At Equine Legal Solutions, we are frequently asked about rights of first refusal in horse sales. These calls typically come from former horse owners who are upset that they weren't notified before a horse was resold or otherwise transferred to a new owner. They want to know if they can get the horse back. The answer is almost always no. Here's why:
(1) The right of first refusal wasn't in writing. Often, the original horse sale was conducted without anything in writing. Other times, the buyer received a simple bill of sale that doesn't include a right of first refusal. Either way, a verbal agreement will be very hard to enforce, particularly if there were no emails or other evidence supporting the existence of a right of first refusal.
(2) The horse is already sold before the former owner finds out. When the horse has been sold to a third party who is unaware of the right of first refusal, the former owner typically has no legal case against the horse's new owner and therefore no way to obtain possession of the horse. Instead, the former owner has a legal case for damages against the person who granted the former owner the right of first refusal. However, damages are based solely on the monetary injury suffered by the former owner when the right of first refusal was breached. Emotional damages don't count, so the basis for damages is the difference between what the former owner would have purchased the horse for under the right of first refusal versus what the horse's market value was at the time the right of first refusal was breached. Usually, the right of first refusal would have entitled the former owner to buy the horse at the same price the horse was offered to another buyer, so the monetary damages for breaching the right of first refusal would be zero.
The best way to ensure that a right of first refusal is honored is to have a written contract clearly stating the right of first refusal, along with exactly how it will be executed. For example, how much notice of a pending sale does the horse owner have to give the former owner? How long does the former owner have to respond? At what price can the former owner buy the horse under the right of first refusal? A good right of first refusal clause also provides for liquidated damages in the event the right is breached. Liquidated damages represent a dollar amount the parties agree the breacher has to pay the rights holder if the right of first refusal is breached. Liquidated damages eliminate the problem of having to prove actual damages as described in (2) above.
In response to customer demand, Equine Legal Solutions is incorporating rights of first refusal clauses into all of its horse sale and purchase agreements. Currently, the Simple Equine Sale Agreement and the Equine Installment Sale Agreement contain rights of first refusal, and each of the other sale and purchase contract forms are being updated.
Thursday, November 5, 2009
Friday, October 30, 2009
Why Drafting Your Own Equine Contracts Doesn't Save Money
Customers often ask why Equine Legal Solutions doesn't allow customers to edit the equine legal forms they purchase from us. Other than the fact that all our forms are copyrighted, and allowing customers to make derivative works would dilute our intellectual property rights, we want to protect our customers from themselves.
Contract drafting is a technical skill. Just like dentists and carpenters, lawyers receive specialized training and then hone their skills through experience. However, while most people wouldn't even consider filling their own cavities or building their own staircases, they seem to have no reservations about drafting their own contracts. Why? The simple answer is delayed consequences. While the disastrous results of do-it-yourself dentistry and carpentry are immediately obvious, it takes time to find out whether a contract is a disaster.
In my equine law practice, I see a wide range of equine contracts, and the vast majority of them are very poorly drafted. When I review the contracts with potential clients and gently explain how they might not do what the potential clients need them to do, the potential client is rarely surprised. They sigh and ruefully explain that a chat forum buddy sent them a sample document, or they cobbled together the contract using pieces of other contracts they found on the Internet. They didn't want to spend the money to have a professionally drafted contract, so they created their own and hoped for the best. And unfortunately, they are now paying the price.
Here are the top three problems I see with equine contracts drafted by non-lawyers:
(1) The contract doesn't include all the material terms.
Part of a lawyer's job in drafting a contract is to anticipate contingencies and plan for them. As an equine attorney, I hear about or are directly involved in thousands of horse transaction problems, and I use that knowledge of potential issues in drafting my contracts to make sure those "what ifs" are covered.
The amateur contract drafter doesn't have this knowledge and experience, so they do the best they can. But their best isn't good enough. Here are some critical omissions that I see over and over:
-Horse installment sale contract doesn't address what will happen if the buyer doesn't finish paying for the horse.
-Liability release doesn't include all the parties being sued. If the release doesn't include you, it can't protect you!
-Boarding contract lien provisions are insufficient to allow the boarding stable to sell a horse to satisfy a past due board bill. The boarding stable must then rely upon statutory lien rights, which are usually time-consuming and costly to enforce.
(2) The contract doesn't say what state's law will apply, or where the parties can sue each other.
Why does this matter? Here's a very typical example: Sally, who lives in California, buys a horse from Stanley, who lives in Texas. Sally goes to Texas, tries the horse, and buys it. Later, Sally discovers a problem with the horse and calls ELS about suing Stanley. The bill of sale that Sally received from Stanley in Texas says nothing about what state's law will apply or where the parties can sue each other. Sally will probably have to sue Stanley in Texas, because that is where Stanley lives, and where the contract was made.
(3) The contract doesn't provide for attorneys' fees and costs if the parties sue each other.
Why does this matter? In most states, with some very limited exceptions, if you sue someone for breach of contract and you win, the loser doesn't have to pay your attorneys' fees and court costs unless you have a contract that says they do. With the typical breach of contract lawsuit costing a minimum of $10,000 to litigate, your attorneys' fees and costs could easily eclipse what you might win in a lawsuit, making it cost-ineffective to sue.
Cost is the number one reason why horse people draft their own contracts instead of using a professionally prepared form or a lawyer-drafted contract. However, at the end of the day, is it really a cost savings to draft your own contracts? Sure, you might save $24.99 by not buying a liability release form from Equine Legal Solutions, but will that savings be justified when someone falls off your horse and sues you for $1.5 million? And you might not think you can afford to pay $500 for ELS to draft a customized contract for the sale of your $50,000 stallion in which you are retaining breeding rights, but you'll be glad you spent that $500 when the buyer resells the stallion before your breeding rights expire and you are not left wondering what to do because your contract says exactly what will happen.
Contract drafting is a technical skill. Just like dentists and carpenters, lawyers receive specialized training and then hone their skills through experience. However, while most people wouldn't even consider filling their own cavities or building their own staircases, they seem to have no reservations about drafting their own contracts. Why? The simple answer is delayed consequences. While the disastrous results of do-it-yourself dentistry and carpentry are immediately obvious, it takes time to find out whether a contract is a disaster.
In my equine law practice, I see a wide range of equine contracts, and the vast majority of them are very poorly drafted. When I review the contracts with potential clients and gently explain how they might not do what the potential clients need them to do, the potential client is rarely surprised. They sigh and ruefully explain that a chat forum buddy sent them a sample document, or they cobbled together the contract using pieces of other contracts they found on the Internet. They didn't want to spend the money to have a professionally drafted contract, so they created their own and hoped for the best. And unfortunately, they are now paying the price.
Here are the top three problems I see with equine contracts drafted by non-lawyers:
(1) The contract doesn't include all the material terms.
Part of a lawyer's job in drafting a contract is to anticipate contingencies and plan for them. As an equine attorney, I hear about or are directly involved in thousands of horse transaction problems, and I use that knowledge of potential issues in drafting my contracts to make sure those "what ifs" are covered.
The amateur contract drafter doesn't have this knowledge and experience, so they do the best they can. But their best isn't good enough. Here are some critical omissions that I see over and over:
-Horse installment sale contract doesn't address what will happen if the buyer doesn't finish paying for the horse.
-Liability release doesn't include all the parties being sued. If the release doesn't include you, it can't protect you!
-Boarding contract lien provisions are insufficient to allow the boarding stable to sell a horse to satisfy a past due board bill. The boarding stable must then rely upon statutory lien rights, which are usually time-consuming and costly to enforce.
(2) The contract doesn't say what state's law will apply, or where the parties can sue each other.
Why does this matter? Here's a very typical example: Sally, who lives in California, buys a horse from Stanley, who lives in Texas. Sally goes to Texas, tries the horse, and buys it. Later, Sally discovers a problem with the horse and calls ELS about suing Stanley. The bill of sale that Sally received from Stanley in Texas says nothing about what state's law will apply or where the parties can sue each other. Sally will probably have to sue Stanley in Texas, because that is where Stanley lives, and where the contract was made.
(3) The contract doesn't provide for attorneys' fees and costs if the parties sue each other.
Why does this matter? In most states, with some very limited exceptions, if you sue someone for breach of contract and you win, the loser doesn't have to pay your attorneys' fees and court costs unless you have a contract that says they do. With the typical breach of contract lawsuit costing a minimum of $10,000 to litigate, your attorneys' fees and costs could easily eclipse what you might win in a lawsuit, making it cost-ineffective to sue.
Cost is the number one reason why horse people draft their own contracts instead of using a professionally prepared form or a lawyer-drafted contract. However, at the end of the day, is it really a cost savings to draft your own contracts? Sure, you might save $24.99 by not buying a liability release form from Equine Legal Solutions, but will that savings be justified when someone falls off your horse and sues you for $1.5 million? And you might not think you can afford to pay $500 for ELS to draft a customized contract for the sale of your $50,000 stallion in which you are retaining breeding rights, but you'll be glad you spent that $500 when the buyer resells the stallion before your breeding rights expire and you are not left wondering what to do because your contract says exactly what will happen.
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