5 Ways to Protect Yourself from a Supplier Breach of Contract

My periodic review of State of Michigan court cases continues with an important case Renco Electronics, Inc. v. UUSI, LLC (dba Nartron), dealing with how to respond when a supplier breaches a contract.

Nartron contracted with Renco for Renco to manufacture specialized products; Nartron sold to OEMs.  The contract required Nartron to pay for all products no matter what stage of production they were in.

When Nartron’s OEM contract was pulled, it immediately terminated its contract with Renco, and refused to pay for the work in process.

Renco sued, and Nartron defended its non-payment by asserting Renco used non-conforming components in the product it manufactured.

Resolution of the case required a detailed analysis of the facts and should be a warning to all companies who have any type of ongoing relationships with suppliers.

  • First, this case was under the Michigan Uniform Commercial Code because it was an order for products.  The UCC has special rules that govern the sale of products (and generally doesn’t apply to the sale of services).
  • Secondly, the court recognized that some of the products did contain non-conforming products, BUT, Nartron did not provide proper notice of non-conformity to Renco.  In fact, the court said Nartron’s continued acceptance of the supposed non-conforming goods deprived Renco of the opportunity to fix any claimed defect.  The court stated Nartron could have expected the goods to be precise, but once it accepted them and did not assert a claim that the products were poorly made, it had effectively modified the contract “through a course of dealing.”  It should be noted that Nartron had prior notice of the non-conforming goods and even had made notations in its records that they would continue to accept the products manufactured by Renco.
  • Third, because Nartron failed to give proper notice to Renco, it couldn’t defend its non-payment based on this claim.  By failing to raise their claim for improperly manufactured products, Nartron had effectively waived the objection.  As importantly, Nartron could not even show that the value of the non-conforming goods had substantially impaired Renco’s products.

Here are 5 things you can take away from this case:

  1. Every company must have a contract administrator who continuously monitors contracts and the performance of its vendors.
  2. If there is any specific non-conformity by the vendor, this issue has to be raised immediately to either have it corrected or for the company to preserve its rights to claim a breach of a contract.
  3. The manufacturing side of the business must have a point person to deal with the contract administrator so the administrator knows when the vendor has violated the contract.
  4. Avoid, if possible, paying for work-in-progress. Your obligations should only be for finished goods.
  5. Whenever you think there might be a breach (and even if you are not sure) get your legal advisor involved so you take all the actions you need to in order to preserve your rights.

If you have any questions about your contracts give me a call at 248-455-6500 or email me at agoldberg@ajglaw.com

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What You Need to Know about Changes to the MI Department of Licensing and Regulatory Affairs

 

Winds of change have swept through the Corporations Division of the Michigan Department of Licensing and Regulatory Affairs (LARA).

Starting on October 30, 2017 LARA launched the Corporations Online Filing System (COFS).  The former MICH-ELF filing system is no longer available.

How Does this Affect You?

When you formed your business the State of Michigan gave your business an ID number.

This is the number you used for business filings with the State of Michigan i.e. file your Annual Statements, renew Assumed Names, Change Registered Agents, etc.

That number is no longer active

Please note: this has nothing to do with your taxpayer ID number for the Michigan Department of Treasury or IRS.  Different number.

By now the registered agent for your business should have received a letter from the State of Michigan with a new ID number along with a username and password for the new COFS.

If your registered agent did not receive this letter they should contact the Corporations Division by email at CorpPIN@michigan.gov.

You should update the staff that handles your business filings of the new filing requirements.

Of course, if our office is the Registered Agent then we will let you know of your companies new ID number for your records and handle any necessary filings.

As a result of the new system all of the old LARA webpages no longer work.  Below is a list of the new webpages you will need to use.

Please be sure to update your favorites/bookmarks with the following URLs:

  • Corporations Online Filing System – www.michigan.gov/corpfileonline
  • Business Entity Search – www.michigan.gov/corpentitysearch
  • Rejected Filings Search – www.michigan.gov/corprejectedsearch
  • Mark & Insignia Search – www.michigan.gov/marksearch
  • Historic Card File Search – www.michigan.gov/corpcardsearch
  • Certificate Verification Search – www.michigan.gov/corpverifycertificate
  • Order Request Form – www.michigan.gov/corporderform

There will no doubt be some bumps along with way but hopefully this system will make things easier and faster for filing with the State.

If you or your staff have any questions regarding these changes please contact me at 248-455-6500 or email me at agoldberg@ajglaw.com.

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Lawyer or Sounding Board? Sometimes You Need Both

The client had second thoughts.

He was in the middle of selling his business. Nondisclosure agreements were signed, due diligence was conducted, and her had obtained consents from the vendors and landlords.

Then I received an urgent call from the client, “I need to sit down and talk to you right away.” Twenty minutes later we were sitting in a coffee shop discussing his second thoughts about the sale.

After listening to his concerns, I asked these simple questions:

  • Are the facts and circumstances which led to your desire to sell the business over the summer, still present today?
  • If somebody new came to you today, would you still be interested in selling the business?
  • Once you sell the business, what are you going to do?
  • And finally, are you financially able to enter into this sale?

After each of these questions we had lengthy conversations, where I asked more follow-up questions. By the end of our meeting my client felt 100% sure of his next step. He had Confidence and Clarity. Clarity on what he was going to do next and confidence that he was going to be able to accomplish his goals.

Ultimately, the client decided not to sell.

For me, this conversation reinforced what I have come to learn over the last 25 years of practicing law: the role of a lawyer involves much more than simply providing technical legal advice or drafting great documents. 

Rather, the real value is in the conversation with the clients; helping them think about their issues in unique ways, spurring them to consider alternative ideas, and providing them with a road map and a structure to accomplishing their goals.

The role of a lawyer involves much more than simply providing technical legal advice or drafting great documents.

Sometimes a client needs a lawyer.  Sometimes they just need a sounding board.  And sometimes they need both.  Either way, my goal is to help give you, the client, Confidence and Clarity.

Is there some way that I can help provide you with confidence and clarity?   Call me at 248-455-6500 and or email me agoldberg@ajglaw.com.

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Are You Useful to Your Customer?

Numerous books, articles, speeches, blog posts have been written over the last few years about why content marketing is required as part of any company’s marketing and sales strategy.

Youtility: Why Smart Marketing Is about Help Not Hype by Jay Baer, does an excellent job explaining why content marketing is the best approach to reaching your audience. Importantly, it also shows examples of great content marketing strategies that have been implemented by successful brands and start-ups.

Baer’s foundation for content marketing is stated at the outset:

  • First, top-of-mind awareness is less effective than ever because (a) you can’t promote to consumers you can’t find and (b) consumers fundamentally mistrust businesses.
  • Secondly, the only way to truly differentiate yourself is by being useful to your customer. Have Youtility for your customer; not your business. Trying to be an amazing business by being funny, interesting, human, or another quality, is like swinging for a home run at every at bat: you may get the occasional home run, but you will also strike out a lot.

Recent studies show consumers are digesting more information than ever before making a decision.

They need at least 6 data inputs before making the simple decision on where to buy a chicken sandwich, and will contact a business only after independently completing 60% of the purchasing decision.

What does this mean to you? It means you have to provide information consumers need to make decisions. The essence of Youtility.

Youtility also overcomes another problem. Because information can be found anywhere, everywhere, and at any time, your product or service is in danger of becoming commoditized. Frankly, everything you know, have learned, and think about your product can likely be found on the internet. Therefore, the more helpful you are to your clients in helping them make decisions, the less commoditized your product becomes.

Interestingly, Baer proclaims that Youtility is never finished. You have to be in it for the long haul because customers’ needs change, technology shifts and evolves, and new ideas are conceived. To counter at the speed of the market, Youtility is the only choice. To try and develop different advertising campaigns, marketing campaigns etc. often simply takes too much time and is too expensive an investment; by the time it’s put into the marketplace, consumer expectations have shifted.

For those businesses contemplating a content marketing campaign, this book gives a lot of great examples of how companies have successfully done it.  For those companies debating whether to even get into this area, this is likewise a great book as it puts forth that rationale as well.

If you have any questions about this book feel free to contact me at 248-455-6500 or agoldberg@ajglaw.com.

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Shareholder Advances: Debt or Equity?

The tax court recently gave another reminder of the importance of properly documenting shareholder loans, and making sure that they reflect economic reality.  If they don’t, any attempt to deduct these loans as bad debts will be disallowed, causing financial and tax heartache for the lender-shareholder.

In Sensenig, TC Memo 2017-1, the court relied on three factors to determine that Sensenig’s loans to corporations were not debt, but equity. These factors included: (1) the form of the instrument; (2) the economic reality of the transaction as it relates to investor risk; and (3) the intent of the parties.

First, the form of the instrument, is a matter that I constantly focus on. In this case, there was no formal loan agreement nor were there any formal demands for repayment of the debt. Further, in many court cases, the court will state that even if there is a formal note, if there has not been interest or repayment of any principal within five years, it will automatically be considered equity and not a loan.

This critical factor is one reason why all corporate minutes should ratify and confirm loans between shareholders and their companies, as well as have a proper debt instrument in place. 

All corporate minutes should ratify and confirm loans between shareholders and their companies

The second fact, reality, is also important. In this case, no reasonable person would have loaned money to this high-risk borrower. A person would have only advanced funds if he took equity, because the risk of nonpayment was too high (and equity would give a higher rate of return).

The last factor, intent, is examined by evaluating the subjective thoughts of the parties. For the purposes of this discussion, I am going to ignore this part.

Even beyond these factors, the most glaring failure of the taxpayer in this case was that even after he had declared some loans as bad debts, he continued to lend money to the powers. This falls in the category of “dumb.” Even without the first three factors, when you continue to loan money to a borrower, you expect to get repaid; so how could you claim that prior loans were not going to get repaid?

The takeaway: If you are going to loan money to any company (including your own), make sure:

(1) it’s properly documented;

(2) the parties actually intend for the monies to be a loan and not equity; and

(3) other unrelated third parties would make similar loans on the same terms as you.

(4) don’t continue to loan money if you haven’t been repaid prior loans.

If you have any questions about documenting your shareholder loans or other matters regarding your business give me a call at 248-455-6500 or email me agoldberg@ajglaw.com

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The Truth About Why I “broke up” with Twitter

That’s it… I’m stopping cold turkey.

No more Twitter.

I’ve been trying to be more active on social media, reach out to my clients in new and unique ways (at least for me), but Twitter is just one tool that I’ve given up on.  Yes, I announced with great fanfare not too long ago that I was everywhere on Social Media, but I think you’ll understand why I’m no longer on Twitter. Continue reading “The Truth About Why I “broke up” with Twitter”

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Three Lease Issues That Can Kill a Business Deal

When my client decided to sell her business, she thought most of the issues would revolve around agreeing on the ultimate purchase price, and minimizing any claims the Buyer could make against her after the sale.  However, it turned out, lease issues posed the biggest problems. Continue reading “Three Lease Issues That Can Kill a Business Deal”

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Book Review of The Power of Habit: Why We Do What We Do in Life and Business

One of the most talked about books over the past year is the New York Times bestseller, The Power of Habit: Why We Do What We Do in Life and Business by Charles Duhigg.

I read this book because I was interested in utilizing habits to reduce the numerous decisions I have to make every day. Every decision I was making reduced my ability to make the next decision. This became quite obvious when I arrived home one night and my lovely wife asked me some very basic questions. I simply replied that I had no energy to answer them right now because I was making too many decisions all day long. The epiphany: the more decisions we make, the more energy we have to use, reducing our ability to make clear and effective decisions later in the day. But, by using habits, we reduce the mental energy we need for simple issues, and reserve our energy for more complex matters.

Duhigg first discusses how habits work, how to create new habits, and why we are able to create new habits. Habits emerge because the brain is constantly looking for ways to save effort. This book discusses how habits emerge and why they are so powerful. They are based on the same three step loop: the cue, the routine, and the reward.

But this book is more than just about changing an individual’s habits, it discusses how to implement key habits within an organization so they’re all working toward the same goal. One of the best ideas that I believe came out of this book was the fact that creating “keystone habits,” in other words, “small wins” have enormous power. Once these small wins occur, it sets in motion forces that favor additional small wins that keep building upon one another. It’s not too different from the law of physics that says “a body in motion, stays in motion, and a body at rest, stays at rest.” Once you start creating small wins, they will naturally build on one another to create greater and greater impact on the organization. In creating these keystone habits, the author discusses case studies taken from various companies showing how the habits created structure in an organization, provided a routine for employees to follow when they weren’t sure what to do, and gave employees a sense of ownership in the progress of the business.

The book discusses not only how habits are created, but also how to change habits. The author declares that to modify habit, you must decide to change it. There has to be a conscience decision to accept the difficulty and hard work of creating new cues, routine, and rewards. Thank you Captain Obvious. I’m looking for something a little more practical; his comments are a little too highbrow and cerebral. 

I’m looking for something a little more practical; his comments are a little too highbrow and cerebral. 

For me to change habits, I need it spelled out clearly and concisely what steps I need to take, andhow to implement these changes. Maybe that just my simple mind at work.

This is an excellent book for understanding the social psychology and science behind habits, but I felt it was lacking in the practical application. However, with the idea of habits now being at the forefront of creating more efficient businesses, and even more efficient workers, there will be no shortage of books on this topic in the future, as well as reading fodder in blogs.

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Do Your Non-Solicitation Agreements Pass Muster?

The recent case Saturn Wireless Consulting, LLC v. Aversa in New Jersey sheds more light on how non-solicitation clauses will be interpreted.

Here’s the story (“CliffsNotes” version): Saturn Wireless hired Aversa. A Confidentiality, Non-Solicitation, and Non-Compete Agreement was signed by Aversa.  Aversa quit and set up a competing shop (outside of the non-compete radius).  Saturn Wireless sued, in part, for breach of the non-solicitation provision of the contract.

In this case, the non-solicitation clause stated an employee was prohibited from solicitation activity or contacting customers “for the purpose of diverting work or business.”

The court gave a divided ruling, some benefiting Aversa and some benefiting Saturn Wireless. Continue reading “Do Your Non-Solicitation Agreements Pass Muster?”

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