Wednesday, 25 February 2015

Understanding Summary Judgment

A motion for summary judgment is one of the most frequently filed motions before a civil court. Regardless of the field of law that a lawyer practices in, it is usually important to understand what a motion for summary judgment means. This article is an attempt to briefly explain what a motion for summary judgment is, and to make it easier to understand. 

A motion for summary judgment is filed by a party to a case when they believe that there is no dispute as to any material facts and therefore no requirement of hearing evidence and going through the process of trial to determine disputed facts. Alternatively, it could also be explained as follows: if the facts are such that even if they are considered in the manner most favorable to the non-moving party (i.e., not the party who has moved the court for summary judgment) a reasonable jury would not possibly find in favor of the non-moving party. In layman’s terms, this means that the facts of the case are so one-sided that it can be decided in favor of one party without even going to trial. 

Burden of proof:

On a motion for summary judgment, the initial burden of proof is on the party moving for summary judgment. The moving party has to demonstrate an absence of a genuine issue (or dispute) of material facts. Once the moving party has established this, the burden shifts to the non-moving party. The non-moving party must then produce enough evidence to rebut the moving party’s claim and establish that there is a genuine issue of material fact. If the non-moving party does so, then the motion for summary judgment will be denied. 

Motions for summary judgment are typically heard prior to the taking of oral testimony or evidence at trial. It is based on admissions made by the parties in their written briefs, evidence provided in affidavits or other authenticated documents and arguments that the factual issues in the briefs are either not genuine or not material to the case. 

Why is it important?

The decision in a motion for summary judgment is critical because it amounts to an adjudication of the controversy ‘on its merits’. In simple terms, this means that once summary judgment has been awarded, you cannot litigate the same issue again, unless you are appealing against the grant of summary judgment. 

Judges frequently grant partial summary judgment – this happens when they believe there is no genuine issue as to one aspect of the case, but the other aspects ought to be decided at trial. In cases involving multiple parties, courts may also grant summary judgment against one party without granting summary judgment against another. 

Choosing to move for summary judgment:

The decision to move for summary judgment must be made carefully. It requires a thorough analysis of the moving party’s claim or defense, and the extent to which evidence can be presented to establish or controvert the existence of an apparent issue of fact and its materiality to the case in question. The lawyers handling the case need to be extremely conversant with the issues involved and the proof that would be required to establish them at court. Lawyers typically make complete use of pretrial discovery devices available before considering a motion for summary judgment. A failed motion for summary judgment could have an adverse effect on the ultimate success of the moving party, because it would betray a lack of knowledge/understanding by counsel.

Friday, 13 February 2015

Understanding Motions To Demur

A demurrer is ‘a pleading used to test the legal sufficiency of other pleadings’. A ‘pleading’ is the term used to refer to documents that are presented before court. Documents such as complaints, answers to complaints and cross-complaints are all considered pleadings. 

The concept of a demurrer has its origins in common law (the term ‘demur’ meaning ‘to object’ and the term ‘demurrer’ referring to the pleading in which the objection is made). Demurrers have been abolished in many places including the United States federal court system and many state court systems, because of the idea that it unnecessarily extends the litigation process. However, demurrers are still permitted (and commonly used) under state law in California, so it is a concept worth understanding for residents and businesses in California. 

A demurrer essentially raises issues of law regarding the form or content of the other party’s pleading. A demurrer does not challenge the truth of the other party’s pleadings and does not deal with the facts. It is typically filed in the early stages of the proceeding, and is used as a mechanism to throw out the case before it can be heard. 

A motion to demur is used to challenge defects on the face of the pleading under attack; or from matters outside the pleading that are judicially noticeable.
A demurrer could be effective in eliminating standard affirmative defenses that are almost always pleaded. For example, a common defense is to say that a party has come to court with ‘unclean hands’. This defense is frequently argued as a boiler plate defense without sufficient facts to justify it. A demurrer would be an effective way to get rid of such a defense. A demurrer may also be made on the ground of failure to plead sufficient facts to constitute a defense.

Kinds of demurrers:

There are two kinds of demurrers. Demurrers for failure to state a cause of action or defense, or for lack of subject matter are called ‘general demurrers’. This means that the party filing the demurrer argues that the other party’s pleadings do not sufficiently state a cause of action that can be presented before the court (or alternatively, do not adequately plead a defense). This covers a number of defects in form or substance, including statute of limitations, inclusion of improper party, laches and delay in litigating the matter, etc. All other demurrers are called ‘special demurrers’. 

However, the reasons for which a demurrer may be filed are limited. Demurrers can be raised only on specific grounds that are allowed by the California Code of Civil Procedure.  A demurrer essentially raises issue with the content and form of a pleading. Therefore, if the party against whom the demurrer is filed, files an amended pleading before the demurrer hearing date, then the hearing date falls. The opposing party then has to reply to the amended pleading and/or file a demurrer to it. 

Advantages and disadvantages

The most important advantage that a demurrer presents is that it forces the non-moving party to clarify particular elements of the cause of action involved. This could place the party moving for the demurrer in a position to contemplate whether the proof is sufficient for a summary judgment motion, and alternatively, could force parties to re-evaluate the merits of the case and consider settlement. 

Many judges today are unsympathetic to demurrers, preferring that the case move forward on the merits. In situations where they do permit it, the judge usually permits the non-moving party to amend the pleading to correct the defect, but this does not help much except to obtain a little time (at considerable cost).

In California, a motion to demur is the equivalent of a motion to dismiss that may be filed in federal court. However, considering the advantages and disadvantages, it would be a good use of time to carefully evaluate the situation before deciding whether/not to file.

Tuesday, 27 January 2015


Aspects of a Commercial Contract

Now that we've reviewed the basic aspects of contract drafting with a simple example of contract involving the sale of used car, let’s look at the more complex aspects of understanding a contract.

1. Establishing the law of the contract:
A unique feature of contract law is that it sets out a ‘private law’ between the parties. This means that the parties to a contract can choose which law they wish to be governed by, regardless of the local law of the place where they reside.

For example: in case of a contract regarding the sale of a used car, the buyer and seller could resort to arbitration as a mechanism of dispute resolution instead of approaching the courts.

For example, if an American company wishes to sell a factory that it owns in China, to an Australian company, the parties could choose to have the contract governed by the laws of a California where the Australian company has a local office. This ensures that the governing law and forum are neutral towards both parties, and provides both parties with a certain degree of comfort in structuring the transaction.
2. Establishing complex transaction structures:
Commercial contracts are usually complex documents which lay out the structure and organization of the transaction. Commercial contracts are also often futuristic.

Consider the example of the sale of a business by Sam to Sally. The contract could be signed on Day 1, and then the parties could provide for a 20 day time-period where Sally has the right to inspect the financial and operational documents of the business before they take a decision on finalizing the sale. During this period, the parties will usually negotiate the purchase price, based upon the inspection of the documents and understanding of the business. At the end of this 20 day period, if Sally is not satisfied with the results of the inspection, she would have the right to walk-away. Alternatively, the contract could provide both parties the right to walk-away if they are unable to finalize the purchase price.
3. Reducing risk:
One of the most important jobs of a lawyer is to structure a transaction in a way that minimizes the risk of his client. Lawyers are becoming increasingly creative in drafting clauses that reduce risk and/or transfer the risk from their client to the other party. The most common risk that is encountered in all contracts is the financial risk. This could be mitigated in a number of ways – establishing an escrow account for the funds during the period between signing of the contract and finalizing the sale; ensuring that the buyer provides a guarantee from his bank regarding the availability of funds, providing that a third person would step in to guarantee payment of the purchase price, etc.
4. Providing waiver rights:
Waiver rights are provided to parties to permit them to go ahead with the transaction, even if some of the contract obligations have not been met.

For example, in the used car contract, the parties could include a covenant to say that: "The Seller shall ensure that the car contains a full tank of gas on the day of the sale." However, the closing conditions to the contract could provide the Buyer with the right to waive this obligation and still purchase the car, if he so wishes.

Waiver rights are important because they permit parties to go ahead with transactions, if the party feels that the risk incurred by him because of the other party’s non-fulfillment of a certain obligation is less than the risk that would be incurred if he concluded the transaction.

Contract drafting has traditionally been a lawyer’s domain. However, websites offering customizable forms have become popular, especially for the contracts that we use almost every day. Examples include: lease agreements, agreements for the sale of a used car, etc. A quick read would seem to suggest that the contract contains fairly standard terms, but a single seeminingly unimportant word, phrase, or even punctuation mark could change the meaning of an entire clause. Therefore, each party should have proposed contracts reviewed by a lawyer who understands their company, their goals, and the laws governing the transaction. This ensures that the party receives the benefits they are contracting for and prevents costly future litigation.

Friday, 9 January 2015


Basic Aspects of a Contract

A well-drafted contract sets out the relationship between the parties, and lays down their agreement regarding the rules that will govern their relationship. A contract should accurately memorialize the business deal, in clear and unambiguous terms. Ideally, it should be fluidly drafted, so it is
flexible enough to deal with changes that occur, while at the same time tying down the parties to their obligations. As an example, let’s use a simple contract involving the sale and purchase of a used car to explain key contract concepts.

A standard contract will always contain the following clauses:
1. A statement of facts made by each party that induced the other party to enter into the Contract:
These are technically referred to as ‘Representations and Warranties’. Representations and warranties are always made as of a moment in time, and do not provide futuristic guarantees. For example: The Seller represents and warrants to the Buyer that the car was purchased in 2000.
2. The rights and obligations of each party to the contract: 
These are technically referred to as ‘Covenants’. Covenants are present and futuristic obligations that each party owes to the other.

For example: The Seller shall maintain the car in good condition, until the date of sale. The Buyer shall have the right to inspect the car, prior to the date of sale.
3. The events/sequence of events that must occur before a party to the contract is required to perform its obligation:
Contracts are always reciprocal arrangements and require one party to comply with a certain obligation, before triggering the obligation of the other party.

For example: The Buyer shall pay the Seller an amount of $10,000 in cash for the purchase of the car.
As per this example, the Seller is not obligated to sell the car to the Buyer until he has received this amount. A subsequent clause would provide that upon receipt of this amount, the Seller will execute a bill of sale for the car in favor of the Buyer.
4. Discretionary rights:
Contracts could often provide a party with a discretionary right that he could use under certain circumstances. Discretionary rights can usually be identified by the use of the term ‘may’ in the drafting of the clause. A discretionary right does not obligate the party to make use of it.

For example: If, upon inspection, the Buyer is not satisfied with the condition of the car, he may terminate the agreement.

If a situation arises where a member of Seller’s immediate family is in need of the car, then the Seller may terminate the agreement.
5. How the contract will end – the rights of parties to terminate the contract:
This includes details of when and how a party can terminate, as well as a list of specific situations under which a party can terminate. These are technically referred to the ‘Termination Clause’. Termination clauses are very important because they give the parties the right to walk away from a transaction under specified and negotiated circumstances. Clearly specifying the conditions under which the parties can walk-away, and the consequences of the parties walking away avoids a messy court battle.

For example: The Buyer shall have the right to terminate the contract if the car is not in good condition on the date of the sale.

Or, the Seller shall have the right to terminate the contract in the event that Buyer fails to pay the purchase price on the date of the sale. 

Tuesday, 18 November 2014

Limited Liability Companies – Combining The Best Of Two Worlds

Leading commentators have summarized the LLC as ‘a non-corporate business [form] that provides its members with limited liability and allows them to participate actively in the entity’s management.’

Limited liability companies or LLCs, have been a popular form of business for some time now. An LLC offers two main benefits – flexible tax planning and limited liability.

Corporate formalities:

LLCs are intended to be treated as a non-corporate form of business. This means that LLCs do not have to comply with typical corporate formalities like instituting a board of directors, provide for voting rights, conduct meetings, etc. LLCs are also free to tailor their capital needs with a greater degree of flexibility. LLCs can be suitable for many businesses, from a garage-based start-up to a sophisticated joint venture business structure.

Limited liability:

LLCs are regulated by LLC statutes as enacted by each state. LLC statutes generally provide the members of the LLC with a corporate-like limited liability shield. The language of this shield differs from state to state. Essentially, the liability of the member of an LLC is restricted to the amount that he has invested in the enterprise. California law is the most explicit in this explanation, and clearly states that the personal liability of the members of the LLC is similar to the personal liability of the shareholders in a corporation. However, this protection is not absolute. It is subject to certain exemptions which can be broadly categorized as follows:
  • False or defective formation of the entity;
  • Wrongful conduct by a member;
  • Abuse of the shield;
  • Capital-related obligations imposed by the LLC statute.

Led by Delaware, the LLC statutes of a few states go beyond the traditional shield of limited liability, and permit LLCs to internally compartmentalize their assets and create individual shields. Under this, the assets of one branch of business can be protected from claims arising out of another branch of business. This is another example of the extreme flexibility offered by LLC statutes.


Governance and management of a LLC can broadly be divided into the following three areas:
  • Right of members to bind the management;
  • Power of members and management to bind the LLC to third parties; and
  • Rights of members and managers to information pertaining to the LLC.

Management of an LLC can be in one of two forms– management by members or management by managers. Almost all LLC statutes provide for both parallel forms of management, and the LLC has the choice to choose between them. In stark contrast to corporate law, the default rule in most LLC statutes (regarding the form of management) is decentralized management by the members. Under these statutes, in a member-managed LLC, a member has the power to bind the LLC, similar to the general provisions of a partnership. In the event that the LLC breaks up and neither party has an operating agreement to evidence the form of management, the default rule of the LLC statute will apply (regardless of practical or economic considerations). From a practical standpoint, it is important to choose the form of management and to state it in the operating agreement to prevent a future conflict.


The most common ways in which an LLC is dissolved are (1) upon expiration of a specified term; (2) upon occurrence of a specified event; (3) with consent of the members; and (4) in an LLC that has only one member, the termination of that member’s membership.

In addition, many statutes provide for administrative dissolution for LLCs (on failure to file required reports), and for dissolution by court order (under limited circumstances). The common causes of dissolution of a partnership such as death, bankruptcy or resignation of an individual partner should ideally be dealt with in the operating agreement of the LLC.

Structuring an enterprise as an LLC has several tax-planning benefits as well, which will be dealt with in a later article.

Wednesday, 15 October 2014

Corporate Governance And Management Of Corporations

State corporate laws place the responsibility of managing the corporation upon its board of directors. The primary advantage of the corporate form of business is that it enables shareholders to share in the benefits, while at the same time limiting their personal liability.

State corporate laws generally provide 2 important protections for the board in managing the daily affairs of the corporation.

The first is the benefit of ‘business judgment presumption’. In the event of litigation arising out of a business decision, the court will assume that the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the corporation. Essentially, this means that the court will trust and uphold the decision of the board, unless the plaintiff to the suit is able to prove that the directors were grossly negligent in keeping themselves informed of all material facts.

The second protection provided to the board is known as ‘demand futility’. The principle of demand futility exists to protect the central importance of the Board in the management of the corporation and to prevent meritless lawsuits. Demand futility acts as a safety valve, allowing only the right level of policing.

For instance when a shareholder intends to file a derivative shareholder suit for and against the corporation, the shareholder needs to make a claim/demand upon the directors to prosecurte the claim, or alternatively show why a demand was not made (‘demand was futile’). When a shareholder makes a claim against a corporation which is accepted by the board, then the litigation regarding the claim is controlled by the board. Alternatively, a shareholder can claim that demand was futile, if he can prove that at the time of filing of the suit, the board could not have acted impartially upon the demand. Thus, if the majority of the directors were interested in the transaction sought to be litigated, then it could be argued that the board could not have acted impartially upon the demand.

There are some situations where federal regulation provides shareholders with an advisory vote in addition to corporate law and the corporation’s documents. For e.g., the new ‘Say on Pay’ rules require public companies to provide shareholders with an advisory vote regarding the compensation of its most highly-compensated executives. Advisory votes are important because they give shareholders a chance to voice their opinion. Although these votes are beneficial in maintaining a healthy dialogue between the corporation and its shareholders, the corporation can still choose to ignore the shareholders vote if it believes that an alternate proposal is in the best interests of the corporation.

A certain degree of tension and conflict between the shareholders and the management is healthy, and would encourage good governance of the corporation. However, for the peaceful functioning of the corporation, it is necessary that a delicate balance between these (sometimes conflicting) interests be preserved. The board is and should be the final word on management and governance of the corporation – the purpose of a corporate enterprise is passive investment by shareholders while the management runs the show. However, boards need to keep in mind that shareholders have legitimate interests in the governance of the corporation and should be provided with some kind of mechanism to express their concerns to the board. This could be achieved by encouraging shareholders proposals or by providing shareholders with greater voting rights. A corporation that does not adequately address shareholder concerns could open itself up to a host of problems, including proxy battles, hostile acquisitions, or poor stock performance.

Thursday, 18 September 2014

Incorporating a Company in Delaware

Corporate law is regulated by each state, in the United States. This means that while there is no ‘federal corporations law’, each state has its own corporate law code (many modeled upon the Model General Commercial Code).

What is the significance of the state of incorporation?

A company can establish its headquarters, and do business in any state (not restricted to the state of incorporation). The importance of the state of incorporation lies in the fact that it establishes the legal domicile of the corporation. Based on the ‘internal affairs doctrine’, the law of the state of incorporation generally governs how disputes between directors/officers of the Corporation and shareholders are resolved.

Delaware as the first choice

Delaware is neither a populous nor geographically large state. However, it is the state of incorporation for fifty-seven percent of U.S. public companies and for fifty-nine percent of Fortune 500 companies. Delaware began to acquire its present status in the early 20th century, by adopting a corporate law code aimed at attracting and retaining more incorporations. Due to the large number of companies incorporated in Delaware, and the consequent litigation generated by them, Delaware’s corporate law plays a central role in establishing corporate governance norms for publicly traded corporations in the US.

Why incorporate in Delaware?

Established system of judge-made law:

The corporate law of Delaware is known as the Delaware General Corporate Law or ‘DGCL’ and contains extensive provisions regarding the formation, conduct and dissolution of a corporation. However, even the DGCL is limited in its provisions and interpretations. Several vital concepts in corporate law are governed by common law, i.e., judge-made law. These include fiduciary duties of directors, officers and controlling shareholders of the corporation both in conducting the daily business of the corporation, as well as in dealing with particular circumstances like mergers or proxy contests. Delaware courts deal with a massive amount of corporate litigation on a daily basis, which has led to the establishment of a sound corporate jurisprudence. Outside of Delaware, corporate law cases generally constitute only a tiny portion of a judge’s typical case-load.

A sound court system:

The Delaware Chancery court is a uniquely established court with limited jurisdiction. It has a docket of primarily corporate cases. These cases are heard by judges who are experts in corporate law, as opposed to juries. Court decisions are published in case-law reporters and are commercially available, providing valuable guidance to practitioners.

Reduced transaction costs:

Corporate lawyers develop an early familiarity with the extensive corporate case law laid down by the courts of Delaware. This reduces transactional costs and enables corporations incorporated in Delaware to plan with some foresight and knowledge. Delaware does not charge income tax to corporations incorporated within the State, which have their business/headquarters and operations outside the state.

There is some argument among scholars and practitioners that Delaware is losing its sheen as the corporate law giant. However, for the foreseeable future, it is unlikely that any other state will overtake Delaware as the favored place of incorporation for sizable companies.