Archive for category Liability
Article 9 of the Iowa UCC (Iowa Code Section 554.9101 et seq.) governs the purchase and sale of goods and related secured interests. This blog will deal with protecting a business during an initial transaction. My next blog will deal with placing the public on notice of a security interest.
Bill’s Bakery Supplies is an equipment wholesaler.
Joe Smith is CEO (and sole employee) of Smith’s Confectionary Inc.
Smith purchases equipment from Bill’s. If Smith cannot pay, how can Bill’s recoup the unpaid balance?
Often, security agreements arise where an item is sold on account (six months same as cash) or a loan is received for the purchase of an item (bank loan for a car), and the purchaser is allowed to pay off the balance over a period of time. A seller may want to retain certain rights to the goods until paid in full.
Smith pays 10 percent of the total price, signs the purchase agreement, and takes the equipment. Bill’s Bakery Supplies may be entitled to full payment on the account, but has it retained a security interest in the goods?
Likely no. In Iowa, an agreement to sell goods alone is not enough for a security interest to attach to the goods. Iowa Code Section 554.9203 provides that for a valid security agreement there must be:
(1) value given;
(2) a right in the collateral that the debtor can transfer to the secured party; and
(3) a signed security agreement with a description of the collateral or the collateral in possession of the secured party.
This means Bill’s no longer has an interest in the goods sold and, essentially, has an unsecured open account.
If your business wishes to keep a secured interest after sale, create an agreement that:
(1) specifies that a security interest is held by the seller;
(2) is signed by the purchaser; and
(3) includes a detailed description of the goods (e.g. serial number, make, and model).
 (Author’s Note: The UCC refers to a security agreement in this situation as a Purchase Money Security Interest, where the entity which gave the funds to the person to procure the good/s has a security interest in the goods as collateral.)
A license grants someone (licensee) permission via contract to engage in an activity or to use property owned by the person granting the license (licensor). These prolific interactions are part of daily transactions. Obtaining a hotel room for a night is a license. Franchise agreements involve a license. The computer on which I am typing this has software licenses from Microsoft, Apple, Intel, and HP.
My iTunes license agreement is 4,289 words long.
For personal use, license agreements are often reasonable. What about when you click through for business? Sometimes not. There may be specific provisions stating you cannot use certain programs, images or words for business. The license agreements may reserve a fair amount of control for the licensor. Additionally, various other terms are working their way into license agreements. (See my prior two posts: nondisclosure agreements and indemnity agreements).
The licensor will request the licensee not share business secrets obtained through the license agreement and will also ask the licensee to indemnify, or hold harmless, the licensor in the event of injury or damage from the licensed item.
What does this mean? If you post a Microsoft Word document on your website, are you violating your Microsoft License Agreement? What if your link allows the user to access Word through your server?
Step 1: Read that long long long boring license agreement.
Step 2: Decide if you are engaging in any activities that may extend beyond the term of the license (e.g. making copies of a program for other business computers or using the source code for your own custom program or simply using images for which you have no license. Yes, they will sue you even if you are a “little” business.
Step 3: Ask yourself whether your business property, such as your website, would benefit from a license agreement, which should not be 7,000 words long.
Is the license for exclusive use of the licensee or is it non-exclusive – can it be used by multiple people at once? What is the term of the license? Can you charging a fee or a royalty for use?
If your business owns a patent, trademark or has a business model that works, a license is one way that you may be able to protect your asset. Or perhaps earn money from that asset. It is a wise, and sometimes mandated, decision to work closely with a licensee to be sure that your business property is not used in a manner that is inconsistent with your business.
Getting sued for violating an agreement is not fun. The best way to avoid that lawsuit is to read the agreement before clicking “I agree”. Reading the agreement may give you ideas about which of your products you wish to protect and how you will create that protection.
Waivers are everywhere: the back of concert tickets, Web sites, sales agreements. As a business consumer, you may wish to make sure
that you are willing to give up the stated rights. As a business owner, ask:
- From what are your protecting yourself?
- Is this a real danger?
- What is your goal?
- Do you run a PR risk by warning your clients that your product “may cause death” (especially if you sell coffee tables)?
This post addresses personal injury waivers: the kind you sign at batting cages and skating rinks.
My next post will address the types of waivers that are part of sales agreements and are found within websites for products..
The post that follows that will address Indemnification Agreements.
First, the easiest way to avoid lawsuits and judgments for personal injury is to be prudent in taking care of your business. Common sense safety is more cost effective than waivers.
- Encourage employee common sense through a wellness program.
- Talk with your insurer about risk analysis and risk reduction.
The Iowa Supreme Court addresses waivers in a number of cases:
Personal injury waivers must “be specific enough to identify all possible causes of injury so that a reasonable person is on notice.” A waiver that simply agrees that one party is not responsible for any injuries is not specific enough to waive all claims related to acts by that party1.
A waiver must be “voluntary“, ”intentional” and “knowing”. The waiver must intentionally relinquishment a known right.”2 The court uses the standard of a reasonable person to determine whether a party had notice of the provisions in question and may be bound by terms within a contract/agreement.3
The parties must be clearly identified to be considered released parties.4
Once the release is clear in its intent, parties may be bound. Even if you (or your client) does not read the release, a party who is able to read and has the opportunity to do so must suffer the consequences of failing to do so.5
The more dangerous your business, the more likely you can set out the risk and put them in the hands of a person who assumes the risk. For example,“Hang gliding is associated with injuries and death.” If you run a shoe-shine stand, it is more difficult to set out the risks and pass them on to a client. (Then again, hopefully the shoe-shine isn’t dangerous.) From a client perspective, you may have clients who wonder why they must sign a waiver that states that “death is a possible consequence” of their shoe shine. If you are leading rock-climbing expedition, the client likely expects a waiver.
A well drafted waiver will:
- specifically set out the parties involved,
- address the type of danger,
- specifically waive the damages, if any,
- show that the waiver is voluntary, and
- provide clear language.
We will see how the Iowa Supreme Court handles the inevitable case about “throw in the kitchen sink waivers” written in three-point font. For amusement or consideration, the waiver below from an actual ticket. I used a magnifying glass to read it. Apparently a kids’ concert needed the following waiver:
“warning! Despite enhanced spectator shielding measures, pucks still may fly into the spectator area, serious injury can occur, stay alert at all times including during warm up and after play stops. If struck, immediately ask usher for directions to medical station. Holder voluntarily assumes all risks and danger incidental to the event for which the ticket is issue, whether occurring prior to, during or after the event, including, but not limited to, danger of being injured by thrown, batted, kicked, shot, struck, etc. objects such as balls bats hockey sticks pucks racquets and other objects or equipment or by other spectators or players or by entering a mosh pit. Holder voluntarily agrees that the management, facility, league, participants, participating clubs, Ticketmaster, and all of their respective agents, officers, directors, owners, and employees are expressly released by holder from any claims arising from such causes”
- Christine Branstad
1. Sweeney v. City of Bettendorf, 762 N.W.2d 873, (Iowa 2009)
2. Benton v. Slater, 605 N.W.2d 3, (Iowa, 2000)
3. Joseph L. Wilmotte & Co. v. Rosenman Bros. 258 N.W.2d 317, (Iowa 1977)
4. Huber v. Hovey, 501 N.W.2d 53, (Iowa 1993) (plaintiff injured by fireworks misfiring into pit area of race track); Grabill v. Adams County Fair and Racing Association, 666 N.W.2d 592,( Iowa 2003) (plaintiff injured by detached wheel of race car flung into pit area of race track).
5. Forrester v. Aspen Athletic Clubs LLC, 766 N.W.2d 648, (Iowa App. 2009).
My posts deal with avoiding litigation. My last post addressed the benefit of putting business dealings in writing. Once you put something in writing, the next logical determination is how long to save that document.
Prior to going Enron on your corporate records, take a look at the IRS’s Starting a Business and Keeping Records. The Record-keeping section addresses records for taxes. To address concern about potential lawsuits, work with your attorney to design a record retention plan. Be sure the plan covers paper records and electronic data. Once you have a record retention (and destruction) plan, integrate that plan into your business processes.
What if you don’t follow the plan?
Under Iowa law [Iowa Civil Jury Instructions contain a model instruction] if a jury concludes you intentionally destroyed or failed to produce evidence, it can assume that evidence would have been unfavorable to you. The jury may see the missing evidence as the :”smoking gun.” A saved receipt may nail your case down; a prematurely destroyed receipt may become a nail in the coffin. Well kept records may be more productive than winning lawsuits; they may convince opposing parties not to sue you in the first place.
How do you devise and regularly apply a sound plan to avoid problems?
In Iowa, most oral contracts have a five-year statute of limitations [section 614.1] to enforce a contract (or to be sued for a breach). Depending on your business, you may wish to retain supporting documents for five years after the contract ends.
In Iowa, most written contracts have a 10-year statute of limitations [section 614.1]. Does your record retention plan keep the contract for 10 years after performance of the contract ends? How long do you keep record of payments made or received? Should you keep emails about the contract?
Under Iowa law, as a designer, manufacturer, distributor or seller of a product, can you be sued 10 or 20 years after production and multiple re-sales if the product causes damage? What are the time limits or Statutes of Repose [614.1(2A)] for such claims? What if your product is a Web-based application? How long must you keep the records of product testing? Of use? Was your product sold with warnings or safety devices, or for a Web-based application, was a warning included with installation or initialization? Do you have records that show your product was altered?
Although the questions are complex, setting consistent policy will make later involvement in litigation less likely or, at least, less painful.
Record retention is important. Failure can subject you to legal presumptions that could end your business. Find out the factors that affect your particular business. Implement a record retention and destruction policy. Put it in writing. Stick to it.
Or wait until you have a problem. Then come see me.