The BUSKLAW February Newsletter: "What's in Your Contracts?" The Case for Auditing Your Contracts (Part 2)

In last month's newsletter, we discussed the importance of auditing your business contracts and pointed to five potentially troublesome provisions: identification of the parties, agreement term, payment, intellectual property rights, and confidentiality. But there are additional provisions that deserve careful scrutiny:

> Indemnification. To understand this concept, start with three players: the parties to the contract (call them Able and Baker) and a third player who isn't a contracting party (call him Charlie). Let's say Able manufactures widgets, Baker sells them in its retail stores, and Charlie is a customer who purchases an Able-produced widget from Baker. The widget injures Charlie. Charlie's lawyer sues Able and Baker because Able produced the widget and Baker sold it to Charlie. Baker's only involvement was selling the widget, so he tells Able to take care of it, i.e., defend him in the lawsuit and pay the settlement or the court judgment if the case goes to trial. The extent to which Able must protect Baker from Charlie's lawsuit is what indemnity is all about; chances are that the sales contract for the widgets between Able and Baker discusses indemnification. Lawyers love to fight over indemnity, including whether the buyer's negligence is covered, i.e., if Charlie's injuries from the widget didn't result from a manufacturing defect but because Baker damaged the widget before it was sold to Charlie and thus created the hazard that caused Charlie's injury.

 The proper drafting of indemnification provisions is crucial, and exceptions or conditions to the duty to indemnify should be carefully stated. And indemnification should always relate to third-party claims and not to damages between the contracting parties for breach. Do the indemnity provisions in your contracts pass this test? 

 >Insurance. Insurance provisions are vital in business contracts, but in my experience, transactional lawyers don't always understand the various insurance coverages available and how they relate to other contractual provisions. Using the above example, Baker may require to Able to maintain contractual liability insurance (and Able may want this as well) to fund (or "insure over") Able's obligation to defend Baker from Charlie's product liability suit. And cyber-risk insurance has become available that should protect a company from claims resulting from data breaches. Companies that handle customer data should seriously consider obtaining that insurance, and a savvy information technology/business lawyer can add value to that process. Is your insurance coverage adequate and complete? Is it properly described in your contracts? What about the other party's insurance?  

 >Limitation of Liability and Exclusion of Certain Damages. These are key provisions that must be carefully considered unless you don't care about "betting your company" by having unlimited liability when you sign a contract. To simplify a bit, there are three major points to ponder: first, whether there should be a cap on direct damages resulting from a party's breach of the contract; second, whether a party's indirect damages should be entirely excluded from available damages resulting from a breach; and third, whether a dollar cap should apply to a party's obligation to indemnify the other.  Do your contracts contain understandable limitation of liability and damages exclusion provisions? And are they consistent with all of the other contractual provisions?

 >Governing Law, Jurisdiction, and Venue. What State's laws govern your contract? If you're a Michigan-based company doing business with a California-based company, you probably shouldn't agree that California law governs the contract. And where would legal action under the contract occur? Would you rather litigate in a Michigan court or in a California court? Your decision could make the difference between driving to court proceedings in downtown Grand Rapids  - or lengthy plane trips to and from a California court. Do the governing law, jurisdiction, and venue provisions in your contracts prevent you from being dragged into a faraway court? 

 >Litigation or Arbitration of Contract Disputes. Arbitration proceedings are private; court proceedings are not. Would you care if the news media attends court hearings about your dispute? And court proceedings may be more expensive than arbitration and may involve a jury trial. But if your arbitration provision isn't carefully drafted, you may wind up spending just as much for arbitration than litigation. Do you know if your contracts contain litigation or arbitration provisions? If arbitration, is that provision carefully drafted to ensure that arbitration would indeed be less expensive than litigation? 

 >Legal Jargon. I've already posted about lawyers and their goofy words. But some legal jargon should simply be removed from your contracts: "and/or;" "execute" to mean "sign;" vague pointing words such as "aforementioned," "foregoing," or "below;" confusing phrases such as "including but not limited to," "in witness whereof," and "for the avoidance of doubt;" and such verbs as "may," "must," "will," and "shall," that can be confusing when used in the wrong context. And the stupid yet common practice of writing numbers in both words and digits, e.g., "thirty (30)." All it takes is a contract containing "fifteen (30)" to land you in court. Have you detected and removed all legal jargon from your contracts? (If your lawyer uses legal jargon, best get a new one.)

 And what about words or phrases that sound like legal jargon but aren't? Two examples: first, there's definitely a need to insert "hereby" in some cases. Second, "according to" isn't necessarily the same as "in accordance with." And to further complicate matters, some apparent legal jargon should be retained as terms of art. Do you know what specialized legal language should remain in your contracts - and why?   

 When Ben Franklin said that "an ounce of prevention is worth a pound of cure," he didn't have contract audits in mind, but his logic holds true. You can hire me to find and correct these potential problems in your contracts for a modest fee. Or you can wait until they blow up and you're forced to hire a litigator to sort them out - at a much greater cost.

2019 is here. What's in your contracts?



If you find this post worthwhile, please consider sharing it with your colleagues. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. And my email address is busklaw@charter.net. Thanks!
 

The BUSKLAW March Newsletter: Basic Legal Protections for a Small Technology Business



This post is directed to a small Michigan-based technology business with several employees who write code or produce other creative work. Start-up technology businesses may find this post especially relevant; established smaller technology firms may also find this useful. As always, the recommendations in this post should not be taken as legal advice and are simply general guidelines for your consideration.

 Here are what I consider basic legal protections that you – the astute entrepreneur - should have in place for your technology business from the day that you open the door:
  • Protect Your Intellectual Property. Your creative output may be protected by U.S. patent, copyright, trademark, or trade secret law. Know the basics of these legal protections by reading this excellent article in the February, 2016 issue of the Michigan Bar Journal. Then, find a good intellectual property (I.P.) attorney to discuss the best cost-effective ways to protect your valuable I.P. assets. 
  • Have Your People Sign Employment (or Independent Contractor) Agreements. Your employees should sign employment contracts as an integral part of the hiring process. Standard provisions should include confidentiality, I.P. rights assignment outside of the work for hire doctrine, non-compete, conflict of interest, and acknowledgment of any separate human resources policies such as vacations, benefits, leave of absence, etc. And consider including a mandatory arbitration provision in exchange for discharging an employee only for “good cause.” Finally,  if you want to classify any of your people as independent contractors rather than employees, you will need to have special agreements with these folks to (hopefully) avoid tax and other liability problems. 
  • Respect the Formalities of Your Business Entity. Whether you are a corporation, limited partnership, or limited liability company, there are statutory requirements to observe if you want to keep the legal protections afforded by these entities intact. Your attorney should help you understand these formalities. In the case of a corporation, you need to have annual shareholders’ and directors’ meetings with appropriate business actions. And it’s wise to have your lawyer attend these meetings, if only to make sure that the appropriate resolutions are properly enacted and put in the best legal form. The danger of ignoring the required formalities includes personal liability for debts incurred by the business entity. 
  • Adopt a Record Retention Policy. Even a small business can be hit with a lawsuit, and when that happens, you’ll be glad that your board of directors adopted a record retention policy (RRP) and appointed one of your detail-oriented employees as a record retention manager. The RRP should detail how long and in what form your business must keep its documents, including emails, contracts, employment agreements, payroll records, purchase orders, invoices, receipts, licenses, etc. It should also specify when the policy will be suspended if there is litigation (this is called a “litigation hold”). An RRP is vital to justify the normal destruction of business data that may be requested by a plaintiff’s attorney on a "fishing expedition." Your business may be small, but you need an RRP! And once adopted, make sure that you follow it (as with all of your other company policies)!
  • Protect Yourself with Contracts. Even if you have only a handful of contracts, make sure they are signed, dated, safely stored, can be produced in a legible format, and don’t put you at a disadvantage. And don’t accept any contract that lands on your desk, however innocent it may appear, without first consulting with your attorney! Agreements to be wary of include leases (if you lease equipment or your business location), supplier agreements, customer agreements, bank loans, service agreements, and non-disclosure agreements. (And avoid letters of intent for the reasons discussed here.) These documents will contain legal jargon that you won’t understand. Consider having your attorney draft a set of plain-language purchase order terms and conditions that you can routinely send to your suppliers. And tell your attorney that you want a plain-language arbitration provision in all of your contracts to avoid the burdensome time and expense of litigation! Finally, don't try to save a few bucks by going to an Internet legal forms site and downloading a document that sounds okay to you. You're rolling the dice with that approach! 
  • Do Lunch with These Three. You’ll be busy building your business, but you’ll still get hungry around noon. Resist the habit of avoiding lunch (exception: to exercise) and take the following three people to lunch on a regular basis: your attorney, your outside accountant, and your insurance broker. You “don’t know what you don’t know,” so you’ll benefit from talking to these folks. If you don't benefit, find a replacement for the unhelpful person.  
_______________________________________

Smaller firms aren't immune to the risks of doing business in a litigious culture. You need to devote time, effort, and the necessary expense to keep your firm on an even keel by considering these basic suggestions.


If you find this post worthwhile, please consider telling your colleagues about it. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. Thanks!

The BUSKLAW October Newsletter: Do Your Contracts Discourage Litigation?


If you are a business person working with contracts, you probably already know that lawsuits - regardless of their outcome - are expensive and time-consuming. And "alternative" dispute resolution procedures such as arbitration don't fare much better if standard arbitration clauses are used. (I use a unique arbitration clause that streamlines the process.) It's better to avoid litigation or arbitration altogether; the best way to do that is to have a contract with provisions that discourage one party from filing suit - or an arbitration petition - against the other party. 

 What might these anti-litigation, anti-arbitration contractual provisions be? Several come to mind:

 1.  A provision that in any lawsuit or arbitration between the parties, the losing party must pay the winning party's attorney fees and court costs. As Attorney Stephen Hulst points out in his Michigan Business Court Blog (9/1/2015), "It's a good piece of leverage to have, to be able to say at the outset of a case, 'you signed this contract, and the contract language is clear that you are going to pay for my legal fees and costs if I prevail in this case.' " But to be effective, this provision must be carefully drafted or there may be problems in making it stick. For example, what does "prevail" mean? To win the case by a verdict of a judge or jury? What if there is only a partial victory? Does that mean that the victorious party has "prevailed"? What if the case is settled before or during the trial but before a verdict is rendered? Did the party receiving the "benefit" of the settlement "prevail" over the party being "hurt" by the settlement? Also, unless the provision is carefully drafted, a judge may interpret it as applicable only to a lawsuit, not an arbitration.

 2. A shortened period for a lawsuit or arbitration petition to be filed. If the contract is for the sale of goods, the Michigan Uniform Commercial Code permits the parties to agree to a limitations period of not less than one year after the breach. If the parties don't include this provision, the period within which legal action may be filed is extended to four years. Why does a one-year limitations period discourage legal action? Because if the legal action is not filed within one year after the breach of contract, the non-breaching party arguably has no remedy against the breaching party. 

 3. The requirement that legal action must occur in a particular city, county, and state. If I'm headquartered in Grand Rapids, Michigan, and I'm contracting with a company located in San Diego, California, I'll ask the California company to agree that the only proper forum to hear a dispute will be state and federal courts (or arbitration panels) located in Grand Rapids, Michigan. This provision discourages litigation because the California company will understandably be reluctant to give the Michigan firm a home-town advantage for a lawsuit or arbitration proceeding involving the contract.  

4. A provision that the contract be governed by a particular state's laws. Going back to our contract between a Michigan company and a California company, I'll ask the California business to agree that the contract must be interpreted under Michigan law, not California law. The provision increases the chances that if there is a contractual dispute, the California company will hire a Michigan lawyer to represent it; this may increase the time and expense that the California company must bear to communicate with their lawyer. Avoiding legal fees is a great incentive to settle a dispute short of filing a lawsuit or arbitration claim. 

 5. A time restriction on invoicing, including appropriate waiver and release language. I had a client who was invoiced by a supplier several years after the goods were allegedly received by the client. A lot of the documentation proving non-receipt of the goods was archived and had to be retrieved at a substantial cost. So after that experience, I drafted a provision for my client's sales contract requiring suppliers to invoice my client within one year after the goods were shipped, and if they failed to do so, the suppliers waived their right to receive payment for the goods - and released my client from all liability to pay for the goods. While this provision has never been considered by a court or arbitration panel, again it serves as a legitimate incentive to settle a dispute without litigation or arbitration.  

 6. But the best way to discourage litigation or arbitration is to sign contracts written in plain language. Traditional legal jargon in contracts creates ambiguity that leads to disputes. Examples include here- and there- words such as herein and thereby, according to Joseph Kimble, a professor emeritus at Western Michigan University–Cooley Law School. "Not only are they stuffy and archaic, but they can be ambiguous," he says. "You sometimes don't know whether herein means in this paragraph or in this entire document, and there's lots of cases out there that center on the meaning of the words herein, or therein, or hereby, or thereof.” 

There is no guarantee that these six steps will avoid a contractual dispute resulting in painfully expensive and time-consuming litigation or arbitration, but they increase the odds that the dispute can be resolved on a business level, without calling in the lawyers to bandy about arguments and threats that will likely create an atmosphere hostile to a prompt resolution. And those lawyers will bill their clients for those arguments and threats. 

 And my final piece of advice? If you and your business counterpart on the other side settle a contractual dispute, make sure that your lawyer drafts the appropriate "release and settlement agreement" (in plain language of course) so that a presumed-dead and buried controversy stays that way!