Author: thelegalknow

Read the SMALL print

Posted on by thelegalknow


Yup! It’s as simple as that. Read the small print! Read the disclaimers (this blog has one). Read the exclusion clauses. Read the terms and conditions.

I get so annoyed when I see companies or blogs or ANYTHING referring to the small print as “legal mumbo jumbo”. I can assure you that the small print it is NOT mumbo jumbo. It is a coherent stream of dos and don’ts that could NEGATIVELY affect your business – the SMALL print can have BIG consequences!

So do yourself a favour and take the time to read and understand the small print. Ask questions too! If you see something you don’t like, can you get a waiver? Can you negotiate out of it? Or maybe it’s not worth going ahead with at all? Again, reading and understanding contracts, offers etc gives your business options.

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3 ways to get the most out of your lawyer

Posted on by thelegalknow

1. Educate your lawyer about your business – We may know the law (that’s our job) but we do not necessarily know YOUR business. Educate us. Bring us in to the office, let us play around with the product or let us taste the food! Basically, don’t let your lawyer work on assumptions. If you want a tailored, personal service from your lawyer, you have to help them to understand YOU, your EMPLOYEES and your BUSINESS.


2. Maintain good housekeeping – Lawyers will always need to see the paperwork so do yourself a favour and get the paperwork ready. Get all your business contracts together in one place. If possible categorise them by product, by year or by client, whichever, so long as it is ORGANISED! Get every receipt and financial document in a finance folder (electronic is fine) and put all key correspondence (letter, email, text) in a tidy place. Good document management enables your lawyer to hit the ground running from the minute you instruct them. The SOONER you start the better as there is nothing worse than trawling through years of paper/emails. Good document management is also a life saver when you want to attract investors or apply for a loan. This is the famous paper trail!

3. Give realistic deadlines – Most good lawyers will always want to do a Rolls-Royce job. If you need your lawyer to help you review a contract or draft an agreement or settle a dispute, give them as much NOTICE as possible and ASK your lawyer how long they will need. This puts the onus on the lawyer to manage their time and to assess the situation efficiently. If you give your lawyer a day to build Rome you will most likely receive a job riddled with errors or even worse, a great piece of work BUT a disgruntled lawyer who starts to put you at the bottom of the pile and er…dodge your calls.

Do these three things and your lawyer will respect you and work hard for you!

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Before you sign: Dispute Resolution

Posted on by thelegalknow


Contrary to what the majority of people believe, when you have a contractual bust up with the other side litigation or arbitration should be the last resort. THE LAST RESORT. Taking a dispute to court is extremely expensive in any country and it should only ever really be done when you can’t do anything else. This is why good lawyers review the dispute resolution clause before signing to ensure that a dispute between the parties can be RESOLVED by cheaper alternative methods and is not just fast tracked to formal litigation or arbitration. These other ways are known as alternative dispute resolution (ADR) and it is becoming more and more common for dispute resolution clauses to build in some of these alternative forms of dispute resolution as a precursor to any formal proceedings.

The forms of ADR are abundant. ADR can be anything from SIMPLE NEGOTIATION between senior members of either party to MEDIATION whereby an independent third party (called a mediator) helps you and the other parties to talk things through and guides you to a settlement agreement (a document setting out the agreement reached between the parties). ADR is less confrontational and is more likely to encourage business relationships to continue. HOWEVER essentially ADR is NOT binding in the same way as a JUDGMENT given at court or an AWARD (which is basically a judgment) given in arbitral proceedings (small caveat here, arbitral awards are binding so long as international treaties are in place in the relevant countries, such as the New York Convention…this is a topic for another post). This means that you CAN’T actually make the other side COMPLY with whatever you have agreed with them as a result of the ADR. For example if the other side failed to act in accordance with the settlement agreement you would have to sue them for breach of the settlement agreement. CONSEQUENTLY, if the other side is being obstructive and uncooperative in the ADR procedures take that as a warning that A BINDING judgment is required and that maybe formal legal proceedings are necessary.

So how can you incorporate these more friendly and way cheaper ADR forums into your dispute resolution clause? Well the ways are infinite and you NEED a lawyer to ensure that this clause is carefully drafted. HOWEVER, generally, dispute resolution clauses are either multi-tiered or drafted as carve out clauses.

Multi–tiered dispute resolution clauses require the parties to engage in tiers (stages) of ADR and only when a stage fails can the parties progress to the next stage with the last stage being formal court or arbitral proceedings. If the dispute is truly and obviously irreconcilable (you hate each other) it would of course be possible to waive the tiered obligations by mutual consent and skip straight to the expensive bust up. Here is an example of a tiered dispute resolution clause:

“If any dispute arises out of or in connection with this agreement or its formation, directors or other senior representatives of the parties with authority to settle the dispute will, within [ ] days of a written request from one party to the other, meet in a good faith effort to resolve the dispute. If the dispute is not wholly resolved at that meeting, the parties will attempt to settle it by mediation in accordance with the CEDR Model Mediation Procedure. Unless otherwise agreed between the parties within [ ] days of notice of the dispute, the mediator will be nominated by CEDR. To initiate the mediation a party must give notice in writing (“ADR notice”) to the other party(ies) to the dispute requesting mediation. A copy of the request should be sent to CEDR. Unless otherwise agreed, the mediation will start not later than [ ] days after the date of the ADR notice. If the dispute is not settled by mediation within [ ] days of commencement of the mediation or within such further period as the parties may agree in writing, the dispute shall be referred to and finally resolved by arbitration.”

As mentioned above, dispute resolution clauses can also be carve-out clauses. Carve out clauses allow for some disputes to be resolved through arbitration/litigation and other disputes relating to other aspects of the parties’ relationship to be referred to a form of ADR. For example a dispute relating to the quality of a product (a computer) supplied to a purchaser might be referred to an expert in that field (a computer engineer – this is called expert determination), and all other disputes relating to the contract (for example exclusivity or payment terms) might be referred to litigation or arbitration.

The point of this post is to encourage you to GIVE yourself OPTIONS when it comes to resolving the disputes under your contracts. You don’t have to go straight to court or arbitration (did I mention these forums are EXPENSIVE). You can take a breather and try to settle things amicably (and CHEAPLY) first. ALSO please do not use the example clause in this post in your contracts – it is an EXAMPLE. There are several other factors that MUST be considered when drafting dispute resolution clauses and this is why you really need a lawyer’s drafting skills here. Some dispute resolution clauses have been deemed by the English courts to be unenforceable or not part of the contract at all because of bad drafting. So never sign a contract without considering this clause and thinking about the best ways to resolve disputes for your business HOWEVER this is not A DIY clause by any means.

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Before you sign: Termination

Posted on by thelegalknow

exit 2

In continuation of the “Before you sign” series, I present the third potentially deadly clause for your review…TERMINATION. A termination clause is effectively your get out of jail FREE card in any contract so long as you DRAFT it that way. This is why you need to understand your contract so that you know a) what you want (life is good and business continues as normal) and b) what you do not want (often that the deal has soured and you need to end it). Termination clauses set out WHEN either party can LAWFULLY terminate the contract. The consequence of UNLAWFULLY (so not complying with the termination clause) terminating the contract is that you are most likely sued by the other party/parties to the contract for damages (compensation).

There are different circumstances in which you may want to terminate a contract. You may just want to try out a business relationship and give yourself the option to walk away if you don’t think there is a future in it. In this instance your termination clause should specifically enable you to end the contract on a short period of notice, for example 3 months after a fixed initial period of 6 months – this is termination for convenience or “without cause”. Either party can walk away after a set period of time simply because you have given each other the opportunity to do so. Of course it is also possible for a contract to just end naturally for example by effluxion of time (the contract runs its term), or by both parties performing their obligations under the contract. For example A contracts with B for delivery of 70 tennis balls on X date in return for A paying B a fee, once B delivers the 70 tennis balls in accordance with the contract and A pays B, the contract is over.

HOWEVER more likely than not you will want to make sure that you can terminate the contract when the other party BREACHES (messes up) the contract. Here are some examples of when that might be:

  1. The other party has committed a MATERIAL breach of the contract that CANNOT be remedied – so this is when you receive something SUBSTANTIALLY DIFFERENT from what the contract specified, for example, if the contract specifies the sale of a box of tennis balls and you as the buyer receive a box of footballs. Or you hire an artist to perform the piano at your event but they turn up with a guitar. Such a fundamental breach should entitle you to terminate the contract immediately without notice to the other party. 
  2. The other party has committed a MATERIAL/SUBSTANTIAL breach of the contract that is capable of being remedied but has failed to remedy that breach within a set period of time – so this is when the other party has breached the contract AND the breach is fixable HOWEVER the other party has  failed to fix it within the set period of time. In such circumstances you will want the right to terminate the contract. For example you order pink balloons and the other party delivers blue balloons. You still have balloons but they’re not the right colour, you will notify the other party giving them a chance to send you the correct colour balloons by a certain time in accordance with the contract (say 7 days). The other party fails to send the correct balloons by your deadline OR sends white balloons. You will want to terminate the contract and sue for damages. Please also note that even where a failing party manages to remedy its material breach within a set period of time, the innocent party could still seek damages for any loss caused by the breach. For example You have a restaurant that requires 100 burgers and 100 hot dogs but you only receive a delivery of 70 burgers and 70 hot dogs from your supplier. By the time your supplier has delivered the remaining 30 burgers and 30 hot dogs, you’ve missed out on business or you’ve had to buy more expensive burgers and hot dogs at short notice from another supplier to meet the demand of your customers. You will want to sue for the loss you suffered during this time even if you continue the contract with your original supplier.
  1. The other party persistently breaches the contract in MINOR ways which altogether have a negative impact on the performance of the contract E.G continuously delivering goods late, being late with services without a reasonable excuse, persistently making late payments (this can affect cash flow) or continuously failing to meet sales targets or sales quotas within a period of time. You will want the right to pull the plug on the contract after a while. It will be up to you to determine, in your contract, when enough is enough in respect of these minor breaches. For example you would not want to terminate the contract for one late payment but you might want to terminate it for three consecutive late payments.
  2. The other party has become insolvent or bankrupt or is in the process of becoming so – the other party has gone bust or is clearly in financial trouble. You will really want to get out of the contract in this situation so you must make sure that your contract allows you to do so.
  3. You anticipate that the other party is about to breach the contract (an anticipatory breach) – so this is where the other party has made it known that they will not be carrying out the agreed work or they effectively stop acting in accordance with the contract, leading the other party to believe that they have no intention of fulfilling their part of the agreement. For example the other party persistently fails to produce an ordered item or refuses to accept payment. You will want to end the contract and sue for damages WITHOUT WAITING for the actual breach to occur.

Termination clauses are complex and this is where you really need a lawyer’s help. If you do not expressly make provisions in your contract for the different scenarios in which you want to terminate the contract, your contract will be subject to common law (this is the case in the UK but check the consequence in your country). Common law is law developed by judges through decisions of courts and similar tribunals that decide individual cases. If you leave your contract to the mercy of common law you could end up spending heaps of money paying lawyers to work out which case law applies to your particular contract’s circumstances and then even more money when the other side says your application of the common law is wrong and takes you to court! 

Basically, ALWAYS make express provision in your contract as to when it can be terminated.

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Before you sign: Jurisdiction and Governing Law

Posted on by thelegalknow

jurisdiction

There are a number of things that you should check out before you sign ANY contract however what I’m about to tell you is arguably one of the most important. When your business is doing well and the profits are booming, it’s hard to think about what happens if things go wrong between you and your client or you and your supplier. Well, regardless, lawyers go straight to the back of a contract to look at WHERE the parties battle it out if a lawsuit arises and WHICH LAW governs that battle. This is captured in each of the jurisdiction (WHERE) and governing law (WHICH) clauses. This post considers a UK law perspective however, jurisdiction and governing law are universal concepts (pretty much) so please look up your country’s equivalent.

Jurisdiction determines which country’s courts will hear any claim that is brought under the contract.  Governing law is the law that will be applied by the courts to interpret each party’s rights and obligations under the contract.  The two do not have to match, so for example the English courts could hear a dispute arising from a contract and apply French law to determine the outcome of the dispute. However, whilst the English courts are experienced in applying foreign laws, the French law must be PROVEN as a fact, usually by witness evidence from a qualified French lawyer. You can see how the costs can easily wrack up, witness evidence from a lawyer! Oh the fees! This is why lawyers tend to recommend that the jurisdiction and the governing law are the SAME to avoid uncertainty and to avoid the unnecessary costs of hiring lawyers as expert witnesses on top of hiring lawyers to actually represent you at court!

The jurisdiction and governing law clauses should be considered and agreed from the outset. You do not want to get to the point of suing or being sued only to learn that despite your business being domiciled and operating in the UK, you are having to fly all the way to Singapore because the other side snuck in a jurisdiction clause that the contract would be subject to the courts of Singapore and a governing law clause that the contract would be interpreted in accordance with Singapore Law. NIGHTMARE.

It is possible to draft one joint jurisdiction and governing law clause however contracts that want to be easily understood (hint hint) set the clauses out separately.

Here is an example of a governing law clause:

This agreement and any dispute or claim arising out of or in connection with it or its subject matter or formation (including non-contractual disputes or claims) shall be governed by and construed in accordance with the law of England and Wales.

Here is an example of a jurisdiction clause:

Each party irrevocably agrees that the courts of England and Wales shall have [exclusive/non-exclusive] jurisdiction to settle any dispute or claim arising out of or in connection with this agreement or its subject matter or formation (including non-contractual disputes or claims). Note: You can choose to submit the contract to just one country’s courts (exclusive jurisdiction) OR you can choose to allow the parties to commence proceedings in another country’s courts DESPITE stating a particular country in the contract (non-exclusive jurisdiction, this is very confusing and is usually only used in special circumstances).

I must tell you that jurisdiction can either be given to a country’s national courts (as above) OR to arbitration proceedings in an arbitration clause. Arbitration is similar to court proceedings but it is less formal and the parties effectively decide the rules that govern the process. It is also confidential (good for keeping high profile disputes out of the public). If you choose to use arbitration instead of court proceedings, governing law is still required. Arbitration is definitely a topic for another post, in fact many other posts, but for now just know that the option is there. So, with this knowledge, go review your contracts and ask your lawyers questions!

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Be smart but don’t cheat…

Posted on by thelegalknow

fox.jpg

There is a reason why mega successful businesses spend thousands, sometimes millions of pounds/dollars on legal advice. I cannot tell you the number of times that I have almost cried because a client has brought me a problem that could have easily been avoided IF legal advice had been sought in the first place. In the long term, getting proper legal advice could save you so much MONEY and isn’t that what it’s all about – MONEY? You know that saying, what’s worth doing at all is worth doing well…it’s said for a reason! I don’t feel good billing you for my time when it’s for an issue that really shouldn’t have ever become an issue!

Think of it this way, when you have a tooth ache you go to a dentist -you don’t pull out the tooth yourself. When you feel sick you go to a doctor you don’t diagnose yourself. SO, if you need a contract drafted, guess what, you DON’T do it yourself. You go to your lawyer! You should be focusing all your energy into your product/service/idea not struggling to draft a 30 page contract or represent yourself at Court.

So what am I saying? I’m saying be smart BUT don’t cheat.

I am a lawyer and it took me 6 years of training to qualify to be one (a 3 year degree, a 1 year professional practice qualification and a 2 year training contract at an international law firm in the City). You cannot read this blog and become a lawyer BUT you CAN read this blog and become legally smart so that when you seek proper legal advice you are not doing so blindly. You are firing out questions and demanding the best service possible!

It’s quite simple, do things properly at the outset and you will reap the rewards later.

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Who are you in business with?

Posted on by thelegalknow

Suspicious Package

Not all that glitters is gold, but sometimes if you want your business to grow you have to take risks, even if the glitter turns out to be coal. HOWEVER never risk who you do business with! It isn’t worth it. All it takes is one bad business partner or one bad supplier to tarnish your brand or disrupt your product/service/idea. This is why I advise my clients to always verify (investigate and confirm) the entities they contract with. When a company/person says they are something or they are someone NEVER take their word for it, always check them out yourself. Business is about money and money attracts all sorts of wannabe Warren Buffets with an abundance of international debt stowed away in their closets…behind the skeletons. Here are some simple checks that you can do for free/cheaply, to confirm the credentials of those you are in business with:

  1. Check their details on Companies House (or your country’s equivalent)- Companies House is a database of all companies and LLPs  incorporated in the UK, type in the company name or company number and you get a whole load of information for free just like that. You can see their previous company names, their registered office address, their directors’ details, whether the business is still active, when their accounts were filed (or due) and a history of its filed documents. For a few pounds you can even obtain their latest filed accounts and judge their progress for yourself!
  2. Search for disqualified directors – You can do this on the Companies House register or on the Insolvency Service register (look up your country’s equivalent), these registers will tell you if a director of a company has been banned or disqualified from being a director (if the name pops up REPORT them, they tried to play you).
  3. Check the bankruptcy and insolvency register to see if an INDIVIDUAL is bankrupt OR the register of insolvent companies to see if a company is insolvent (bust).
  4. Check their website – Does it look comprehensive? Are there any TESTIMONIALS from their clients? Does it show who is behind the business? What is their mission statement? Where are they based? Do they provide contact details?
  5. Go with your gut – Finally, what does your gut feeling tell you about the company/person? If you have any suspicions or you are uncomfortable dealing with the company/person, walk away and take your business elsewhere.

In the legal profession we call the above DUE DILIGENCE and it is a process we undergo to verify OUR OWN clients (although there are further, more thorough requirements, such as passport copies and knowing who the shareholders are etc). It is a good habit to get into. Even better, keep a record that you checked these companies/people out – if your business blows up and your lender requires an audit before increasing your loan, you will thank yourself that you kept some evidence of your good business practice.

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Get started!

Posted on by thelegalknow

fourth post

Firstly congratulations! You have an idea/product/service and you want to make a business out of it! Now it is time to get started. From the outset you need to ensure that you choose the right legal structure to help enhance your business. This post is quite hefty as it gives a brief overview of the most popular business structures. An important thing to note is that you can CHANGE your legal set up if it no longer works for you. The most conventional business structures are as follows: Sole Trader; Partnership; Limited Liability Company; and Limited Liability Partnership (LLP).

S o l e  t r a d e r

Essentially, you are a one man band; it’s just you!  Sole traders tend to operate in service sectors, such as photography, hairdressing, fitness training etc. There are no fees or forms to register as a sole trader. You can hit the ground running straight away and everything you make belongs to you. Your profits are taxed as income by HMRC, and you will have to register for self-assessment and fill in a tax return each year but that’s basically all the paperwork there is. HOWEVER the law makes no distinction between the business and its owner which means you are on the hook personally (your house, your savings etc) if the business fails. Additionally, since your profits are taxed as income you will be paying 40% as soon as they top £42,385 and 45% above £150,000 (ouch). So taxation and liability is a bit of an issue but insurance can mitigate against liability and if your business grows to mega profits you can just CHANGE your business structure.

P a r t n e r s h i p 

Partnerships are basically an extension of the sole trader model for when two or more individuals (a husband and wife for example) work together to build the business. The partnership is governed by a partnership agreement which sets out how the liabilities (risks), ownership and profits of the business are split between the partners. It also deals with what happens if one partner wants to leave for pastures new. As with a sole trader, each partner must register as self-employed and put in a separate tax return and each partner is personally responsible for all the debts owed by the business. HOWEVER, a partner is ALSO responsible for the liabilities of the other partner (yikes). This means that you really need to know who you are going into business with.

L i m i t e d   L i a b i l i t y   C o m p a n y 

Limited liability companies  are incorporated (registered) at Companies House. They require a lot more administration BUT they tend to give your business credibility and may also make it easier to obtain investment or borrow money. Most private limited companies (there are also public ones…another post) are owned by their shareholders and are limited by shares (if the business fails  each shareholder only pays the face value of its shares). It is possible to have just one shareholder (which could be you). The company is run by directors and, unlike a sole trader or a partnership, a director’s home and savings are not sought after if things go wrong. This is because the law recognises the company as a separate legal entity, effectively as a person itself. This is why Business loves limited liability companies! Your liability is LIMITED as a shareholder and the directors don’t get involved. Also limited companies pay corporation tax of 20% on their profits, very cheap compared to a potential 40% under income tax, and the company directors are taxed as employees in the same way as other people who work for the company. Limited liability companies are awesome BUT they require a lot of filing and paperwork. Too much for this post.

L i m i t e d   L i a b i l i t y   P a r t n e r s h i p ( L L P )

LLP’s are a relatively new creation in UK business law and are especially suited to professional services companies like lawyers and accountants. They are a hybrid between limited liability companies and partnerships as they offer limited liability (members’ assets are protected as liability is limited to however much members have invested in the business) combined with the tax regime and flexibility available to partnerships. The number of partners is not limited, however at least two partners have to be ‘designated members’ responsible for filing annual accounts. Like limited liability companies, LLPs also have to register at Companies House and there is a members’ agreement stating what share of the profit each member receives (draft this carefully).

So that’s it in a very small nutshell. When you are starting your business it is important that you have an idea of these business structures so that you can ask the right questions and encourage tailored legal advice from your lawyer. I’ll write some more detailed posts on each of the above however please drop me an email if you want to know anything specific.

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Filing for bankruptcy when you don’t have a cent!

Posted on by thelegalknow

thrid post

So I’m sure most of us have read that a certain famous rapper has filed for bankruptcy in the US. His lawyers are assuring the world that it’s just business as usual HOWEVER sadly that wouldn’t really be the case if you were made bankrupt in the UK. Here’s a quick post to clarify what bankruptcy means under UK law.

To be made bankrupt, a court has to issue a bankruptcy order against you. This can happen in 3 ways:

  • you apply to the court  because you are unable to pay your debts and want to declare yourself bankrupt;
  • your creditors (the people you owe money to) apply to make you bankrupt if you owe them £750 or more (yup as little as that); or
  • an insolvency practitioner applies to make you bankrupt because you broke the terms of your Individual Voluntary Arrangement (an agreement with your creditors to pay all or part of your debts, the insolvency practitioner manages the payments you make under the agreement).

If any of the above occurs, the Court will issue a bankruptcy order and the following will take place:

  • you will receive a copy of the bankruptcy order and may be interviewed about your situation (this helps the Court to determine what assets you have to pay your creditors);
  • your assets will be used to pay your debts (this could include your car, your income and your home although there are circumstances when assets are exempt, such as items of equipment which you need to use personally in your employment or business);
  • you will have to follow rules called ‘bankruptcy restrictions’ (these rules, amongst other things, stop you from borrowing more than £500 without telling the lender you’re bankrupt, acting as a director of a company, and creating, managing or promoting a company without the Court’s permission); and
  • your name and details will be published on a bankruptcy register called the ‘Individual Insolvency Register’.

After 12 months you’re usually released from your bankruptcy restrictions and debts. It seems grim but sometimes bankruptcy is a way for individuals to get their finances back on track. Bankruptcy only applies to individuals. Limited companies that can’t pay their creditors are ‘insolvent’ and can face compulsory liquidation which is a topic for another post.

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One thing every business should do!

Posted on by thelegalknow

second post

As you know, I’m a lawyer so I cannot give financial advice. Even the legal tips that I give in this blog cannot be relied on in place of the lawyer/client relationship (I’m merely here to inform you so that you are legally empowered and not legally enslaved). HOWEVER I have no caveat for what I’m about to tell you. There is one thing that every business should most certainly do and that is …..GET INSURANCE!

Lawyers try to help you achieve good results but we also consider from the outset what could go wrong and often there is no better solution than being able to fall back on a good old insurance policy. Have a think about what your business/start up/trade is most at risk from and take a considered look in the market to see if you can get an insurance policy to protect against that risk.

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