses often require expensive equipment and building space. Leases set terms and conditions for a given piece of property, including monthly payments, maintenance agreements, deposits and term.
Indemnity agreements are in many types of business agreements. These provisions are agreements between the parties (or from one party to another) to hold the other party harmless in case damages occur as a result of one party’s performance (or nonperformance) of the agreement. Indemnity provisions are invaluable because they protect parties from suits which may arise in connection with the agreement. Oftentimes, parties can even agree to indemnify one another for any attorneys’ fees which are associated with the one party enforcing the contract.
If you are looking for legal assistance with your internal or external business agreements in California, or if you would like to speak with an experienced business lawyer, contact a member of our team for next steps.
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