Legal Question in Business Law in California
We are strategic and creative consultants.
Last year we entered into a contract, which essentially entailed my firm providing a client with services, whereby we would be compensated for our costs, and then share in the business profits once profitable.
We entered into the agreement having been given specific information by the client, and while we understood any business has risks attached, we believed that, based on the data provided and our experience, this risk had reasonable balance.
The data that was provided proved to be wholly inaccurate, in measurable terms this meant that the business in question realized 35% of the customer traffic count than had been stated � to be clear; the traffic count was already in existence therefore this information was at hand and NOT a forecast or new business estimate. We would never have entered into the agreement had we been given the correct data.
Needless to say the business has not been profitable, and while we have invested about $100,000 in fee value, have not seen any income. Meanwhile, the client is using our systems, intellectual property, and advice.
The client is also not adhering to other components of the contract that would make a material difference to our ability in earning fees.
We addressed this with the client, who is in denial, and have presented what we believe to be fair and reasonable settlements and revised terms in order to resolve and move on with the client.
These proposals have been rejected without any counter proposals being provided, (other than to keep working for free).
Our contract clearly states that in the event of a dispute we can opt for mediation, and the mediator�s decision is binding, it also defaults to California Law.
We have issued the client with Notice of Mediation, and while he has initially replied and acknowledged the deadline to respond with his choice of mediator, he has now missed the deadline we set, and has not responded with either a choice of mediator or agreement to mediate.
The questions are as follows:
1. What should we do if the client fails to mediate, even though this is a clear contractual obligation?
2. Given we were [intentionally] misled into this agreement, and suffered losses as a result, what are our rights to recover losses?
3. At what point does this situation move from civil to criminal [if at all], if we can reasonably prove malicious intent or intention to mislead to appropriate services for free?
5 Answers from Attorneys
The key phrase here is "Last year we entered into a contract." Evidently you entered into this $100,000 contract without consulting a lawyer first, or you'd have someone to call. Probably even worse, I'll bet you drafted the contract yourself (or some other non-lawyer did). Whether or not somebody was "misled," or has a "clear contractual obligation," depends on what the contract says. If I had to guess, and I do have to guess because I don't have the contract to read, you probably wrote the contract in such a way that it's unenforceable, and as a result they're laughing at you.
Mr. Stone may be right, but I think he is being overly pessimistic. You probably do have some rights you can enforce against the client, even if you don't have all the rights you think you have.
Since the client refuses to mediate, you should sue him. You probably have causes of action for fraud and breach of contract. As Mr. Stone says, though, the language of your contract may very well affect this analysis.
Mandatory mediation is a strange thing to include in a contract. Mediators don't decide who wins or loses. They just try to help the parties come to an agreement. Many contracts call for mandatory arbitration instead, since arbitrators can impose a decision on the parties. By definition, there is no such thing as binding mediation. If your contract calls for binding mediation, then Mr. Stone is right that it was written very poorly. Without knowing what else it says or omits, I can't be sure what rights or remedies you may have.
You should hire a lawyer to review both the contract and the facts of your case and to give you concrete advice. You should also be prepared to sue the client. Bear in mind that, if the client has no resources, a lawsuit may not be worth the cost.
Your last question is whether the client has committed a crime. He may have committed theft of services, fraud and/or various other crimes. Here again, though, I can't say for sure without reviewing the contract and learning more about the facts.
Feel free to contact me directly if you want to discuss your case in more detail.
The other attorneys are right on point here. Any attorney will say a review of all facts, documents, etc. is required. After that, a personal consultation is needed. This is not a simple bulletin board type question, if fact it involves multiple questions. Consult with an attorney in your area for specifics.
Kevin B. Murphy, B.S., M.B.A., J.D. - Mr. Franchise
Franchise Attorney
Since no one else has been direct, though they have mostly answered your questions in a round about way, let me sum up.
1. As someone mentioned, there is no such thing as binding mediation. In addition, there is a split of authority but the stronger argument is that since mediation can't be binding, there can also never be a binding order to mediate (some courts disagree, YMMV). In any case, you have an unenforceable mediation clause. I am a strong advocate of mediation, so I am disappointed that you have such a cruddy contract, but the bottom line is you can't force mediation in this situation.
2. Your rights are to sue for breach of contract and fraud. If you can prove the facts you allege in your question, you will have to prove what your income would have been had the facts been as promised. That may be tough, but you don't have to prove it to a mathmatical certainty. Once you prove that the fact of damages is not mere speculation, you can let a jury decide the amount, which only has to be reasonably related to the facts of the case.
3. Your chances of getting law enforcement interested in this are about zero.
If you have not resolved this yet, I would like to discuss it with you. You may send me an email at your convenience.
Best,
Daniel Bakondi, Esq.
415-450-0424
The Law Office of Daniel Bakondi, APLC
870 Market Street, Suite 1161
San Francisco CA 94102
http://www.danielbakondi.com
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