San Francisco Business Lawyer Blog

Contract formation is an essential part of establishing virtually any business relationship and documenting most business transactions. Business owners, executives and professionals enter contracts on a regular basis. While frequently a straightforward and uneventful process, in a contract dispute, the issue of whether a contract is legally enforceable is paramount. Contract formation is a technical process and more complex than it may seem.

This post will discuss the legal criteria for a valid and enforceable contract, including mutual assent, offer and acceptance. In my next post I will address consideration, other legal requirements essential to contract formation, and whether a contract must be in writing to be enforceable under the statute of frauds.

Legal Requirements for a Valid Contract in California

The California Civil Code defines a contract as follows:

§1549. A contract is an agreement to do or not to do a certain
thing.

§1550. It is essential to the existence of a contract that there
should be:

1. Parties capable of contracting;
2. Their consent;
3. A lawful object; and,
4. A sufficient cause or consideration.

California Civil Code §1549-1550.

While it is important to know the statutory definition and legal requirements for a contract in California, let's take a look at the legal principles underlying contract formation to gain a better understanding of how an agreement becomes legally binding and enforceable.

Mutual Assent

Fundamental to contract formation is the legal requirement of mutual assent. Mutual assent requires that the parties entering a contract, are, in fact, consenting to the same terms. At common law this principle is referred to as "a meeting of the minds".

Courts examine whether mutual assent exists between the parties by a review of the objective facts and evidence under the reasonable person standard. The reasonable person standard requires that the facts and circumstances be interpreted by the judge or jury objectively as a reasonable person in a similar situation would reasonably believe. This is necessary, as subjective intent cannot be measured; one cannot read another person's mind. See Meyer v. Benko, (1976) 55 Cal. App. 3d 937, 942-43.

Offer and Acceptance

Offer and acceptance analysis is a traditional approach in contract law used to determine whether or not a valid agreement exists.

Offer

An offer is a statement of the terms on which the offeror is willing to be bound. It is the present intent to be bound by a contract with definite and certain terms communicated to the offeree. The offer remains open until it is accepted, rejected, revoked or has expired. A counter-offer terminates the original offer.

Acceptance

Acceptance is the manifestation of a clear and absolute assent to the terms of the original offer communicated to the person who made the offer.

Like the offer, acceptance is measured by the objective reasonable person standard, not the subjective intent of the party receiving the offer.

In summary, mutual assent, offer and acceptance are all vitally important concepts to contract formation. Without a valid offer and an unqualified acceptance where the parties have mutually assented to the same terms, there is no enforceable contract.

Next, in a post entitled What Makes A Contract Valid in California Anyway? Part 2: Consideration and Other Formation Requirements we will examine other essential principles of contract formation, including consideration, legal capacity to contract and whether a contract must be in writing to be enforceable under the California statute of frauds.

Sources

California Civil Code §1549-1550

Meyer v. Benko, (1976) 55 Cal. App. 3d 937, 942-43

California Civil Code §1585

Continue reading "What Makes a Contract Valid in California Anyway? Part 1: Offer, Acceptance and Mutual Assent" »

San Francisco Bay Area businesses and their owners distressed about a negative online consumer review, are anxious to know if they should sue for defamation. This post will discuss the basic legal requirements for establishing defamation and identify some of the most important considerations for evaluating whether an actionable claim for defamation exists under California law.

Defamation

Defamation is an invasion of the interest in reputation. The tort involves the intentional publication of a statement of fact that is false, unprivileged, and has a natural tendency to injure or which causes special damage. California Civil Code §§ 45, 46. Publication means communication to a third person who understands the defamatory meaning of the statement and its application to the person to whom reference is made. Publication need not be to the "public" at large; communication to a single individual is sufficient. In California defamation occurs by either libel or slander. Slander requires verbal publication, while libel requires publication by writing or some other fixed representation. The California Civil Code defines each at §§ 45 and 46.

Libel

In California, libel is defined by statute as "a false and unprivileged publication by writing printing, picture, effigy, or other fixed representation to the eye, which exposes any person to hatred, contempt, ridicule, or obloquy, or which causes him to be shunned or avoided, or which has a tendency to injure him in his occupation." California Civil Code § 45

Slander

California Civil Code § 46 defines slander as ". . . a false and unprivileged publication, orally uttered, and also communications by radio or any mechanical or other means which:

1. Charges any person with crime, or with having been indicted, convicted, or punished for crime;
2. Imputes in him the present existence of an infectious, contagious, or loathsome disease;
3. Tends directly to injure him in respect to his office, profession, trade or business, either by imputing to him general disqualification in those respects which the office or other occupation peculiarly requires, or by imputing something with reference to his office, profession, trade, or business that has a natural tendency to lessen its profits;
4. Imputes to him impotence or a want of chastity; or
5. Which, by natural consequence, causes actual damage.
See California Civil Code § 46.

Public Figures v. Private Persons

In cases involving public figures or matters of public concern, the burden is on the plaintiff to prove malice; that the defendant knew that the allegedly defamatory statement was false at the time the defendant made the statement. See Nizam-Aldine v. City of Oakland, 47 Cal. App. 4th 364 (Cal. Ct. App. 1996). In contrast, in cases involving private individuals, the allegedly defamatory statement is presumed false and the burden is on the defendant to prove the truth of the statement made. See Smith v. Maldonado, 72 Cal.App.4th 637, 646 & n.5 (Cal. Ct. App. 1999).

Online Defamation

The Internet has allowed unscrupulous competitors, disgruntled former employees and unhappy patrons to post false negative information. Defamatory statements harmful to businesses and their owners may be found in Internet blogs, wikis, forums, review sites, consumer advocacy sites along with other forms of digital media.

Defenses to Defamation

California courts recognize a number of defenses to defamation claims, including pure opinion, substantial truth, and various reporting privileges.

Pure Opinion

Statements of pure opinion are not grounds for defamation as they are constitutionally protected speech. Pure opinion cannot be proven true or false. However, statements of opinion that imply false underlying facts may be defamatory. This is a complex determination, and a court will look at all facts and circumstances surrounding the statements made to determine whether in fact they qualify as "pure opinion", a complete to defense to defamation.

Truth

"Truth" is an absolute defense against defamation. See New York Times Co. v. Sullivan, 376 U.S. 254 (1964), and Time Inc. v. Hill, 385 U.S. 411 (1967). Therefore, a claimant must provide convincing evidence of a statement's falsity in order to prove defamation.

Substantial Truth

The law does not require that a statement must be perfectly accurate in every possible manner to be considered "true." Under the substantial truth doctrine, minor factual inaccuracies will be ignored so long as the inaccuracies do not materially alter the substance or impact of what is being communicated. In other words, only the "gist" or "sting" of a statement must be correct.

Reporting Privileges

California provides various privileges against defamation including the publication of reports from public official documents, proceedings and meetings. California Civil Code § 47(d),(e)

Statute of Limitations

In California, you have only one year from the date of publication of the defamatory statements to file a lawsuit for libel and slander. California Code of Civil Procedure § 340(c). Therefore, you should not delay in filing a defamation claim, or you may lose your rights.

Is a Negative Yelp Review Grounds for Libel?

The short answer is that the review may constitute libel if it meets certain legal requirements discussed above. However, any defamation claim can be difficult to win as the defendant has a number of privileges and defenses that it may raise in defense.

Rather than filing a lawsuit, first, you should consider contacting Yelp directly, requesting Yelp to remove the damaging review. Yelp most often will remove the review if it violates the Yelp guidelines, where, for example, the review is by a former employee, not an unbiased customer.

Individual users as well as the site itself both have been sued for defamation by business owners. Notably, in 2008 San Francisco chiropractor Dr. Steven Biegel filed suit against Christopher Norberg, a patient who wrote a negative review of him on Yelp. The highly publicized case generated debate about the responsible use of community forums. The core concern being how to best balance the rights of consumers to freely express themselves with the rights of businesses to protect their reputation.

Ultimately, the case was settled to the satisfaction of both parties shortly after a court-required mediation and never went to trial.

Sources

Yelp Guidelines

Biegel v. Norberg, Defamation Lawsuit, Superior Court of California, County of San Francisco (2008)

Continue reading "Bad Yelp Review for my San Francisco Business - Should I Sue for Defamation? " »

I am frequently asked by established organizations and start-up companies, alike, whether a new hire is an independent contractor or an employee. In a previous post I discussed the determination under California law. This post covers the relevant IRS determination under federal law.

In my experience as an attorney drafting business contracts, proper classification is important to avoid state and federal tax penalties as well as lawsuits by workers. Employers generally must withhold Social Security, Medicare, income and unemployment tax on wages paid to an employee; whereas, no taxes are typically withheld on wages paid to an independent contractor.

Unfortunately, making the determination as to employee or independent contractor status, while important, can be complicated as there are multiple factors under California employment law to be considered and separate tests under California and federal law.

The IRS's Multi-Factor Test

Like California, the IRS also has a multi-factor test to determine whether a worker is an employee or an independent contractor.

Behavioral Factors

Where an employer has the right to control the means and manner in which the job is performed, the worker would likely be deemed an employee. For example, the right to control and direct is often found where the worker is given instructions as to where, when or how to perform the job or what equipment is to be used.

Financial Factors

In addition to behavioral factors, there are also financial elements to a working relationship that help determine whether a worker is an employee or an independent contractor.

For example, where a worker has a substantial investment in the work, the worker is more likely to be an independent contractor. While there is no set limit on the dollar amount required, the investment must be "of substance." Substantial investment is merely a factor in this test--a worker can still be an independent contractor even when he or she has not made a substantial investment in the work.

In addition, where an employer does not reimburse the worker for business expenses, that worker is more likely to be an independent contractor.

Finally, if a worker can realize a profit or loss, then the worker is more likely to be an independent contractor.

Relationship Factors

The final set of factors relate to how the employer and worker perceive their working relationship.

The clearest indication of how an employer and worker perceive the relationship is often set forth in a written contract. Where the above factors do not establish a clear picture of the working relationship, the existence and clarity of a written agreement can often provide a determination of whether the worker is an employee or not.

Lastly, whether a worker is given benefits, such as health insurance or retirement benefits, is also a factor that the IRS considers when making this determination. Independent contractors are not typically given benefits.

It is important to remember that both the federal and California multi-factor test must be considered. Although the federal and state tests may seem similar, they are not in fact the same.

For related reading on employee versus independent contractor legal issues review the following posts on this blog:

Who Owns the Copyright: Independent Contractor or Employer? Work Made For Hire Agreements Part 1: Federal Law

Sources

California Tax Service Center

Internal Revenue Service, Form 1099-MISC & Independent Contractors

Internal Revenue Service, Small Business, Independent Contractor or Employee?

Continue reading "California Independent Contractor or Employee Classification Part 2: Federal Test" »