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Escrow Agreements

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Escrow agreements are used to safeguard money or property with a neural third party while a transaction is completed. The escrow agent is the neutral party that will hold the property until the transaction is completed or fails and will act according to the terms set forth in the escrow agreement. To be more specific, the escrow agreement will detail the circumstances under which the agent will take and retain the property and whether anything will be done with it while it is stored. The agreement states how the property will be distributed, and finally, the agent’s fees, release from any liability while storing the property, and possibly an indemnification provision for any losses arising out of the storage of the property.

Typically, escrow agents require joint written instructions from the parties, because they agree as to the terms, otherwise a court order may be required, or some sort of neutral dispute resolution procedure. Sometimes, an agent will be permitted to resign if the parties cannot agree to the terms of the escrow agreement. In either case, an agent will be permitted to bring a legal action seeking declaratory relief as to the disposition of any property. Pertaining to the purchase of real estate, the escrow deposit takes place at the simultaneous signing of the contract and escrow agreement, wherein the purchaser deposits the earnest money with the agent until the deal is closed or a certain period of time passes without closing, or the buyer is at fault for the failure to close on the property and the funds are then remitted to the seller. Otherwise, the deal may fail to close through no fault of buyer or seller and the funds or a portion thereof are returned to the buyer. Problems in escrow agreement drafting occur when the terms of the storage, transfer or return of the funds are not made clear to one of the parties, or when certain expenses that the agent expects to have reimbursed, have not been explicitly listed, and the agent is permitted to deduct those expenses from the stored property, and even hold the property as security until the fees are paid.

There are also quasi-criminal escrow services that operate with relative frequency which possess the intent of creating ambiguous escrow agreements and count on the failure of the parties to retain legal counsel to review them. As a result there are various fees tacked on to the agent’s expressly stated fees, which were not expressly disclosed. Sometimes the terms of the agreement permit the agent to sell or otherwise dispose of the held property if it unclaimed for a specified period, or to pay off the fees. In Texas, escrow officers are required to be licensed by the state, prior to which they must be sponsored by another agent, post bond, and undergo a criminal background investigation. The parties should be certain to investigate the license and the commercial status of any escrow company they are planning to deal with, and get the escrow agreement reviewed by a knowledgeable professional.

Starting a Music Publishing Company

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Technically, once a musical composition is created and completed, the composer becomes the publisher and the writer. The artist may choose to split this unified ownership bundle into two by selling the publishing part of the copyright to an established publishing company which will then attempt to exploit the composition by collecting royalties in exchange for licensing the music for recording. The split will vary but may be as high as 50/50 between the composer and publisher of all moneys received by the publisher. And when a separate publisher is retained that publisher will engage the services of two types of organizations to collect performance royalties (BMI, ASCAP, SESAC) and issue mechanical licenses and collect those royalties (Harry Fox). Publishers also use their own contacts in the industry to sell synch licenses, and sell the rights to rerecord their clients’ compositions to other musicians.

A composer may create his own publishing company to engage these companies/services on behalf of the composer and keep far more of the royalties. However, an artist should not consider doing this unless he is certain that he can do a better job at exploiting the compositions than an established publishing company. The artist should have some contacts in the industry if he plans on forming his own publishing company. The steps to take in creating a publishing company are quite simple:

1. You will need to have actual music fully recorded and ready to be released.
2. Join one of the performance rights organizations. (BMI, ASCAP, SESAC)
3. Conduct a name check with that company. They will do a search and deny your proposed company name if it is too similar to an existing publisher. Sending the wrong party royalties is very bad for business. The name should be something very unique.
4. Obtain a DBA certificate from your county and open a checking account in the name of the company name that was approved by the performance organization.
5. Transfer the copyright ownership from you personally to the newly formed company. You will need an “Assignment of Copyright” contract between you and your company, and you may wish to re-record the copyright under the new company with the Copyright Office. Please see Circular 12 here: http://www.copyright.gov/circs/circ12.pdf
6. Fill out both writer’s and publishers clearance forms for the performing rights organization you are a member of. If you plan on representing other artists, you will need to register with all three performance rights societies.

Conditions, Declarations, and Discretionary Authority

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The final types of provisions which make up most properly constructed agreements are conditions, discretionary authority, and declarations. We will begin with declarations because they are the simplest to understand. Simply put a declaration is a statement of fact as to which the parties agree. It is simple to understand because no rights or remedies are associated with declarations; their breach may not be sued upon. To give an example, all definitions in a contract are declarations; they have no substantive effect on their own. No party promises to do or not do something, and no representation or warranty was made. All declarations will have legal effect in that in the above example, a definition is binding on the contract in question. The definitions were agreed upon, and are to be used in interpretation of the agreement. Some declarations have legal and substantive effect; such as a declaration which states the agreement’s choice of law, i.e. The laws of Texas are to govern the entire contract. Although there are no rights or remedies with a breach of such a provision, it has substantive effect because it establishes a policy which governs the agreement itself.

A condition is a state of facts which must exist before a party is obligated to perform. To be a condition, the event which triggers the performance must not be certain to occur. Therefore, passage of time cannot be a condition. A condition may be created before a right is exercised, or a covenant must be performed. The typical form that conditions take is the “if… then” grammatical structure. For example, “if the inspection is performed within one week of the execution of this agreement, and the results are satisfactory, then the buyer shall purchase the vehicle.” This provision combines a condition with a covenant. Conditions may be ongoing, meaning that a certain state of affairs must exist throughout the duration of the agreement for one party to be required to perform. If the condition is not satisfied at any time, the performing party may choose whether to perform, waiving the condition, or terminate the agreement, or seek any other remedy outlined in the agreement. Some conditions may be worded so that their breach does not terminate the entire agreement, but only cancels one party’s duty to perform some action, and the agreement will otherwise continue.

Discretionary authority grants the holder the choice or permission to act. The holder is not required to exercise the authority granted. Commonly, discretionary authority is granted with a condition preceding it. So, a state of facts must exist before a party may exercise its discretionary authority. For example, in every loan agreement conditions exist which will allow a bank to accelerate its loan such as default, unauthorized assignment of the loan, transfer of title, failure to maintain insurance, pay taxes, etc. In such events, the bank may, but is not required to accelerate its loan. Conditions serve to allocate risk, meaning that discretionary authority should usually not be unlimited and unrestrained in an agreement. Discretionary authority is not the same as a right, because in a right, there is a right to receive some performance and a duty to perform. In discretionary authority there is no right to receive performance, only one party has the authority to act if it so chooses.

Rights and Covenants in Contracts Drafting

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These contract drafting terms both essentially mean the same thing, albeit from differing viewpoints. A covenant is simply a promise or an obligation to do or not do something. A contract right is the obligation of the other party to do or not something for the party that holds the right. If there is a duty or obligation to perform then there must a correlative right to receive that performance. A covenant is drafted from the viewpoint of the actor, which a right is drafted from the viewpoint of the recipient. Covenants are correctly drafted using the word “shall” as in “X shall do so and so”, and rights are delineated by various words such as “entitled, is to be, shall receive, etc.” Rights use more passive language and contain inherent ambiguities, thus they are generally to be avoided in drafting. For instance, if one inserts a right into a contract without naming the obligor of that right, then an ambiguity may exist as to which party must perform that obligation.

The remedies for breach of a right or a covenant are essentially the same. The non-breaching party may sue and in some cases seek specific performance, which is an order by a court that a party must perform the obligation specified in the agreement. The measure of damages is the benefit of the bargain, meaning that the aggrieved party is entitled from the party who breached the contract to everything that he would have received, including profits, if the breach had not occurred. If the breach cannot be cured, then the aggrieved party may have the right to void and rescind the agreement.

A breach of a covenant legal action does not require a breach of any representation or warranty, because these are determined to have been breached or not at the time they were made, therefore, if the representations and warranties were true at the time they were made, and a covenant or right was breached at any point in the future then only an action for breach of a covenant or right would exist. To give an example, when selling a vehicle, the seller represents and warrants that the vehicle is pink, which is in fact the case, and furthermore the seller covenants not to change the color of the vehicle before the transfer, while actually painting it blue before delivering it to the buyer, there would only lie an action for breach of covenant and not for breach of warranty or representation because these were true at the time they were made.

Measures of Damages for Breach of Warranty and Misrepresentation

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Warranties and representations are some of the most important provisions in any agreement; in fact they are fundamental. To recap a prior post, a ‘warranty’ is a promise that a statement is true, and a ‘representation’ is a statement of fact which applies to the past or present and is intended to induce its recipient to act. The remedies for breach of either are different, and the recipient will want to receive both in any contract to ensure maximum enforcement rights.

A breach of a ‘representation’, or more correctly a ‘misrepresentation’ (representations are not promises and cannot be breached), can be innocent, negligent, or fraudulent. All misrepresentations must be material, meaning that a misrepresentation must pertain to an important part of the agreement and bargain. If a misrepresentation is innocent or negligent, the standard remedies are avoidance and restitution. Avoidance, which is the same as rescission, simply means the unwinding of an agreement, as if it had never occurred. Restitution means that each party returns to the other all that it has received, and the agreement becomes null. If a breach is fraudulent, meaning it was perpetrated knowingly and with intent to defraud, the injured party has a choice of remedies. The first choice is restitution, as with the breaches discussed above, the other choice is to retain the benefits of the agreement and seek damages in fraudulent misrepresentation, which may include punitive damages (monetary punishment).

With fraudulent misrepresentation the damages calculation used in Texas, and a majority of states, is the benefit of the bargain measure of damages. This simply means that the damages are calculated as if the breaching party had performed as promised. The number is obtained by subtractive the actual value received from the value of the benefit as represented. So, if an item was purchased for $5k, with a promised value of $10k, and in fact turns out to be worth $3k, the benefit of the bargain measure would mean the proper damages would be $7k, not $5k (the amount paid). The formula is: value as promised-actual value=damages.

The other measure of damages used by a minority of states is the out of pocket measure. This simply means that the actual value is subtracted from the amount paid. In the above example the amount paid was $5k-actual value $3k=damages in the amount of $2k. You can see that the benefit of the bargain measure provides a greater recovery for the plaintiff, and most would agree it is the more fair measure because the buyer relied on the promise that the value of the bargain was much greater than the amount being spent, otherwise the buyer would not have entered the transaction. Punitive damages are also available and should be sought in most cases. The measure for this type of damages is the amount which a court or jury would consider just and sufficient to compensate the victim for other than financial injury, deter further wrongdoing by the defendant, and affirm the public policy of deterring civil wrongdoing.

A breach of warranty will have the standard measure of damages which is the benefit of the bargain described above. The highest potential recovery will dictate the damages sought, which are likely to be benefit of the bargain for breaches of warranty, and benefit of the bargain to include punitive damages for fraudulent misrepresentations. Innocent and negligent misrepresentations will cause a contract to be unwound, avoided and restitution paid to the injured party so the parties end up as though the contract in dispute had never existed.

Contracts Building Blocks

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There are seven concepts within in the language of contract drafting. These concepts must be understood in order to be properly expressed in a document so that a commonly understood meaning may be assigned to the document’s provisions by all signatories. This commonality of intent is necessary so that potential disputes are avoided as to the meaning, intent, or potential ambiguity which is not evident at the time of drafting. It is common practice that attorneys who do not know and have never studied the concepts of contract drafting will engage in drafting documents which will not be interpreted in the same manner by other parties, or courts. Contract drafting is a particularized niche which should not be entrusted to dilettantes, equally as much as litigation should be left to knowledgeable litigators.

The seven contract concepts are:
1. Representations
2. Warranties
3. Covenants
4. Rights
5. Conditions
6. Discretionary Authority
7. Declarations

These concepts will all be discussed in future posts, in pairs, and only two will be reviewed here. Representations and warranties typically go together because they cover the same ground and can be worded the same way. A representation is a statement of a past or present FACT, made as of a moment in time which is made in order to induce a party to act. This is not a promise but a statement. A warranty is a promise that the statement is true, and implies the indemnification of the other party in the event that this promise turns out to be false.

An example of a ‘representation’ within a contract would be: “The Mazda is five years and two months old, it has no known mechanical problems.” A representation can only apply to past or present facts, not to the state of future facts. Additionally, it must induce the other party to act or rely on that representation, AND that reliance must be reasonable. Therefore, if a mechanic inspects the vehicle and informs the buyer of mechanical problems, reliance by the buyer on that representation would not be reasonable, and a cause of action for misrepresentation would not lie, however, an action for breach of warranty may exist. There are three types of misrepresentations, innocent, negligent, and fraudulent, which imply a different determination of damages, these are to be discussed in another post.

A warranty is a promise of the truth of a statement, and it is irrelevant if the maker of the warranty knew that the warranty was false when made; the maker will still owe damages to the other party. “The Mazda is five years and two months old” is a warranty, which can be a promise about anything pertaining to the contract, and the determination of its breach is determined as of the time when it was made, not as of the time when the truthfulness or falsity of the warranty was discovered. Therefore, if the sale of the hypothetical car sale is not consummated for another three months, the car will not be “five years and two months old,” as stated in the bill of sale, however, no action for breach of warranty, or misrepresentation will exist because the statement was true when made. Most parties will seek that both representations and warranties are made by the maker, while the maker will seek to limit his/her obligation to one or the other to limit potential liability. The maker may but is certainly discouraged from making warranties about future facts. Breach of a warranty also contains its own measure of damages.

What Is An Independent Contractor?

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This question is common in today’s lagging economy where the expense of the regulations, benefits, and paperwork of hiring employees may be cost prohibitive to many small to medium sized businesses. The answer is usually relatively simple, and one that also requires a solid contract to finalize. Without a contract, and in the event of a dispute and potential litigation, the judge or jury will decide, and even with a contract, independent contractor status is sometimes imposed and withdrawn by a court of law, as the facts of the relationship may dictate. However, a written agreement will go a long way towards memorializing the parties’ intent. The employer is not required to provide any benefits to an independent contractor, and is not responsible for any tax obligations, such as withholding. The employer merely must provide a 1099 form at the end of each tax year to the worker who files his or her own taxes.

Texas law presumes the relationship between a worker and the employer to be that of ‘employee and employer’, and the burden of proving independent contractor status is on the employer. The main issue in this determination is control. How much control over day to day activities does the hiring entity exercise over a particular worker? In the Texas Workers’ Compensation Act an independent contractor is defined as “a person who contracts to perform work or provide a service for the benefit of another and who ordinarily:

1. acts as the employer of any employee of the contractor by paying wages, directing activities, and performing other similar functions characteristic of an employer-employee relationship;

2. is free to determine the manner in which the work or service is performed, including the hours of labor of or method of payment to any employee;

3. is required to furnish or to have employees, if any, furnish necessary tools, supplies, or materials to perform the work or service; and

4. possesses the skills required for the specific work or service.”

An important point to add is that ‘non-compete’ clauses in any hiring relationship will strongly indicate employee status for the worker. In addition, the employer should have no interest in how the independent contractor allocates his time. By the same token, the employer should have no interest in the contractor’s right to hire his own helpers and provide his own tools. Finally, the more long-term, continuous, and exclusive the relationship is, the more likely it is to be considered employment.

The IRS uses its own eleven-part test based on common law and various criteria of its own making, which should be discussed with your federal tax preparer if necessary.

This office regularly drafts independent contractor agreements to ensure that the hiring relationship is understood by all parties from the get go. All forms of compensation should be clearly stated in writing, as should all duties and obligations of each party. Nobody wants to have this dispute after the work is completed or ongoing, at a significant cost and time expenditure.

Texas Deeds

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There are three basic types of deeds which are commonly used in real state transactions. Deeds are evidence of legal title, and they are used to transfer legal title when buying or selling real property; and title simply means ownership. Deeds are written declarations of intent to transfer title, stating that consideration (payment or something of value) has been transferred in exchange for the title, and contain a description of the property to be transferred as recorded in the county clerk’s office. Most deeds should be recorded with the clerk’s office in order to provide public notice that a new owner of the property exists, which will prevent any parties from placing liens or ‘clouds’ on that property’s title or a fraudulent seller from reselling the same property to others.

A quitclaim deed is the most basic and lowest form of deed, and it does nothing more than transfer all the interest the transferor/seller has in the property, which could be partial or none. Quitclaim deeds are highly risky purchases, and one risks being swindled accepting one. On the other hand, buyers are required to accept quitclaim deeds after some purchases such as at government auctions. Most attorneys will advise against accepting a quitclaim deed in any form of real property transaction, unless the transfer is from a relative such as a spouse or a parent, for example.

A special warranty deed only guarantees good title of the seller, and no farther back in time. As such, it is a better deed than a quitclaim, although it still carries some risk, depending on how long the seller has owned the proeprty. However, with a professional title search and opinion it is possible that the title is perfectly clean and the buyer may receive a significant discount on the property for accepting such a deed. This type of deed is not common, except in commercial transactions, and occasionally some sellers simply want to sell the property without the unqualified promise of a title guarantee to the first owner of the property. A special warranty deed is a perfectly acceptable way to transfer title.

A general warranty deed guarantees good title all the way back in time to the first owner of the property. This is the most common form of deed and one on which many title companies will insist on if the buyer is to obtain title insurance. This type of deed comes with six specific warranties, which will be discussed in a separate article, however, the main point here is that if there is any defect in title, ever in the history of the property, and the purchaser is disturbed in his unqualified possession and ownership of the property, the previous owner is legally bound to commit the time and expense necessary to resolve the matter and quiet title in the new owner or be subject to litigation and potential recission of the sale. A “subject to” clause may be inserted into this deed or a special warranty deed, which will state any known defects, or potential defects in title right on the deed, and limit the seller’s liability for them to the transferee buyer.

Typically, title companies will insist on a general warranty deed to provide title insurance, although sometimes a special warranty deed will be sufficient if the title search discovers a particularly clean history for the subject property. A quitclaim deed will have a very difficult time obtaining title insurance.

A buyer of property should consult an attorney before the contracting stage, so that the contract may be reviewed prior to the title transfer, as the contract may obligate the buyer to accept a certain type of deed, among other potentially dangerous obligations, and once signed it will be too late to demand a more favorable type of deed.

There are numerous other types of deeds used in specific situations. To ensure you are planning on using the correct type you should consult a knowledgeable attorney.

Mediation In Practice

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The mediation process is commenced upon the agreement of two or more parties to a dispute, or an order issued by a judge, to resolve their differences through a mediator, who is a neutral third party acting as a conduit and sounding board. In other words, the mediator may not take sides and is paid by all parties equally (unless there is a prior agreement), while conducting information from one party to another, as well as probing into the parties’ claims as a means to assess all possibilities as to how the matter may be resolved. This process is far simpler, faster, less costly, and less stressful than litigation, which would only be undertaken with a substantial monetary dispute. Mediation is a far better approach for disputes with a smaller sum involved, or a dispute where compensation other than financial is desired.

On mediation day, the parties gather in a room, and are permitted to break up into separate rooms at any time. The mediator will explain the process in that everything said and any information given during mediation is confidential as to any subsequent court appearance, and the mediator is not permitted to testify or disclose information as to anything he learned during the mediation. The mediator will explain that he will ask difficult questions, and at times it may seem as though he is taking sides, however, the parties must be aware that the mediator’s job is to push both sides toward a compromise, which means that neither party will get exactly what they desire, and all parties must accept this fact. The parties must understand that the mediator has no interest in any of the parties’ settlement of the dispute, and impartiality is the cornerstone of an ethical mediator.

Finally, the mediator will explain that the parties must respect one another’s time to express their points, without interruption. If an agreement is reached then a contract will be drawn up describing the resolution in detail, and if litigation is in progress, the court will enter the agreement into court record, making a violation of the agreement punishible by contempt. The parties must remember that a mediation is a private process, it does not involve the government, unless there is a violation and a judge sanctions a party. The parties then will be permitted to make their initial statements, produce any documents to the other parties, and at that point the actual process of attempting to reach a resolution will commence.

You should always seek out an experienced mediator to handle the resolution process because if a resolution is not reached money and time will have been wasted. Mediators have different approaches; some are meek and do not push a resolution at all, allowing the parties to resolve the dispute. Other mediators will suggest potential resolutions to both sides and attempt to expose weaknesses in the parties’ claims so that it becomes clear that the prospect of litigation would be highly undesirable. The Law Office of Bruce Belenky generally takes the second approach; while maintaining strict neutrality, Mr. Belenky clarifies and crystalizes the facts as they apply to the law that may be applied in any potential litigation so that the parties know where they stand. Mr. Belenky may bring up creative resolutions that could be agreeable to all parties, while always allowing the parties the final say as to whether they will accept any of them. Mr. Belenky has been a highly successful mediator, with a high degree of full agreements being reached in a wide range of business and personal disputes.

Deceptive Trade Practices Act; Four Causes of Action

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There are 4 ways to use the Texas Deceptive Trade Practices Act to initiate a claim:

1. Unconscionable Acts. This occurs when a merchant takes advantage of a consumer’s lack of knowledge, ability, experience, or capacity to a grossly unfair degree. This is basically fraud, extreme dishonesty, or abhorrent act. Think used car salesman selling a buyer a lemon knowing it will break down after a few miles.

2. Breach of Warranty. This will include a variety of warranties:

  • Express Warranty: Written or verbal warranty.
  • Implied Warranty of Merchantability: Item purchased does what it is supposed to do. This is not written or stated verbally.
  • Warranty of Fitness for a Particular Purpose: Item purchased performs the specific job the sales person claimed it would perform.

3. Insurance Code. Any violation of the insurance code will automatically be actionable under the DTPA and its favorable damage provisions will apply. The insurance code is a whole separate consumer protection statute which governs insurance companies dealings with their insureds.

4. DTPA Laundry List. The DTPA provides a list of 27 violations which must be specifically listed in a petition against a defendant. A few of the more commonly used violations enumerated in Section 17.46(b) are:

(1)  passing off goods or services as those of another;

(5)  representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities which they do not have or that a person has a sponsorship, approval, status, affiliation, or connection which he does not;

(12)  representing that an agreement confers or involves rights, remedies, or obligations which it does not have or involve, or which are prohibited by law;

(14)  misrepresenting the authority of a salesman, representative or agent to negotiate the final terms of a consumer transaction;

(17)  advertising of any sale by fraudulently representing that a person is going out of business;

(20)  representing that a guarantee or warranty confers or involves rights or remedies which it does not have or involve…

(22)  representing that work or services have been performed on, or parts replaced in, goods when the work or services were not performed or the parts replaced;

(24)  failing to disclose information concerning goods or services which was known at the time of the transaction if such failure to disclose such information was intended to induce the consumer into a transaction into which the consumer would not have entered had the information been disclosed;

These provisions are relatively self-explanatory, however there are other violations which fall under the auspices of the DTPA, and to be certain that your potential claim may be filed under The Act, you should consult with a knowledgeable attorney to discuss your particular facts.