Reference no: EM132186407

Background: Painted Images (PI)

Jo, Maddy, and Taylor are friends, business acquaintances, and residents of Maryland. Jo has been the project manager for twelve years for a construction company owned by a general contractor and developer. Maddy and Taylor have owned and operated a small, successful home rehab and “flipping” business for ten years.

After considering several business ventures, the group decided that a residential painting business would be a good fit for their professional experiences, skills and interests and agreed to pursue the possibility of launching a Maryland-based painting business named Painted Images.

The three hired a market analyst to research market trends and demands for the painting services industry and confirm whether Painted Images would likely be a viable business in their community. The market analysis showed there is an increased demand for homes services businesses in the region. Consequently, the group decided to move forward with their idea to establish PI.

The group is committed to operating and marketing PI as a green business. Most paint contains high VOC (volatile organic compounds) that pollute the air, particularly indoor air. According to the Environmental Protection Agency, VOCs are considered one of the top five hazards to human health, arising primarily from interior paints and finishes. New environmental regulations and manufacturing techniques have led to the development of low-VOC and zero-VOC paints that are durable, cost-effective and less harmful to human and environmental health.

Jo, Maddy, and Taylor plan to purchase all paint and other supplies from Naturals, Inc. (Naturals), a mid-sized manufacturer of zero-VOC paint and chemical free paint supplies. The potential owners of PI are familiar with Naturals as each has purchased from Nautrals for their respective current businesses.  PI plans to resell certain Naturals products to PI clients directly for painting jobs, and via internet sales.

PI will be headquartered in a business space in a local shopping center. The PI headquarters will include private business offices, a reception area, and conference meeting and planning space to which potential and existing customers will be invited to discuss proposals for painting jobs, paint products, and to complete contracts for painting jobs. The business space will be open to the public to collect information and inquire about PI services, examine paint displays, and view photos and exhibits from ongoing and past painting jobs.

The potential PI owners recently attended a start up business seminar sponsored by the local chapter of the Small Business Administration. Following the seminar, the owners held several meetings to define the nature and scope of the work to be done to prepare a clear plan for the start-up business. They realized this process requires time, thoughtful analysis, and clear guidelines as the owners have somewhat different priorities, interests and expectations.

They also recognized that they need for professional business consultants, such as BCA, to guide their start-up for PI. Consequently, the three have hired BCA to advise and guide them through the start-up process for PI.

Painted Images Owners

Jo:  Jo wants an initial 30%-40% interest in PI, but wants to limit future capital commitment until the business is operating profitably. Jo wants the option to acquire others’ interests if they die or leave the business for any reason.   Also, Jo wants to take out money from the business, in the form of salary, benefits, expenses, or dividends, as appropriate, as soon as PI has a healthy net profit margin.

Jo is most concerned about liability and knows the other owners are trustworthy and ethical, but wants to limit personal liability in the business to no more than capital contribution. If possible, Jo wants Key Man Insurance for the owners so all will have protection if one owner can no longer contribute to business for any reason.

Jo prefers a strong managerial position to make decisions for day-to-day operations. Jo is willing to be involved in day-to-day business operations and wants to play a key role, along with the other owners, in establishing the structure, and the business environment and culture for PI.  

Maddy:  Maddy wants at least a 25% interest, and prefers to minimize additional investments to protect personal cash assets needed for other business investments. Maddy’s main goal is to realize a return on investment as quickly as possible.

Maddy wants to minimize personal liability, especially in the event of bankruptcy or death of any of the other owners.

Maddy wants to participate in long-term business decisions, but does not want to be involved in day-to-day business activities. Maddy prefers to hire a general manager to run the business, although is willing to consider having others manage the business.   

Taylor:  Taylor is enthusiastic about the new business plans and trusts the others and respects their business expertise.  

Taylor is willing to commit to an investment of 51% interest in PI, but is agreeable to a lesser interest. With a maximum interest of 51%, Taylor would want complete control over business operations. Even with a lesser investment, Taylor wants a strong managerial position and prefers owners with a minority interest to be silent in day-to-day management of PI.  

Taylor wants to minimize personal liability.

Assignment

Purpose

The purpose of this project is to research, analyze and create a plan that demonstrates your understanding of legal risks and liabilities related to tort law, product liability law, and contract law.

The project requires you to identify and analyze legal issues and to make recommendations. These issues will relate to the concepts covered in weeks 1-7.

You will also develop skills in writing a memorandum and using critical thinking to write an in-depth comprehensive analysis.

Outcomes Met by Completing this Assignment:

· analyze contractual rights, obligations, liabilities, and remedies in the business environment

· analyze tort rights, obligations, liabilities, and remedies in the business environment

Background:  Things have been moving quickly for the PI owners. They are almost ready to open operations. An important next step is to finalize negotiations to contract with Naturals to purchase paint and paint supplies. PI wants a clause in the contract with Naturals that PI would buy paint and paint products exclusively from Naturals for 3 years. The contract will also include a product description that all paints are zero-VOC.  

Recently, PI owners learned that although some of Naturals paint products are zero-VOC, most Naturals paint contains 1-5% VOCs, and thus, are not actually zero-VOC.

Under state and federal regulations, paint products that contain less than 8% VOCs can legally be categorized as a zero-VOC green product. However, PI has already begun advertising and marketing its business and paint as zero-VOC.

Naturals paint products are 15-20% less expensive than other equivalent paint products on the market. PI is unsure whether to continue its plan to contract with Naturals for use of Naturals' paint.   The owners are concerned about possible liabilities for PI if it uses Naturals’ products knowing the products are not zero-VOC paints. PI has again come to BCA for advice.

The PI owners believe they have 2 options regarding purchase of paint products and supplies.

The options are:

Option 1: Continue PI’s plan to sign a contract with Naturals, use Naturals paint under a 3-year exclusive contract, and advertise and market the paint as zero-VOC paint because Naturals paint legally can be categorized as zero-VOC paint under state and federal regulations.

Option 2: Discontinue contract negotiations with Naturals and opt to contract and purchase similarly-priced paints from New Green, Inc., a manufacturer in Mexico. New Green is a new company and one with which PI has no experience. The Mexico company guarantees all its paint are zero-VOC and its paint supplies are chemical-free.

PI has again come to BCA for advice on this matter.

Instructions: Your BCA supervisors, Pat Braden and Gale Roth, have given you the responsibility of researching and analyzing possible legal implications and potential risks and liabilities regarding the decision facing the PI owners about whether to continue buying paint products from Naturals or switch to purchasing paint products from New Green.

You are to research and present your recommendations to PI as a Power Point (PPT) presentation or a video presentation (choose either the PPT or the video for your presentation). Scroll down for format requirements for the presentation.

The presentation should address the following:

A. Analyze and discuss the pros and cons – from a business perspective of PI choosing Option 2 above and contracting instead with New Green.

B. Analyze and discuss any potential risks and liabilities arising under contract law by choosing Option 2 and contracting with a company (New Green) in Mexico.

C. Assume PI chooses Option 1 and establishes a 3-year exclusive contract with Naturals to buy their paint and supplies. Assume further that PI was sued 1 year into this 3-year contract period under product liability law (for example, if a client sued because of some problem directly resulting from use of Naturals paint), what liabilities could PI face under contract law if PI chose to cancel its 3-year exclusive contract with Naturals prior to the end of the 3 years. NOTE: You are to address contract law risks and liabilities, not product liability law.