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What boilerplate language should a contract have?

Pen laying on unsigned contract. Does it include necessary boilerplate?

You need to sign a contract, but you aren’t sure if you’re protected. Here are two quick pointers. First, make sure you have boilerplate language to protect all parties involved. There are sentences that pretty much all contracts should have. They are kind of like a vaccination. Having it won’t hurt. But not having it could. For example, you may never be exposed to Neisseria meningitidis, but having the standard booster shot (which includes this vaccination) is still a good idea.

(The second pointer is don’t try to figure it out on your own. Lawyers have special training to figure out ambiguities and protect you. You may be thinking you save money now by proof-reading the contract yourself. But if there is an ambiguity, or something is missing in the contract, it can cost you dearly later.)

Here are boilerplate contract provisions that should be in almost inteevery contract:

Applicable Law. This Agreement shall be construed and interpreted in accordance with the substantive laws of the State of Arizona.

Binding Nature of Agreement; Assignment.  This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and permitted assigns.

Construction. This Agreement shall be construed as if drafted mutually by the parties through their respective counsel and therefore shall not be construed against either party.

Effective Date. This Agreement has been executed by the parties intending that it be effective on the effective date set forth on the caption page. The parties recognize that they effectuated a meeting of the minds among themselves on that effective date and intended that this Agreement take effect on that date even though, because of the exigencies of the modern world, the mechanics of drafting, the convenience of the parties, and the economy of travel, it may have been necessary to actually sign the document at a later time.

Counterparts. This Agreement may be executed in one or more counterparts, each of which may be executed by one of the parties hereto, with the same force and effect as though all the parties executing such counterparts had executed the same instrument. All counterparts shall be construed together and shall constitute one agreement.

Effective Place of Execution. The parties intend that the place of execution be that county and state that is set forth in the caption of this Agreement. The effective place of execution is the place that the parties intend this Agreement to have been executed incorporating all laws, for purposes of conflicts of laws, which apply to that effective place of execution. The parties recognize that, due to the exigencies of the modern world, the mechanics of drafting, the convenience of the parties, and the economy of travel, this Agreement may be executed by one or all of the parties at some other geographic location and possibly at multiple places. In spite of this, however, they intend that it be deemed executed at the effective place of execution.

*Entire Agreement. The terms of this Agreement constitute the entire agreement between the parties. The parties represent that there are no collateral agreements or side agreements not otherwise provided for within the terms of this Agreement.

Execution of This Document. All parties named in the caption as parties shall sign below and at least one of the parties shall initial all pages of all original copies of this Agreement. Furthermore, all documents such as schedules, exhibits, and like documents which are expressly incorporated herein shall be initialed by the parties and either exchanged or attached to the originals which are given to any party named on the caption page of this Agreement. It is the intent of the parties that all pages be initialed on all originals that are exchanged in order that no substituted pages or misunderstanding shall ever become possible to create problems in satisfying the intended objectives of this Agreement.

Execution of Related Documents. The parties agree to execute and deliver to the other, in recordable form if necessary, such further documents, instruments or agreements, and shall take such further action, that may be necessary or appropriate to effectuate the purposes of this Agreement.

Fair Notice of Default. The parties are desirous of giving one another fair notice of any default before sanctions are imposed. In the event of an act of default with respect to any provision of this Agreement, no party may institute legal action with respect to such default without first complying with the following conditions:

Notice of such event of default must be in writing and faxed, E-mailed or mailed to the other party by U.S. Certified Mail, return receipt requested.

Such written notice shall set forth the nature of the alleged default in the performance of the terms of this Agreement and shall designate the specific paragraphs(s) hereof which relate to the alleged act of default.

Such notice also shall contain a description of the action to be taken or performed by the other party to cure the alleged default and the date by which the default must be remedied, which date may not be fewer than 30 business days from the date of mailing the notice of default.

Force Majeure.  Neither party shall be liable to the other party for any delay or omission in the performance of any obligation under this Agreement, other than the obligation to pay monies, where the delay or omission is due to any cause or condition beyond the reasonable control of the party obliged to perform, including, but not limited to, strikes or other labor difficulties, acts of God, earthquakes, acts of government (in particular with respect to the refusal to issue necessary import or export licenses), war, riots, embargoes, or inability to obtain supplies (“Force Majeure”).  If Force Majeure prevents or delays the performance by a party of any obligation under this Agreement, then the party claiming Force Majeure shall promptly notify the other party thereof in writing.

Good Faith — Attorney’s Fees and Costs. The parties desire that each raise only good faith disputes for mediation, arbitration, or litigation. To discourage the bringing of such proceedings without a good faith reason, this provision is enacted. If, upon failure of any party to this Agreement to comply with any of the terms or conditions hereof, to enforce any payments herein stipulated, or to enforce any provision hereof, the losing party will pay to the prevailing party reasonable costs, except witness fees, and expenses, including attorney’s fees and the value of time lost by the prevailing party or any of its employees in preparation for or participating in any arbitration or litigation in connection herewith as determined by the court or arbitrator. All lawsuits under this Agreement shall be filed in the courts of the county and state where this Agreement was executed.

Interest. If, by reason of any default or act of one party under this Agreement, it is determined by agreement, mediation, arbitration, or litigation that the party owes another any sum of money, interest shall accrue on that sum at the rate of 10% per annum from the date the sum was first due until paid.

Interlineations and Initials. The parties recognize that, because of the exigencies of the modern world, the mechanics of drafting, the convenience of the parties, and the economy of costs, they may have made minor changes in their own handwriting in this Agreement. These minor changes have been initialed by all the parties, if any changes have been made, fore and aft of the change on all originals to prevent any extension or alteration of that change by any of the parties or others. Unless otherwise indicated by the placement of a date beside the change, these changes were intended by the parties to have occurred as of the effective date of this Agreement. Any interlineated changes made by the parties after the effective date of this Agreement shall be initialed by all parties and dated and have the date itself initialed fore and aft by all parties to this Agreement.

Interpretation. Whenever any word is used in this Agreement in the masculine gender, it shall also be construed as being used in the feminine and neuter genders, and singular usage shall include the plural, and vice versa, all as the context shall require.

Marginal Headings. The marginal headings of the paragraphs of this Agreement are for convenience only and are not to be considered a part of this Agreement or used in determining its content or context.

Materiality.  All covenants, agreements, representations and warranties made herein shall be deemed to be material and to have been relied on by the parties in entering into this Agreement and shall survive the execution and delivery of this Agreement.

Modification. Any modification or amendment of this Agreement shall be in writing and shall be executed by all parties.

Notices. Copies of all notices and communications concerning this Agreement shall be mailed to the parties at the addresses written on the caption pages hereof. Any change of address also shall be communicated to the other parties in writing and in English. Any document which may adversely affect the rights of any party to this Agreement shall be dispatched by fax, E-mail or U.S. Certified Mail, return receipt requested. For all documents mailed to persons in the continental United States, the time period of all notices shall begin running on the day following the date that the document is postmarked. For documents mailed to persons outside the continental United States, the time period shall begin running on the date that the document is received by the other party.

Incorporation of Recitals.  The prefatory language and Recitals made and stated above are incorporated by reference into, and made a part of, this Agreement.

Integration; Time of the Essence.  This Agreement and its exhibits and documents incorporated herein constitute and embody the full and complete understanding and agreement of the parties hereto and supersedes all prior understandings, whether oral or written.  Time is of the essence in all matters associated with this Agreement.  No representation, promise, inducement or statement of intention has been made by any party hereto which is not embodied in this Agreement, and no party hereto shall be bound by or liable for any alleged misrepresentation, promise, inducement or statement of intention not so set forth.

Partial Invalidity. If any term, condition or provision of this Agreement or the application thereof is judicially or otherwise determined to be invalid or unenforceable, the remainder of this Agreement and the application thereof shall not be affected, and this Agreement shall otherwise remain in full force and effect.

Power and Authority. Each party executing this Agreement in a representative capacity warrants to the other party that he has the right, power, legal capacity, and authority to enter into this Agreement. No approval or consent of any other person shall be necessary in connection with the execution, performance, and delivery of this Agreement.

Settlement of Disputes. This provision is enacted to protect all parties to this Agreement in the event of unusual changes in circumstances which occur outside the control of the parties and which create an undue and unreasonable hardship on any of the parties or gross inequities between the parties because of such an unusual change in circumstances. If any of these conditions occurs, this Agreement shall be modified by first communicating with the other party and attempting to resolve the dispute. If that does not work, the parties will submit the dispute to mediation. [Consider also including: If mediation is unsuccessful, then the parties agree to submit the dispute to binding arbitration using the rules of the American Arbitration Association.]

Statutes and Contracts Not Being Breached. Each party to this Agreement represents and warrants that the execution and delivery of this Agreement by such party, compliance with the terms and provisions of this Agreement by each party, and such parties’ consummation of the transactions as contemplated under this Agreement will not breach any statute or regulation of any governmental authority, domestic or foreign, or acceleration of any of the terms, conditions, or provisions of any agreement or instrument to which each such party is a party, or to which each such party is or may be bound, or constitute a default or event of termination thereunder.

Waiver. Any waiver by any party of a breach of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach hereof.

[*For sales of goods contracts, use the following: “No waiver by either Supplier or Distributor with respect to any breach or default or of any right or remedy and no course of dealing shall be deemed to constitute a continuing waiver of any other breach or default or of any other right or remedy, unless such waiver be expressed in writing signed by the party to be bound.]

NOTE: This blog post is NOT intended as legal advice. While having these boilerplate clauses in contracts is normally good, every situation is different. You MUST consult with an attorney before acting on the information provided in this blog or on this website. If you want help, contact us.

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What are my duties as a Trustee in Arizona?

PHoto of person holding nest with money as representation of trustee duties.

As a fiduciary, you are held to the highest standard of care in dealing with the Trust assets. This means you have a legal duty of undivided loyalty to the primary beneficiary of the Trust. You must be cautious and prudent in dealing with Trust assets. As a fiduciary, you must remember, Trust assets do not belong to you and must never be used for your benefit or mixed with your assets or anyone else’s assets. You may be held personally liable and responsible for any damage or loss to Trust beneficiaries resulting from a violation of your trustee duties as a fiduciary (Trustee). More to the point, you have the following trustee duties and more:

  1. You must administer the trust according to its terms.
  2. You are required to act with undivided loyalty to the beneficiaries of the Trust. As trustee can breach the duty of loyalty by acting for personal gain;
  3. You are obligated to eliminate and exclude all selfish interest and to act solely for the highest and best benefit of the beneficiaries of the Trust;
  4. You are not permitted to obtain any economic advantage and may not profit from your relationship from the Trust;
  5. You cannot engage in “self-dealing” regarding the Trust assets. “Self-dealing” means that a trustee (such as you) used the advantage of his or her (your) position to gain an economic benefit for the trustee, other than reasonable compensation. The Trust, as drafted, permits you to “receive reimbursement, for all reasonable expenses incurred in the management and protection of the Trust Estate.”

“Self-dealing” occurs when a fiduciary (you) has a personal interest in a transaction of such a substantial nature that it might have affect his or her (your) judgment in a material regard. “Self-dealing” can occur when a trustee, acting for himself and also as trustee, seeks to consummate a deal in which self-interest is opposed to duty. A trustee who engages in “self-dealing” violates his or her duty of loyalty.

  1. You owe a special duty to Trust beneficiaries in your transactions relating to them, which is called a fiduciary duty. This fiduciary duty, among other things, requires you to conduct your transactions for the benefit of all beneficiaries and the trust with scrupulous integrity, honesty, good faith, loyalty, care and diligence;
  2. You cannot place yourself in a position in which your self-interest would or possibly could conflict with your trustee duties to act for the benefit of Trust beneficiaries;
  3. You cannot use trust assets for personal benefit except as approved by a court of competent jurisdiction;
  4. You are obligated in dealing with trust assets to act as a prudent person dealing with the property of another would act, including exercising the care and skill that a person of ordinary prudence would exercise in dealing with the property of another;
  5. You are obligated to be vigilant in protecting Trust assets.

The following is an outline of some of your trustee duties. It does not describe all of your trustee duties under the Trust and is not a substitute for seeking professional legal advice. If you have any questions, you should retain your own separate attorney.

  1. Immediately locate, identify, and inventory all of the assets of the Trust and make proper arrangements for their protection, such as changing the locks on the house, renting a safe deposit box for important documents, etc.
  2. Immediately take title to all the Trust’s property. The property should be titled in the name of the Trust. Do not put trust funds or assets into joint accounts, trust accounts (“in trust for”) or payable on death (POD) accounts. Do not list yourself as beneficiary on any bank accounts or other assets belonging to the Trust.
  3. Keep detailed records of all receipts and expenditures you make on behalf of the Trust, including bills, receipts, bank statements, tax returns, bills of sale, promissory notes, etc. Include date, check numbers, payees and purpose for all expenditures. Avoid dealing in cash!
  4. Establish a budget, pay Trust debts when they become due, and properly invest Trust assets. You may hire accountants, attorneys, and other advisors to help you carry out your trustee duties. You are also responsible for collecting information regarding taxes, and for preparing or filing any required tax returns. Please create an inventory of assets (both personal property and financial accounts). This will serve as the opening balance for the accounting that you are required to maintain.
  5. Keep detailed records of the time you are spending in identifying, managing and protecting Trust assets in case you later decide to ask to be paid for your time in managing Trust affairs. If you do not maintain these records now, it will be impossible to re-create them at a later date in the event you decide to seek this compensation.
  6. Generally, you must account to the beneficiary on an annual basis. This includes information recording all sums and property received since your appointment itemized by date, source, purpose and account; and all expenditures made since your appointment, itemized by date, payee, purpose and amount; and the balance on hand at the end of the accounting period. The trust document may provide more detailed information about this duty. Sometimes this duty to provide an accounting is waived. However, in our opinion it is usually best to provide the accounting anyway.

I advise making and maintaining copies of all the statements each year, as well as a written statement that you have delivered such statements to the beneficiaries (or counsel for the beneficiaries) each year. It is a better practice to account more frequently, however.

  1. NEVER use any Trust money or property for any reason other than Trust expenses. You may not profit in any way from access to the Trust assets. You have a legal duty of undivided loyalty to the beneficiaries. Neither you, your friends, nor other family members may profit by dealing in or with Trust assets. For example, you may not invest assets in family businesses or the like. You must be cautious and prudent in investing the Trust’s assets. A copy of the Prudent Investor Act is enclosed for your review. This is a general guideline under Arizona law for a fiduciary’s management of assets belonging to another. The Act may be altered by specific provision of the Trust; more specifically, the Trust may allow investments and transactions not allowed under the Act. Please seek the advice of the relevant professional (namely, financial advisor or CPA) in regard to management of the specific assets belonging to the Trust, whether held in the Trust or otherwise. Please note as well that the Trust is governed by Arizona law.

Advise all financial advisors in writing that the account is a fiduciary account and keep a copy of your written communication to them telling them of the fiduciary nature of the account.

  1. You must not make speculative investments. Do not purchase merchandise or services that would be objectively considered extravagant or inappropriate for a prudent investor as set out in the enclosed statute.

The applicable statutes are located at A.R.S. 14-10801 through -10813.

If you have questions regarding your trustee duties, contact us. The information set forth in this letter is intended to be of a general nature. However, we are happy to guide you regarding your particular situation. We just need to meet first and have you sign a fee agreement.

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Own an Arizona Business? You Need to Know This …

Photo of sign in business window that reads, "Sorry We're Closed."

Does your family depend on your company’s income? Are you hoping to pass your business on to a loved one?

If so, read on. Here are common scenarios, and the solution.

You have a serious illness, and have no Durable General Power of Attorney that specifically provides for management of your business. In this case, someone will need to go to court and get appointed as a Temporary Conservator. Sounds easy enough. But what if your family gets into a dispute over who should be appointed?  That could delay the process by months. And meanwhile, your business has no one to manage it. Once a Conservator is appointed, that person has authority to continue to run things under A.R.S. 14-5424 (C)(3). BUT the status is less than clear on whether the Conservator can turn around the business if it suffered during your illness or during the court proceeding. The statute allows the Conservator to “continue” the business. But I’ve seen that be interpreted as not requiring the Conservator to take proactive steps to help fix or correct problems as needed.

You have a serious illness, and you DO have a Durable General Power of Attorney. In this case, you probably think you’re in the clear. But … most Power of Attorney documents that I’ve seen do NOT include language specifically allowing the agent (aka “power of attorney” holder) to continue to operate a business. If businesses have any sort of license, this can also be catastrophic.

Your business is in a Living Trust. You might be slightly better off with this situation. But, two common problems are (a) having a business license in your personal name and (b) the trust document not specifically permitting the continuation of the business by a successor trustee. Again, your business could suffer while you try to fix this problem somehow. In most instances, the only solution is to go to court and ask for permission for the trustee to continue the business. Meanwhile, the business flounders.

You die, and the business is not owned by a Trust. The Arizona Probate code merely requires the Personal Representative (aka executor) to administer your estate expeditiously in the best interest of the estate. That is interpreted to mean basically that the Personal Representative just needs to list it for sale. If your enterprise lost clients during your illness, the PR need not do anything to try to turn the business around. (For the record, I disagree with this interpretation of the statute, but I’m sharing how the Arizona courts treat this situation.)

Bottom line: Talk to your estate attorney and come up with a continuation plan in case you are out of the picture. Have someone picked to take over the business who actually knows how to run the business. Then make sure that somehow that person will have authority to do what is required. If your venture is licensed, the license should be held in an LLC or corporation if that is allowed. Then make sure there is a clearly documented transition plan in place for that entity.

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Duties of a Guardianship with Mental Health Powers

Photo of scrabble letters spelling "Mental Health"

If your loved one needs to be committed for inpatient mental health treatment in a locked facility, then you are looking at what’s called a “Guardian with Mental Health Powers”. This is a complicated process, and I strongly encourage you to get the help of an attorney. You will need to prove that your loved one is incapacitated as a result of a mental disorder and is likely to be in need of inpatient mental health care and treatment within the next 12 months. See A.R.S. Section 14-5312.01. This authority would allow the guardian to place the person to a “level one behavioral health facility” (aka, a locked mental health facility).

If the subject of mental health is new to you, please read up on it. It isn’t always easy to tell if someone has a mental health issue, or a physical one. (Here is an article about that subject.)  In this country, we joke about people being “crazy” and are baffled by the number of homeless people. In truth, many people with mental illness want help. It isn’t fun to be seriously depressed or confused or addicted. And sometimes a family member or friend needs to step up to the plate and go to court to get permission to provide the help that is needed. This also isn’t fun. First, you will need to get a health care professional’s report stating the need for a guardianship with mental health powers. Then you will involve going to court. If you are the one trying to get appointed as guardian, a court investigator will call you or meet with you to make sure you are a responsible person. There will be a court appointed attorney whose job it is to protect his client (your loved one) and push back on your efforts. This is all part of the process. The purpose is to make it difficult to take someone’s legal rights away.

If you are appointed as a guardian with mental health powers, you are required to report annually, in writing, with respect to your ward’s residence, physical and mental health, whether there still is a need for a guardian, and your ward’s financial situation. Your report is due each year on the anniversary date of the Letters of Appointment.
You must be conscious at all times of the needs and best interests of your ward. If the circumstances that made a guardianship necessary should end, you are responsible for petitioning to terminate the guardianship and obtaining your discharge as guardian. Even if the guardianship should terminate by operation of law, you will not be discharged from your responsibilities until you have obtained an order from this Court discharging you.

If you have any questions, call us at 602-443-4888.

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How to Create a Family Dynasty

I’ve been studying how to create a family dynasty for the last 10 years. It turns out that there are 8 Keys to a family’s long term success. I’ll explain the importance of these 8 Keys by telling this story. In 2012, I was fortunate to spend a couple of days with the adventure photographer, writer, filmmaker and wilderness guide Michael Powers in Half Moon Bay, California – about 40 miles south of San Francisco. Michael is an avid ocean kayaker, and prefers riding the big waves at Half Moon Bay on his kayak—what’s called kayak surfing.

Michael took me kayak surfing at Mavericks where the waves routinely crest at 25 feet but can get to 60 feet! I had never before been kayaking, and I had never been kayaking on the ocean, let alone a destination for extreme surfers. What I learned is that you need to have balance, momentum and persistence to get past the initial waves, which are called “breakers.”

The breakers treated me like a homeless person at a country club brunch. At least once I remember tipping over with my legs still stuck in the kayak and—being the beginner I was—trying to figure out how to extract myself while holding my breath and trying to avoid leaving parts of my face among the submerged sand and rocks.

About 50 feet from shore, the waves turned into giant swells. If you timed it just right, and had your kayak angled just right, you could glide down these swells like you were sledding. If not, well you would be trying to get back on a kayak while the giant waves kept coming at you, without being able to touch the ground.

Here’s what I found most interesting. There is a distinct difference between the area close to shore, where the breakers keep trying to push you back, and the open water. Sure there are dangers in the open water as well. But the rules are different. In the open water, you can focus on having fun. But close to shore, you just keep getting pushed back.

This reminds me of how most families are in terms of being able to preserve and grow their wealth from generation to generation. From a long-term (multi-generational) wealth enhancement standpoint, most families never get past the breakers. That’s why having a family dynasty is so rare. Until fairly recently, it has required a minimum of roughly $50 million for a family to be able to implement all of the systems necessary for a family to prosper indefinitely (especially the family office component). But things have now changed. With the help of new options—multi-family offices, outsourcing companies, and new technologies—families no longer need to hire full time staff to ensure their long-term success.

Most families prosper for a lifetime, and then leave some measure of wealth to their kids. If the family is somewhat sophisticated or owns a profitable business, the second generation may be able to hold onto that wealth for their lifetimes. But the initial wealth rarely survives to the end of the third generation.

At Half Moon Bay, I was able to get past the breakers when I was kayaking for the first time, largely because I had a good coach. And I believe that families can get past the financial breakers and create long-term wealth that will survive more than 100 years—even with less than $50 million in net worth—if they follow the steps of other families that have made it.

In the coming blog posts, I will introduce the 8 Keys to a family’s long term success (i.e., how to create a family dynasty). For more information, go to EachGenerationStronger.com.