Risk

Ask for an indemnity.

Posted on by thelegalknow

elephant

Commercial contracts are packed with risks. In fact the contract itself is one big risk. However, ironically, contracts are the safest way to conduct business; we need them! So, since we cannot avoid contracting with each other we have to ensure that we protect our interests in every contract that we sign. A key way to do this, is to ask for an indemnity clause.  An indemnity clause is a contractual transfer of risk between two contractual parties to prevent loss (you are not liable if X happens) or to ensure compensation for a loss (the other party reimburses you for any loss suffered if Y happens) which may occur as a result of a specified event (X or Y event). Let’s take a look at some examples of indemnity clauses:

  1. Basic Indemnities – Party A indemnifies Party B for all liabilities or losses incurred in connection with specified events or circumstances. For example, if you are contracting with a construction company to build your new store, you will want a basic indemnity saying that the construction company will compensate you for all losses if one of its subcontractors fails to do the job to the specification set out in the contract. If a subcontractor tiles the roof poorly, the construction company is liable for all losses ensuing from that subcontractor’s poor job. Pretty good right? However, basic indemnities can be troublesome as they do not set out any specific limitations on the indemnity. They are silent as to whether they indemnify losses arising out of YOUR own acts and/or omissions that cause the subcontractor to tile the roof poorly. What if you give the sub-contractor the wrong instructions or you don’t give the subcontractor access to the site on time?  This basic indemnity operates so that the construction company indemnifies you for the poor job of the subcontractor, even if the poor job was your fault. You may be thinking well, that’s great, but it’s only great if you are the party receiving such an indemnity. That’s why basic indemnities should be avoided where possible.
  2. Proportionate or Limited Indemnities – These indemnities rectify the potential unfairness of a basic indemnity (explained above) as they limit the indemnity. Sticking with the example above, say you obtain an indemnity from the construction company to the effect that the construction company is liable for all losses ensuing from a subcontractor’s poor job – a limited indemnity will go on to state “except those losses incurred as a result of [your] own acts and/or omissions”. If the subcontractor’s poor job is your fault you don’t get compensated. Seems fair.
  3. Third Party Indemnities – If third parties are involved in the operation of the contract, as in the example above, you may not want anything to do with them since you are contracting with them. Following on from the above example, what happens if a subcontractor isn’t paid for their work? You wouldn’t want to be liable for that. You can protect against this by asking the construction company to indemnify you for all liabilities relating to its subcontractors so that the subcontractors are always the construction company’s issue and not yours.

These are very high level examples which would make most lawyers (if they’re good) chuckle. Indemnities can be very complex and they should at the very least always be more than a basic indemnity. Here are some of the things your lawyer should consider when drafting an indemnity clause for you:

  1. Scope – The scope of the indemnity must be clear so that the intended protection is given.
  2. Context – An indemnity clause should always be drafted in consideration of the wider commercial context of the agreement. Is it applicable?
  3. Extent – Who does the indemnity cover and are there any limitations to the indemnity? If the indemnity is given by the other side but not its contractors or representatives, then the extent to which this offers protection will be limited.
  4. Insurance: There is no point in having an indemnity if the indemnifier cannot pay out in an event of breach. An obligation to insure to a level consistent with the indemnity obligation will provide comfort that the indemnifier has the means to back up the indemnity given.
  5. Caps: Indemnities can be capped but any such cap should be subject to careful consideration. Where an indemnity has a financial cap, the indemnified party may, depending on any other limitation clauses, still have an uncapped claim in contract law for any breach of contract.

As with many of my posts, this is a very simplified overview. You really need a lawyer to draft indemnity clauses because they are essentially financial obligations with very serious consequences. The aim of this post is to make you aware of them so that you can ask your lawyer about them. You may want receive indemnities as added protection or you may want to offer indemnities to show the other side that you mean business (they can be great for negotiation)!  So go ahead and ask your lawyer about them. Pick up one of your contracts and check to see if you have a few in there already.

I must also emphasise that an indemnity is a distinct right from the right to claim damages for breach of contract. If the construction company breaches a clause in the contract you still have your common law right to sue for damages. Any limitations under an indemnity will be for that indemnity only. This is important because limited indemnities often exclude any loss ensuing from your own negligence whereas a claim for breach of contract can be brought even where you too have been negligent. Ask your lawyer, they’ll break it down for you!

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Cut it out: the beauty of a severance clause.

Posted on by thelegalknow

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It is said that the law is the fabric of society, without it we would have nothing but unruly human beasts roaming the earth’s surface. However in business, sometimes the law actually gets in the way. Yes you read that right. English law believes in freedom of contract, however there is always a risk that a contractual clause may be invalid or illegal – e.g. it offends against public policy or competition law – often this is the case with non-compete clauses and restrictive covenants (clauses that tell a party what they cannot do). This is why clever lawyers make use of “severance clauses” when drafting contracts.

A severance clause (or severability clause) tries to mitigate the damage that may be caused by the interference of the law in a contract. How does it do this? It ensures that a contract will continue to be enforceable even if one of its terms is found to be illegal, invalid or unenforceable. Severance clauses assist in helping a contract to SURVIVE. Pretty cool right? For example, if a contract for the sale and purchase of various vegetables is suddenly subject to a new law stating that no one can sell or purchase carrots (ridiculous but it’s an example), why should the contract die just because the sale and purchase of carrots is illegal? A severance clause would carve out or sever the ILLEGAL part of the contract and require the parties to continue to perform the remaining LEGAL part of the contract i.e. the selling and purchasing of courgettes (zucchinis), potatoes, aubergines (eggplants), peas and so forth. In other words, business shouldn’t stop if it doesn’t have to stop. This is why a severance clause is simply beautiful.

Let’s look at an example of a basic severance clause:

“If a Clause of this Agreement is determined by any court or other competent authority to be unlawful and/or unenforceable, the other Clauses of this Agreement will continue in effect.”

The above clause severs the illegal part of the contract. BETTER versions of a severance clause will try to sever as little of the illegal clause as possible. Here is an example:

“If any unlawful and/or unenforceable Clause would be lawful or enforceable if part of it were deleted, that part will be deemed to be deleted, and the rest of the Clause will continue in effect (unless that would contradict the clear intention of the parties, in which case the entirety of the relevant Clause will be deemed to be deleted).“

Even BETTER severance clauses will give the parties the option to modify or correct the would be severed clause, in order to make it legal. Here is an example:

“If any provision or part-provision of this agreement is or becomes invalid, illegal or unenforceable, it shall be deemed modified to the minimum extent necessary to make it valid, legal and enforceable. If such modification is not possible, the relevant provision or part-provision shall be deemed deleted. Any modification to or deletion of a provision or part-provision under this clause shall not affect the validity and enforceability of the rest of this agreement.

If  any provision or part-provision of this agreement is invalid, illegal or unenforceable, the parties shall negotiate in good faith to amend such provision so that, as amended, it is legal, valid and enforceable, and, to the greatest extent possible, achieves the intended commercial result of the original provision.“

Severance clauses are usually included in any contract as a boilerplate (standard) clause – however don’t take that for granted. Go check your contracts and flag this magical clause with your lawyer. Get your lawyer to advise you – could your severance clause be better? Do not rely/use the examples in this post, they are EXAMPLES. Your lawyer will draft a robust severance clause tailored to YOU.

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HOW TO… be an entrepreneur in your day job.

Posted on by thelegalknow

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Some of us are not quite at the point of saying goodbye to the salary and entering the world of risk and unpredictability. However, guess what? You don’t have to kick the day job in order to start honing the skills of an entrepreneur. Whilst you are planning your future business, you can start to test your entrepreneurial ability now, at your desk, under the nose of your boss.

  1. Respond to a request with a suggestion – If you are planning on leaving your day job, it is often because there is something about it, maybe how it is run or what it actually does, that you do not like. SO since you’re planning your exit, why not challenge some of those things that drive you nuts. When asked to negotiate that sale or purchase on the usual terms, suggest a different tactic. If you are asked to, yet again, make that same salad for the Monday customers, suggest changing the ingredients a bit, for example adding a bit of chilli? If you are asked to do the rota for whatever, suggest a change that makes that rota better. Start to challenge the norm. That’s what you do as an entrepreneur right? You see what others do not and you push the boundaries.
  2. Be yourself – This one is difficult in an office environment or a store where you are reminded daily that it is better to conform than to be yourself. But hey, you’re about to go it alone so you may as well shine and encourage others to shine too. I have a few clients who are unapologetically themselves. They ask you the most direct questions or they decline to come to an event you’re hosting because they, in their words “can’t be bothered with that sort of thing”; I respect these clients. Try to be the person you want to be and see how people respond. Do those under you work harder for you? Do those above you listen more? You can then get a feel for how you will be perceived by others when you are running your own business.
  3. Get to know everyone – When you eventually go it alone, you’ll need to be a people person. You will need to let everyone know who you are, where you are and what you’re up to. You will need to market yourself. So why not start now? Start marketing who you are. If you’re in a big organisation, go and talk to other teams; pop up to the third floor and say hello to the person you email in accounts every Monday. Basically, start honing your networking skills.
  4. Say yes – If you are asked to do something new, do not shy away. If it is out of your comfort zone, step up and take the challenge. Sink or swim that’s what you’ll be doing as your own boss with no one to delegate to. You’ll be doing new things daily, from attending events to speaking at events, from negotiating contracts to drafting strategies. Just do it and get used to a) the initial fear and b) the adrenaline once you realise that, whether you’re doing it well or not so well, you are trying and you are learning.
  5. Ask for help – When you set up on your own it is all about resources. You will be calling in favours and hiring professionals at a competitive price. SO whilst you are still in a day job, get used to asking for help from the people who know how to do what you can’t. If you don’t really know how to use your computer, ask IT for help. If you’ve never been part of a pitch and want to learn, ask a colleague who has done one before. Get used to asking for help, NOW.

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Do you need a break?

Posted on by thelegalknow

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When you’re running an up and coming business, costs are always on your mind. The less costs you have, the more profit you can make. So what do you do? You look for savings, HOWEVER, one of the biggest overheads of any business, often gets overlooked; RENT. In the UK most businesses rent their premises from a landlord as tenants under a lease. When the market was booming (pre-credit crunch) landlords had the upper hand setting high rents and long leases however in today’s challenging economic climate, landlords and tenants have found that long leases and high rents are no longer sustainable; there needs to be a compromise. This is why most commercial leases contain a BREAK clause which enables either the landlord or the tenant or BOTH to end the lease early and seek better terms elsewhere.

How does it work?

Say for example, you own a restaurant. You have a three year lease. In year one, business is booming however in year two, it’s not doing so well because the government has got rid of a big housing estate next door causing footfall to significantly decrease. You still have to pay your rent which in year one, was a piece of cake but now in year two, is a massive burden. You review your lease agreement but ALAS you’re locked in until the end of year 3. You go to the bank to apply for a loan. Whilst doing this you spot a great  empty space in a shopping centre round the corner. You know that your business would thrive there. You review your lease again, alas,  NOTHING HAS CHANGED, you’re STILL locked in until the end of year 3.

In the above scenario, not having a break clause in your lease prohibits you from getting out of a high rent deal in a poor area for your business. Your overheads increase and your profits decrease. Let’s look at this scenario WITH a break clause.

You have a three year lease. As soon as business starts to fail in year two you begin to review your options. You look closely at your lease agreement and to your joy you see that you have a break clause that kicks in after 18 months. You serve a notice to your landlord in accordance with the lease agreement, notifying him that you want to end your lease early. Your landlord accepts and at 18 months you move out of the premises and into the space that you spotted in the shopping centre. HAPPY DAYS.

Can you see the benefits for your business in having a break clause? It gives you some leeway to reassess one of your business’ biggest expenditures. In some circumstances where the location and premises still suit your business needs but the rent is just too high notifying your landlord that you are thinking of sending a notice to activate your break clause could help to bring your landlord to the negotiation table and agree a more sustainable rent. Landlords are business people too and what they value more than anything else is reliable tenants. However, as with everything in law (and that’s why you need a lawyer) there is more to it than just having a break clause and sending a notice. Here are a few considerations to bear in mind:

  1. Form and Service of Notice – You must comply exactly with method and form of service of a notice to exercise a break clause. Also once the notice has been served, it cannot be withdrawn. If the notice complies, you WILL be moving out so consider it seriously.
  2. Timing – It is important when drafting and negotiating the break clause that it is clear when the break date is and what the required notice period is. A break clause may occur on one or more specified dates or be exercisable after a specific period of time has elapsed. Your lawyer can help you work out what works for your business. Landlords usually never want to lose a tenant so they will hold you to strict compliance with the break clause notice provisions; the best thing is to diarise them so that you always have them on your radar and  consider them well in advance.
  3. Break conditions – These conditions must be strictly adhered to. If these pre-conditions are not complied with, your break notice may not be accepted. The most common pre-condition is that all rents due under the lease must have been paid. You must make sure that your lawyer negotiates this condition carefully. A lot of money is wasted in court where it is not clear whether a tenant has to pay a full quarter’s rent or just the apportioned rent up to the date of the break clause. There have been instances where a tenant has had to pay the full rent with no refund. Another pre-condition is that the tenant must give up vacant possession meaning the premises should be EMPTY. Take all your stuff and go.

So do you need a break? Yes! Make sure that you are always giving your business options and do NOT forget to use them.

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HOW TO…negotiate.

Posted on by thelegalknow

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In business, negotiation is a very important skill. You negotiate practically every day! From getting better wholesale deals to giving a pay rise. We are surrounded by negotiation. Negotiation leads to improvement and progress so it is important that you know HOW to negotiate effectively! Here are some tips from my experience as a city lawyer!

  1. Do your homework – You know that saying fail to prepare, prepare to fail, that basically sums up negotiation. You cannot just turn up and blurt out what you want. You need to know a) who you are going up against and b) what they want. This is the only way that you can determine a best case (your dream outcome)/worst case (your bottom line) position for yourself. Study your opposition’s motivations, obstacles and goals. Research them and ASK questions in the negotiation, ask and listen and think about how you can manipulate that information to get what you want. FOR EXAMPLE, Bob is negotiating better wholesale prices from his fish supplier for his restaurant. Dave, the supplier, cares about getting rid of his entire catch of the day on the same day. Bob knows this having done his homework and so agrees a 30% discount on prices if Bob buys the remainder of the catch of the day at the end of the day.
  2. Don’t be afraid to ask for what you want – If you don’t ask you don’t get, simple. That’s not to say that your requests should be outrageous. They should be considered requests based on doing your homework above. Start by listing what you want from the negotiation and why. For example, following on from our example above, Bob may have listed that he wants cheaper prices for the fish that he buys so that he can offer cheaper prices to customers and attract more business. Dave may have listed the fact that he no longer wants to have to chuck away leftover stock at the end of each day. When an opportunity arises to discuss anything on your list of wants, leap in and talk about it. The trick is to always go in with your best position; start with your hopes and dreams then work down to your bottom line (but this is still better than where you are).
  3. Persuade them – So following on from the above, you have your list of wants but how can you get the other side to buy in to them. You present them as a solution or a benefit. Think of everything you want out of the negotiation and how it can actually help the other side. Having done your homework, you should always try to present your wants in the best possible light, not as things that the other side is giving away but as things that HELP them. HOWEVER this will not always be possible. Some things you want are just things you want BUT you can attach them to other potential benefits for the other side. For example, Bob might decide that he doesn’t need all types of fish in Dave’s catch of the day. He may only need Cod and Plaice so that’s what he bargains for. Dave is annoyed because ideally he wants a guaranteed buyer for all of the remainder of the catch of the day. Dave is losing out with this proposition. He may have a catch of the day that is all Cod or that is Cod, Haddock and Mackerel, he still faces wasting produce and losing money. Bob addresses this concern by saying “hey, you’re still getting a guaranteed buyer for Cod and Plaice which you catch REGULARLY.“
  4. Don’t be in a hurry – The reality is that some negotiations take longer than others. Some issues are more complex. Some concerns affect more than the parties negotiating. If you face such a negotiation, you won’t get anywhere rushing the process. You have to go in at a realistic pace. Rome wasn’t built in a day and a sensitive negotiation can’t be agreed in a day. If you push too hard you could chase the other side away leaving you at square one. It is ok and a smart move to suggest “some time to think about it“. This shows the other side that you really want THEM to consider YOUR WANTS because you are serious or that YOU really want to consider THEIR WANTS because you are serious. You  can suggest a night, a couple of days or even a week to “think about it“. The amount of time will depend on the issues being negotiated.
  5. Keep your cool – DO NOT under any circumstances rise to negativity from the other side. Keep your cool! It will intimidate them. If you’re met with a stone wall or ridiculous counter arguments, take a minute and think about what the other side is saying. Then make them defend themselves. Ask them WHY they take a position. What’s their rationale? In most cases they can’t do this and hey presto, you’ve shifted the balance of power in making them realise that they can’t defend their ridiculous idea. In exposing the fact that they cannot actually defend their position, you then have the opportunity to launch into what you want, eloquently explaining your rationale and persuading the other side as to why they should agree.
  6. Stay flexible – Do not LIMIT yourself to a single strategy. You should have done your homework so well that you give yourself different ways to get to a solution. If you are met with heavy resistance to one option, build in the next and work on that. If the other party makes a demand, ask them to explain the reasoning behind that demand then brainstorm. Think – how can I get there another way?

Ultimately the worst negotiators are those who never move from their best case or shout down the other side instead of listening. Just remember that negotiation should lead to progress, negotiation is successful when a compromise is reached. HOWEVER there will be circumstances where it just won’t work, the parties interests are just not aligned. This is when you 7. WALK AWAY. Never ever force it. Good negotiators know when to cut their losses and walk away. In my opinion such negotiators have still won as they have been able to definitively rule out a business relationship thus freeing them to focus on another.

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