insurance — The BUSKLAW Newsletter

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!

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)!

Have the Necessary Insurance in Place. Find a good insurance broker who understands your business and then buy the necessary insurance to protect your people and assets. For a technology firm, consider technology errors and omissions insurance. If you keep customer data (especially credit card data) on your servers or subcontract that function to a third party, you should obtain a cyber and privacy insurance policy to protect you from claims resulting from a data breach. And you can also insure against cyber ransom, as this article notes.

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.

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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!