Thursday, December 24, 2009

"Mind" -> The Beauty Of The Courts

One of the first things that come to mind when we think about the law, is the famous scene in Henry the VI by Shakespeare


The first thing we do, let's kill all the lawyers.


Nay, that I mean to do. Is not this a lamentable thing, that of the skin of an innocent lamb should be made parchment? that parchment, being scribbled o'er, should undo a man? Some say the bee stings: but I say, 'tis the bee's wax; for I did but seal once to a thing, and I was never mine own man since.

Now, many legal firms have tried to explain that these two guys were actually bad guys, and thus they wanted to kill the lawyers to allow lawlessness to reign. This is only an explanation that a lawyer could come up with. The context of the famous line is found in the follow on by Cade.

To understand Cade's follow-on, we need to understand the culture. Legal contracts were done on parchment or lamb's skin. And when the contract was done, it was sealed with bee's wax. Cade basically says, "Yes, we need to put these lawyer guys out of commission. After all, what do they do? They kill innocent sheep to take their skin for a contract to undo a man and they seal it with their wax. If you think that a bee does its damage with a bee sting, you are mistaken. The bee does its damage when it's wax is used to sign a contract."

Now, we might think that this is funny, in reality, the problem of the legal system is that we don't teach our children the law. We don't teach legal concepts, and therefore, the common thought is that all law is considered black magic and voodoo. However, the idea of hearing disputes by leaders has a long history in the Bible starting with Moses. Disputes and judgment is as old as the Bible.

Exodus 18

15 Moses answered him, "Because the people come to me to seek God's will. Whenever they have a dispute, it is brought to me, and I decide between the parties and inform them of God's decrees and laws."

Moses' father-in-law replied, "What you are doing is not good. You and these people who come to you will only wear yourselves out. The work is too heavy for you; you cannot handle it alone. Listen now to me and I will give you some advice, and may God be with you. You must be the people's representative before God and bring their disputes to him. Teach them the decrees and laws, and show them the way to live and the duties they are to perform. But select capable men from all the people—men who fear God, trustworthy men who hate dishonest gain—and appoint them as officials over thousands, hundreds, fifties and tens. Have them serve as judges for the people at all times, but have them bring every difficult case to you; the simple cases they can decide themselves. That will make your load lighter, because they will share it with you. If you do this and God so commands, you will be able to stand the strain, and all these people will go home satisfied."

The needs for courts and law go back to the earliest books in the Bible. As long as we are human beings, we are going to have disputes about what is fair.

It is unfortunate that we as Christians need to deal with the courts and legality. It is clear in the New Testament that Paul says that we should not be taking a Christian brother or sister to court. It becomes much questionable when you are dealing with non-Christians. Our family tradition has always believed that if you are in dispute with somebody, you have the right to defend yourself to the full extent of the law.

While I'm not a lawyer, and while I would hate to think that anything that I would say should or could be construed as legal advice, I have worked contracts and I have worked a lot of items with lawyers in the business that I have been in. In a recent dispute with a limousine company, I was amazed at the lack of understanding of common law principles that the owner of this small business was showing. He was making claims that simply would not or could not stand up in court, as I understand the law. In this light, I thought it would be help to understand the basics of contracts.

This blog post is meant to layout some of these issues. Every day you are entering into contracts through the items that you buy and what you say to people.

In this case, the law is actually beautiful. While there are incredibly bad laws on the books, there are many instances where the law is simply brilliant. Lack of understanding of this brilliance will lead to confusion. It will also allow you to be ripped off.

This first thing to understand is "what is a contract?"

A contract is any agreement by two people to a set of terms and conditions. Normally, but not always, these terms and conditions are an exchange of services or property for money. So, the question is "what constitutes a valid contract?"

Basically, it is any time that you have an agreement between two parties. This agreement can be for a second, a day, or an year. Once an agreement is reached, this is considered a contract.

"Well, I wasn't in my right mind," you may say.

This doesn't matter. Unless you can prove by the weight of evidence that there were clearly mitigating circumstances (ie, you were under the influence of drugs or duress), you created a contract. This is why you must be very, very careful when agreeing to anything, and why the current consumer movement is so misleading. When you buy a product from a company, you may think "Oh, I can always take this back." You may have been spoiled by Costcos or Nordstrom. However, these companies are doing something which is not required by law at all.

"Well, I didn't sign my name," you might say. Unfortunately, you do not need to sign your name. All you need to do is to agree. If you are moral, you will not lie, and if you are fighting with an individual that does lie, you may be in a very difficult situation.

The courts recognize that there are two types of contracts: Oral and Written. Oral contracts are very binding. You cannot get out of an oral contract simply because it wasn't written down. If it is written down, the courts immediately start to focus on "what do the words in the contract actually mean?" Thus if you get into a dispute on a written contract, this is where all the focus will go. What did the contract say. It is very, very important as the bulk of the conflict resolution will flow around the verbiage. Beware signing the fine print!

Oral contracts are a much more interesting thing. How do you enforce an oral contract.

Let create an example where you call up a limousine service, and you ask to be picked up at the airport and delivered. You have signed no contracts, and all you have done is said, "I want to get you to agree to pick me up, and you can charge my credit card."

The issue is based around if you have actually come to a resolution on the closure of the oral contract. Most people have heard that "we do business on a shake." This is basically recognizing that there is clearly always two parts to getting a contract done, even if it is oral.

1. Negotiate the terms
2. Agree that the negotiation is done

In the case of the limousine service above, even though you may have said "I want you to pick me up, and you can charge my credit card," you have not had agreement from the other side. It is only once the other side has formally agreed to this, then do we have a formal contract.

Let me give you an example:

Buyer: I will pay you $100 for that car

Seller: I will only take $105

Buyer: Okay, I don't want the car

Seller: Wait, I accept the $100 offer.

In the above case, there was no oral contract made. This is the number one thing that must be considered by the courts (or in small claims court). The only thing that they will ask is "was an oral contract ever in existence?"

I cannot over emphasize how important this is. If you think that you can go into court and say, "well the contract wasn't fair," you will not have a leg to stand on. However, if you go into court and say, "I had no oral contract, as we had never closed on the negotiations and agreed to the deal," as long as you can show that you never had a contract, you obviously cannot be held to this contract. Remember, you have no contract until both parties had reached a moment in time where they agreed.

In oral contracts, making sure that both parties have agreed is really hard. Courts base their laws generally on the body of court cases before the current cases. This idea is called "common law," or it is the idea that the courts judge the current case in light of other common cases of the past. To help prove if somebody really had an agreement, the idea of Estoppel is used.

The estoppel theory says that you can tell that a contract existed by virtual of how the parties acted. There may have been no witnesses to the contract, but if both parties were acting as if the negotiations had been finished, then the courts will assume that an oral contract was done.

For an example, let's say that my neighbor tells me to go to the store an buy a pool filter for his pool and he'll pay me $5 bucks for my effort and reimburse me for the filter. I spend $50 on a filter, and when I shows up at his house, he says, "Hey, man I just found out that I have 6 in a box that I forgot about. I don't need the filter at all."

"You owe me $55," I say.

"Sorry, dude," he says. "It's your word against mine."

So, you go down to the local court house and file a small claims case. When the day arrives, you claim that the neighbor owes you $55. The neighbor claims that he doesn't know what you are talking about.

"Judge dude," he says. "We had some type of a conversation, but I had no idea that he was going to act on this. We never had a formal contract. The contract never existed."

The judge now must decide if you have a claim or not. He asks you if you have any evidence.

"Yes, judge," I state. "Here is the receipts from the pool store showing that I purchased the filter. Here is a picture of his pool that shows that he uses this type of pool filter. Here is a picture of my backyard, showing that I don't have a pool, and I have no use for a pool filter."

Judge will look at this, and he'll say, "Well by estoppel, we are going to assume that a contract existed because the plaintiff acted as if there was a contract."

I remember when I was taking my first business law course many years ago. I remember how surprised I was at this idea. Basically, if one party starts acting as if the oral contract is valid, it makes the contract valid. Generally, this is not well understood by the average person. Acting on a contract makes it valid.

If you think that there is any question that the other party believes that a contract has happened, the first thing that you need to do is make sure that they understand that you believe that no contract has happened. You want to tell this so that they cannot act as if the contract did exist. Registered mail is best, but an email saying "I never agreed to this arrangement." Basically, this should show an attempt to stop the clock. Stopping the clock is incredibly important if an oral contract is determined to exist in the future because it will determine the damages that you owe. Again, this is so important, I will repeat it. You want to stop the clock to mitigate the damages that you may have to pay.

So, let's dig into this a bit deeper. So, in the limousine example above, let's say that you get pulled into small claims court. The problem with oral communications is that it is exceptionally non-clear. The judge has the extremely difficult task of figuring out if a contract existed or not. Before you panic, you need to realize that there are three separate phases of judgment.

1. Determining if there was a contract
2. Determining if the contract was breached
3. Determining the damages if the contract was breached

You may be surprised to find out that many judges will immediately allow to say that there is an oral contract without any good proof. They may use the doctrine of estoppel to grant a contract, and your heart might sink to think that they will immediately say that you breached the contract (or broke it). However, it you have a wise judge, he is going to immediately going to follow it up with the damages.

Let's look at both the limousine case and the pool filter case. In the pool filter case, the judge will turn to me.

"When your neighbor didn't take the pool filter, what did you do?" he asks.

"Well, I took the pool filter back to the store and I got a refund," I answer.

"Well, it looks like you are out of pocket no money for the pool filter, however, you never got your $5 profit, so I rule that the defendant should pay you the $5 that you were promised."

The beauty of a good judge is that he normally is just trying to make things right. He isn't trying to teach a lesson, or make somebody sorry. All he wants to do is put the playing field back into shape. Now, small claims court is a slightly different kettle of fish, and judgments out of small claims court generally don't allow you to claim "specific performance." Specific performance is when a court says "Okay, you must give Tom the shelf that you promised him." Generally, most small courts will only grant monetary damages.

Let's go back to the pool filter. Let's say I didn't take the pool filter back to the store.

"When your neighbor didn't take the pool filter, what did you do?" he asks.

"Well, I took the pool filter back to the store but since it was a unique part, they wouldn't take it back," I answer. In this case, the judge may or may not be able to cut a perfect judgment. Since he can only award monetary damages, he may need to award damages somewhere between $55 to $5. In reality, the judge may award $55 to me, but then tell me, "Now, you have been awarded the $55, but if you do not give the filter to your neighbor, he can come in a counter sue you for damages because you never fulfill the contract."

As another example, let's go back to the oral contract on the limousine. Let's say that that the limousine company says, "alright, my policy is that if somebody cancels their limousine, I get to keep all their money so he owes me $300."

"Wait a minute," says the judge. "Did the defendant agree to these damages?"

"Well, no, but I sent him an email after the fact saying that this was the fee," answers the company spokesperson.

"Well, unless both parties agree to damages in case of breach of contract, there is no preset determination of the damages," the judge will smile.

This is yet one more incredibly important point in oral contracts or in written contracts. If you do not have in the contract the specific remedies, then it is up to the court to decide what the damages will be. When ever I negotiate contracts with other companies, I always look to place in what the damages will be. With almost all of the legal staff that I have, they generally want to leave out the specific damages. Why do they do this? They do this because know that in most cases the judge will grant far less damages than what is the expectation by the company that we are negotiating with.

This is where the law is truly beautiful if applied by a just justice. After all, we will always win some and lose some. The question is what is the damage of losing. This is why earlier, I state that if you believe that the other person believes that there is a contract, you need to quickly tell them that there is no contract, and you plan to dispute the contract.

So, let's go back to the limousine service.

"In my mind," says the judge, "There was no specific damages identified. Tell me mister limousine representative, what is the average profit that you make from one of these calls?"

"I make $50 profit," the spokesperson says.

"Okay, then the amount that you are out of pocket if a contract existed is $50, therefore, the defendant owes you $50 to make you true," says the judge.

This is pretty much the worse case, as long as you are very honest in the court case and act in good faith. Generally, a judge is not looking to hurt anybody but simply make them whole. In the best of all cases, the most that a service provide can hope to recoup is what the profit would have been.

Another example, is if you neighbor decides to have a contractor build a shed on his property for $1000 verbally, and they do this in front of witnesses with a handshake, there is a contract. Before anything is done by the contractor, if the neighbor changes his mind, the contractor can take your neighbor to court. However, he will never be able to get the $1000. Since he has spent nothing, the most that he can hope to get is the profit that would have been generated by the building of the shed. If labor and materials would be $900, the most he could hope to get, without specific damages in the verbal contract, is $100.

Now, mind you. When they shook hands on the shed, if your neighbor stated "and by the way, I'm going to pay you $1000 if I cancel this tomorrow," he would have no recourse. He would have to pay the entire $1000. However, without specific damages, all the courts try to do it make the plaintiff whole.

In reality, when the contract is messy and unclear, the judge may well rule that a contract was breached, but the penalty for breaching the contract is one cent. This has happen many times.

In the case of the limousine, the judge may think to himself, "Well there is something fishy about this. This company claims an oral contract exists, but clearly they were out no money on the deal. The person had canceled clearly in advanced of the pick-up date, and there was no damage done to the limousine company. Therefore, I'm going to have damages of 1 penny."

What is a shame is that we don't teach our children the basics of law. I hope that I can make sure that this error does not happen with my own children.

1 comment:

The Old Geezer said...

interesting blog
God bless you