contracts

Be smart but don’t cheat…

Posted on by thelegalknow

fox

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.

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The impossible: force majeure clauses

Posted on by thelegalknow

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Before you read on, please note that this post is not for the faint hearted. This clause is really important in any contract and I’m going to try and give you a full explanation of it.

Force Majeure translates to a “superior or irresistible power” in the beautiful French language.  In English law, it refers to a clause in a contract which protects the parties from their contractual obligations in circumstance where that contract, by no fault ofthe parties, becomes impossible to perform. In such a scenario, the parties will usually have the right to terminate the contract or to suspend the contract, if the impossible circumstances are likely to come to an end within a certain time frame. This is a very useful clause when faced with the effects of acts of God (tornadoes, lightning strikes, floods), governments and regulatory authorities – none of which give a hoot about your contracts!

There are generally three essential elements to an event being determined force majeure:

  • It can occur with or without human intervention.
  • It cannot have reasonably been foreseen by the parties (for example your machine breaking down is foreseeable and so is not a force majeure event).
  • It must have been completely beyond the parties’ control so that they could not have prevented its consequences (for example a riot, like the London riots).

A very basic force majeure clause will look as follows:

“A party (affected party) shall not be liable to the other party for any failure to perform the Agreement caused by circumstances outside the reasonable control of the affected party.”

What exactly is “circumstances outside the reasonable control of the affected party”? Well the answer is, how long is a piece of string! This is where your lawyer steps in. Over time, lawyers have come up with a list of events which are generally considered to be force majeure events. These events are as follows:

  • Fire, flood or other natural disaster;
  • malicious injury;
  • strikes, lock-outs or other labour troubles;
  • riots;
  • insurrection; and
  • war.

However, please note that the above list is not exhaustive so lawyers have also taken to adding sweep up language to cover anything else that might occur with force majeure characteristics. For example many clauses end their list with “ and any other reason of like nature not the fault of the party in performing the contract”.

The better force majeure clauses oblige the party relying on the force majeure event to do certain things so as to help the contract to survive as far as possible. The relying party must usually promptly notify the other party of the force majeure event. The relying party is then only excused from the contract for the period of the delay caused by the force majeure event. During that time, the relying party must take what steps it can to mitigate the effects of the force majeure event on the contract. In other words, the relying party must do its best to find another way, where possible, to fulfil its contractual obligations. HOWEVER, the period of delay can’t go on forever, so where the force majeure event exceeds a certain timeframe the party entitled to the performance of the relying party may terminate the contract. For example “if any delay exceeds six months, then the party entitled to such performance shall have the option to terminate this Agreement”.  Such force majeure clauses are GRADE A (my own personal labelling)!

Let’s consider an illustration of a GRADE A force majeure clause.

  1. Happy Fruits Ltd and Love Fruits Ltd are in a contract for the sale and purchase of fruits. Happy Fruits Ltd sells fruit to Love Fruits Ltd.
  2. Under the contract, Happy Fruits Ltd must provide Loves Fruits Ltd with a case of tomatoes by X date.
  3. Before X date, a flood occurs making the delivery of the tomatoes impossible.
  4. The contract contains a GRADE A force majeure clause, therefore as soon as Happy Fruits Ltd learns that the flood is preventing the delivery of the tomatoes to Love Fruits Ltd by X date, it must notify Love Fruits Ltd of the flood in writing, stating a “force majeure event”.
  5. Happy Fruits Ltd must then attempt to mitigate the effects of the flood on its delivery to Love Fruits Ltd. For example, it must try to supply the tomatoes to Love Fruits Ltd from another branch not affected by the flood, or from another supplier with similar produce.
  6. If Happy Fruits Ltd cannot mitigate in the manner above, it must at the very least strive to deliver the case of tomatoes at the next available opportunity. So for example, if the flood passes a day after X date and all modes of transport go back to normal, Happy Fruits Ltd must do its best to deliver the tomatoes to Love Fruits Ltd on that date.
  7. If Happy Fruits Ltd fails to deliver at the next available opportunity or to reasonably mitigate against the impact of the flood on its contractual obligations, Love Fruits Ltd could have a claim for damages under the contract. That’s right. Even though the flood has nothing to do with Happy Fruits Ltd, Happy Fruits Ltd may still be on the hook. However, Happy Fruits Ltd only has to do what it can reasonably do. In English law, reasonably is pretty broad and forgiving. This is why this type of force majeure clause is Grade A, it offers just enough protection AND wriggle room to both parties.
  8. If the effects of the flood surpass the force majeure cut off point then Love Fruits Ltd may terminate the contract.

Hopefully you followed that! Basically each and every business contract should have one of these clauses in them! You just never know what might happen out of your control that may prevent you from performing your side of the contract. In such a scenario, you do not want to be contractually liable for anything. In recent years, a new force majeure event has sadly come to the forefront – acts of terrorism, the effects of which are devastating. Get your lawyer to review your contracts to ensure that you are adequately protected.

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The bigger picture – selling your business.

Posted on by thelegalknow

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Ok, so it’s great that you’ve got your own business and that you’re doing so well. BUT, the question is do you want to be doing this forever? I don’t think so. If your business isn’t getting passed on to another generation then you’re probably looking to, one day, sell it and make a hefty profit! This post is a heads up about the things you need to be doing NOW, in order to build a product (yes, your business is your product) that sells quickly and at the best price possible. Here are my top tips!

Keep it clean – Your business must not have skeletons in its closet. I’ve said this before. Either you eradicate those skeletons or you confess to them, preferably the former. If you have unpaid bills, taxes or ongoing litigation, your business will not sell or it may sell BUT at a DISCOUNTED price. This is because instead of purchasing a nice shiny product, the buyer is purchasing a whole lot of risk. Risk is financial uncertainty and in business we despise financial uncertainty. We are constantly mitigating against it. So, clean up your business and keep it clean. Carry out your due diligence REGULARLY. Do not neglect complaints from clients or scary regulatory letters. The buyer of your business will carry out its own due diligence and it will be thorough. Would you buy a car without a test drive or seeing under the bonnet? Nope, I didn’t think so.

Show them the money – If you want to sell your business you have to be super transparent with your numbers. Start planning now to make sure that your business has a financial record to attract a good buyer. Maintain a healthy working capital, renegotiate supply contracts and make sure that you are getting the best deals for your business. Also, get on top of your debt. Pay off as many of your loans as possible. Think about what is actually costing your business money. If your business requires a lot of machinery, are you using all of that machinery? Can you sell some of it? Don’t forget your forecasts – get them ready and back them up with evidence.

Create and implement a business manual – It is amazing how many of my clients do not have systems and procedures for the simplest of things to do with the day to day operation of their business. If you sell products worldwide, you should not be selling those products on ad hoc procedures. You should have a clear process that the buyer of your business can step into tomorrow and operate. You should have systems in place for every aspect of your business. You should have formalised documents. Get your lawyer to draft standard form employee contracts, terms and conditions, disclaimers, policies etc. Also, is the structure and ownership of the company clear? Make the ownership as clear and as transparent as possible.

Show them your A team – Behind every great business is a strong and passionate management team. Your management team is a big part of your business’ valuation. It is therefore crucial that you consider if your business can retain good employees – this may require considered incentives. The buyer of your business will want all your key people to be a part of the sale. It will also want the assurance that your business is not a DIY job; show off your professional support. Your lawyer, your accountant, your consultant all make an impression. Those relationships matter because they instil confidence in the buyer that everything to do with your business has been done properly. Also seek advice from your A team. What do they think? Get your lawyer to review your business structure and advise you as to whether you need to change it in order for it to be an attractive purchase. Your lawyer will take you through the whole process and organise all of the legal paperwork to ensure that there are no unnecessary complications before and after the sale. You really need everyone on board advising. I have worked on an international acquisition where the whole deal was restructured because of tax. It was cheaper to do it another way! Three days before closing we had to change everything!

You may be far off from selling your business at this point in time, but if you want a big pay out someday, you should start doing all of the above now!

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How to… speed sign low value contracts.

Posted on by thelegalknow

Cheetah

Right, this goes against my lawyer instincts because in my opinion you should always read everything you sign, in as much detail as possible. However, if you genuinely do not have the time and it is a considerably low risk document (so not worth a million pounds/dollars), then here are three things to do before you sign which will alert you of any potential risks and give you some protection going forwards.

  1. Exclusion and limitation clauses – Look for these types of clauses or ask outright if there is such a clause in what you are signing (get them to refer you to it so you can check their honesty). This will list or summarise everything that the contract/document does not include and what the other party is not liable for. The best example of a document riddled with such clauses, is an insurance policy. When you sign an insurance policy, it is important that it covers what you want and one of the quickest ways to confirm this, is to take a quick look at what is excluded. For example Billy asks Janet for an insurance policy for his car. Janet gives him an insurance policy for his car. Billy is in a hurry for a meeting and trusts that he has been given a policy to insure his car, HOWEVER he flicks to the exclusion clause and sees that the policy does not cover RED cars. Billy’s car is maroon, so, arguably red. Billy takes this up with Janet. Janet amends the policy for Billy so that the operative clause clearly states that Billy’s maroon (and therefore not red) car is covered. Always check what a contract expressly excludes.  If it excludes accidental damage and you need it to cover all damage then obviously you are not signing. Another example would be a limitation of liability clause, often found in services contracts. Say for example you hire a professional polisher to polish your silver worth £3,000 but the contract of hire states that liability for any damage arising out of the contract at the fault of the professional polisher, is limited to £500 only. Obviously, you are not going to sign. Who’s going to pay for the remaining £2,500 worth of damage? Always check how liability of the other party is limited. If you sign a contract with a rubbish liability clause, that’s your fault.
  2. Payment provisions – Always check that the numbers are what you agreed. An extra zero here, a missing discount there is BAD for business. If you have agreed a specific discount just take that second to double check that it is expressly in the contract. DO NOT worry if the other party finds it offensive that you are checking, they will respect you for it. Even if my best friend gave me a contract to sign, I would check it right before their very eyes! Also, what happens if you pay late or you have a dispute with a charge? What does the contract say about that? Checking this clause or asking directly about this clause (then getting them to refer you to it specifically) will ensure that the most important thing of all, money, is properly accounted for!
  3. Termination – Imagine your face when you try to switch suppliers and you find that you have signed an indefinite contract! That’s a worst case, silly scenario but hopefully it highlights how important it is to know how to get out of a contract before you sign it (I’ve said this before). Business is unpredictable and you may need to get out of a contract really fast – knowing the termination provisions at the outset can help you to consider all possible scenarios in which you may want to terminate the contract early and therefore judge whether the contract in question is one you want to sign or amend.

I have to also add the obvious cautions, check who you are contracting with. If you are doing business with Joe Blogs Plc make sure it says Joe Bloggs Plc and not Joe Bloggs Ltd. Also, don’t forget the dates, it will take no time at all to make sure the document is dated correctly. Again, these are just TIPS for those of you ALREADY signing standard contracts without checking ANYTHING. If you are one of these people, at least check the above three things or else suffer the consequences. Once you sign a commercial contract, there is very little anyone can do for you if it turns out to be a bad deal. The Courts have no sympathy for business to business contracts because both parties are considered sophisticated.

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HOW TO…write like a lawyer.

Posted on by thelegalknow

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Before you read any further I must explain that there are two schools of legal writer. The first is the school of “I want everyone and anyone to understand what I am writing so that there can be no doubt as to what has been agreed/disagreed and that YOU the CLIENT understand what you have paid for”. The second is the school of “I want to confuse you to make myself look smarter and you the CLIENT feel dumber so that you pay me whatever I ask because you have NO IDEA what’s going on”. If you have a lawyer in the second school of legal writer…get rid of them.

In the UK, the legal profession has snubbed long words and sentences. We’re even striving to move away from the ye olde latin phrases. These days if a judge reads a Defence or a letter that is not in plain English, the lawyer responsible for the drafting is in big trouble. The trick is to strike a balance between simple and clear language but without sacrificing gravitas (which lawyers love). There are a number of tricks that lawyers use to do this.

  1. Short, simple sentences. You can always deduct words! Challenge yourself by continuously asking, can I say this in a simpler way? Get rid of all superfluous introductions too. For example, “It is noted that” (get straight to it), “We should be grateful if you would” (just say please), “As aforementioned” (what??). Ok so SOMETIMES you can’t help but use an introduction such as “Further to your request” but at least this is helpful as it gives a context for why you are writing. If the words do not add value to what you are writing, get rid of them. Here’s an example. Compare “It is noted that you have persistently refused to pay” with “You have persistently failed to pay”. Which one is stronger and clearer?
  2. Define your terms. If you are referring to a really long word over and over again, just define it! For example, Apple Bubblegum Flavour Limited can be defined as “ABFL” like this “Our subsidiary company, Apple Bubblegum Flavour Limited (“ABFL”) is a profitable business”. From then on, instead of writing the full title of Apple Bubblegum Flavour Limited you can just write “ABFL”. Let’s look at another example. Tropical Adventures Limited can be defined like this, “Tropical Adventures Limited (“Tropical Adventures”) is a company specialising in coordinating adventurous holidays”. You can define a term in pretty much any way you want EXCEPT that you must actually USE the defined term in your writing and you MUST be CONSISTENT in your use of the defined term. For example, the defined term Tropical Adventures must be referred to as Tropical Adventures throughout the document and cannot suddenly be referred to as “TA”. In my opinion, defined terms can only be used by the very able of writers as whilst they are helpful, they can also be disruptive if you have too many or if you define them in a weird way. Define your terms in a way that helps the writing FLOW and not read like CODE.
  3. NEVER use emotive language. For your credibility’s sake avoid it! Stay away from language that you should only read in Harry Potter (surprised, annoyed, amazed etc). Also don’t make easy overstatements such as “clearly”, “obviously”, and “extremely”. Words like these lack detail and add nothing. For example compare “You received our bill on 7 October 2015” with “You clearly received our bill on 7 October 2015”. What did you notice? The use of the word “clearly” makes the writer appear weak and childish. I mean either something is clear or it is not! Don’t agree? Read this “We find your lack of response extremely rude”  and now this “We find your lack of response rude.” Which version sounds more sure of itself? The LATTER!
  4. Number your paragraphs. The best thing about numbered paragraphs is that you can cross reference! Say for example you are writing a really long complaint to a supplier. You have a strong introduction which sets out in four paragraphs the details of your grievance. You get to the end of your letter after setting out the solution you want. At this point you need to really bring it home to the reader just WHY you are justified in wanting that solution. Are you going to set out your grievance again? NO! You can simply state as follows “As set out in paragraph 3 above, your company has failed to carry out its obligations under the contract. As a result of this breach, we invite you to compensate our company in the sum of £500”. BOOM! You can even number your paragraphs in emails. Imagine this, you’ve drafted a detailed email to a potential investor/client setting out the terms upon which you are willing to negotiate. You should WANT to HELP the investor/client to consider each of your points properly. If you number the paragraphs, the potential investor/client can simply reply with “Dear Jack, I agree with paragraphs 1-7 and paragraph 9 but I’m afraid I cannot commit to paragraphs 8 and 10.” Again, BOOM! Just like that you have narrowed down the negotiation to the key issues (paragraphs 8 and 10) by one considerate email.
  5. Headings. Headings are great as they focus the reader’s attention on key issues that you want to get across and they also prepare the reader for the particular topic or sub topic. Let’s look again at my example at point 4 above (see what I did there…I cross referenced). You are writing a grievance letter to a supplier. How can you focus their attention? You can use headings as follows: Your breach, Loss caused, Solution and Next Steps. Or if you are writing a negotiation paper for a meeting you might use the following headings: Services, Duration of Services and Remuneration.
  6. Font and font size. Please do not write in Times New Roman (just too stuffy and is the automatic format of those who have not really thought about their business identity, unless of course your business identity is stuffy…) or Comic Sans (this font is for children). Pick a font like Arial, Tahoma or Calibri. These fonts are clear and encourage the reader to read what you have written. I personally prefer font size ten. Not too big and not too small. Also create a “house style” for your company. House style will be the formatting that your company uses in all of its correspondence and documentation. This helps with branding and it also protects your business as it grows. If you have a house style, all the employees are writing in the same format and structure.

So there you have it, my tips on how to write like a lawyer, but what I really should have called this post is how to write like a GOOD lawyer. Some lawyers love the serious long words and old school phrases but in my opinion such writing excludes the client, and it’s all about working collaboratively with the client!

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Essential Contracts: An Overview

Posted on by thelegalknow

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Right so you’ve set up a business. Great! HOWEVER, don’t pat yourself on the back just yet. You need to ensure that you are legally ready to actually start FUNCTIONING as a business. So what am I talking about? I’m talking about those ESSENTIAL CONTRACTS that you should have READY at your fingertips so that you don’t a) look like an amateur (even though you may actually be an amateur) b) fall prey to the lawyers for the other side (if they present you with their standard contracts first, they MAY get the upper hand…depends on whether you’re legally smart or not) or C) miss out on fantastic opportunities because you don’t have the necessary documents ready and rearing to go.

There are many standard contracts a company should have depending on the industry within which the company operates. However here is a list of contracts that are applicable to all industries.

1. Shareholder Agreements

In the UK, if you are setting up a limited company, you will need a Shareholder Agreement. This contract regulates the dealings between the shareholders of the company. It sets out who owns what and who can vote and make decisions on what. It also sets out what particular shareholders cannot do. It effectively contains the framework for operating the company. This document should be drafted and agreed by all shareholders of a company at the outset. NEVER assume that just because you are friends or respectable members of society that things will not, one day, get ugly (this is business we’re talking about). A shareholder agreement protects every one.

2. Investor Agreements

Money, money, money…MONEY! If somebody is investing or loaning money to your company they will want to see the terms written down….SIMPLE. If you don’t have a standard form of this document ready for negotiation, you could run the risk of not being taken seriously and missing out on a great opportunity to gain capital for your business. An investor will want to know specific things and they will want to see these specific things neatly set out in concrete. What shares do they get? What is the value of those shares? Will those shares get diluted if more money comes in? What control do they get? What are the procedures for running the company? What is an exit for the investor if they want out? Setting these terms out clearly also protects YOU.

3. Website Terms and Conditions

Do you have a website? Of course you DO. You’re not living in the stone age BUT did you know that you cannot just have a website, you need a collection of documents covering the way that the website is run. Consumers/clients/customers need to see your policies on data, privacy, cookies and cancellation. Make sure you draft Terms and Conditions that are bespoke to your company. DO NOT copy and paste from another company’s Terms and Conditions – something in the small print WILL come back to bite you later. Instead, think about what terms you need in place that are relevant to what you offer and to how you run your business for example “this company operates on a 12 day cooling off period, if you change your mind within 12 days of ordering, we will cancel the contract, no strings attached” or “bookings are only confirmed upon receipt of a confirmation email from our head office”.

4. Non-Disclosure Agreements

Your business is your secret. Everything from your trademarks, patents, copyright, software, recipes, formulas, processes, financial information and so forth is your business IDENTITY. Don’t make it easy for people to steal your identity. This is what makes you unique – McDonalds, Apple, Nintendo! Before prospective investors, trade partners and purchasers will deal with you, they often need to know more about you – a Non-Disclosure Agreement offers you some protection in relation to the information that you disclose. It is a deterrent against breach of confidentiality by the other party. If they breach it, you can take them to court and sue them for virtually all damage ensuing from that breach…the price to pay could be very costly, consequently, they won’t want to breach it and your business identity is SAFE.

5. Employment or Consulting Agreements

If you have employees or consultants, you need a document that clearly sets out your relationship. There are many considerations that you as an employer will need to consider and set out clearly in line with the law. For example the process of terminating the contract, dealing with employee data, dealing with disciplinary matters, and (currently at the fore front in the UK) employee pension rights. Additionally, considerations such as wages, bonuses, working hours, holiday, sick pay, shares etc. all need to be addressed and codified somewhere clearly. This is where you really need a lawyer. There are some benefits to engaging contractors over employees (basically that you are not responsible for them) BUT just because you label someone a contractor does NOT mean that they are LEGALLY a CONTRACTOR. If they are working full time and only for you, tax and the law may classify them as an employee. So again YOU NEED A LAWYER HERE.

So there you have it. This is NOT a comprehensive list BUT it is a very good start. If you operate in another jurisdiction, such as the USA or Singapore or Dubai, the above themes and considerations are pretty universal save for any legal particulars. So go and put your house in order. You can actually buy most of the templates to the above agreements online HOWEVER whilst you can certainly make a start on them ALWAYS get a lawyer to give them at LEAST the once over, remember these documents are ESSENTIAL so you kind of want to get them right.

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Beware the Double D’s – Directors’ Duties!

Posted on by thelegalknow


If you are a director of a UK company that is a big deal. To whom much is given much is EXPECTED and the Companies Act 2006 did not forget about this! Shareholders of a company delegate the day-to-day management of the company to the directors so EFFECTIVELY the directors ARE the company. This is why the law has prescribed certain expectations for directors.

BASIC POWERS

Firstly, let’s ensure that you understand the basic power and authority of directors.

Directors work as a board (basically a team). The BOARD OF DIRECTORS may (if the articles of association permit, as they generally will) delegate powers to a committee of board members (sub team) or to an individual director (so this individual director can make particular decisions without referring to the board).

An EXECUTIVE DIRECTOR is an employee (of the company) with specific powers delegated to them either by a resolution (decision) of the board or under their service contracts.

A NON-EXECUTIVE director is, as the name implies, a director to whom no executive powers have been granted by the board. HOWEVER they can VOTE at board meetings and still have the same duties as executive directors. A non-executive director is usually an expert of some sort who acts as a check on the executive directors by using their particular expertise to vote at board meetings.

A MANAGING DIRECTOR (sometimes called a chief executive) is granted more extensive executive powers by the company’s articles of association or by board resolution. As the name suggests,  a managing director manages the other directors.

IF you are a director, you should know and understand the extent of your powers within your company or else you could fall foul of an array of liability. The golden rule is to never act beyond your powers. Take any issues to the board if you are unsure.

STATUTORY DUTIES

As stated in my previous post, the Companies Act 2006 is really your wikipedia for UK Company Law and it is a great start for understanding your role as a director. A director’s general duties are owed to the company and NOT to the individual shareholders. It is the company that will have the right of action against a director if he or she misuses their position.

The Companies Act 2006 codifies certain key duties, as follows:

  1. Duty to act within powers (section 171);
  2. Duty to promote the success of the company (section 172);
  3. Duty to exercise independent judgment (section 173);
  4. Duty to exercise reasonable care, skill and diligence (section 174);
  5. Duty to avoid conflicts of interest (section 175);
  6. Duty not to accept benefits from third parties (section 176); and
  7. Duty to declare interest in proposed transaction or arrangement (sections 177 to 185).

All of the above are designed to prevent directors abusing the position they hold within a company. Some of them may seem pretty obvious but you’d be surprised! Parliament didn’t pass the Company Directors’ Disqualification Act 1986 for nothing! In my experience, directors generally tend to fail to understand the restraints of 6 and 7 (go read these sections).

CODE OF CONDUCT

Alongside the statutory duties there is also what is known as the ‘code of conduct’ for directors. These include but are not limited to:

  • The likely consequence of any decision in the long term – so you have to demonstrate that you have thought about the future impact of your decisions for the company;
  • The interests of the company’s employees;
  • The need to act fairly as between members of the company; and
  • The impact of the company’s operations on the community and the environment.

Basically, directors have a lot to consider when they act. WHY should you CARE? Well sadly, directors are personally liable if they fail to comply with their duties. PERSONALLY (urgh) AND a director can even face criminal charges. That said, if you are a director, you can protect yourself by always taking difficult decisions to the board – you know, a problem shared is a problem halved…BUT if you ALONE are the board, it is important to document WHY you make a particular decision, to demonstrate that you have considered the code of conduct and the statutory duties.

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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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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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