Entrepreneur

HOW TO… pay yourself!

Posted on by thelegalknow

smiling sloth

When you are the owner of your own business, it is all about ensuring that you are paying yourself in the most tax efficient way. There are a few options and you should go through them with your ACCOUNTANT (yes you should have one of these). It will also depend on your legal set up (sole traders and partnerships, read no further but limited companies this is for you). Set out below is a basic guide of how you can pay yourself effectively in your limited company in the UK.

A The Elements

  1. Employee

As a director of a limited liability company, you are an employee for tax purposes. You will be paid a SALARY. This means that, as with all employees, you need to register with HMRC to use PAYE to pay your salary – full details can be found on the HMRC website HERE.

Your company (remember that it is a separate legal identity even if it is literally YOU) will need to deduct income tax and National Insurance Contributions (“NICs”), from your salary and pay these deductions to HMRC, on a monthly (or possibly quarterly if the amounts are low enough) basis.  The aim is to keep these outgoings as low as possible in order to fall within a low tax bracket, effectively reducing the amount of income tax and NICs that you pay.

  1. Dividend

A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock or other property.

A company’s net profits can be allocated to shareholders via a dividend, or kept within the company as retained earnings. Dividends attract corporation tax payable by the company and may also raise a personal tax liability in the way of income tax. The corporation tax liability is calculated and paid to HMRC at the end of the company’s financial year and takes into account the overall profit of the company and any dividends that have been made over the period. In this respect it is difficult to estimate the amount of corporation tax payable when the dividend is issued so BEWARE that you must ensure that the company has the available profit to make the net dividend payment AND the additional tax liability. If a company pays a dividend that cannot be supported by its profits then it is technically insolvent (AAAAARGH!).

The good news is that currently only higher or additional rate taxpayers pay tax on dividends (with a 10% reduction which represents a 10% tax credit).

  1. Corporation Tax

Corporation Tax is a corporate tax levied in the United Kingdom on the profits made by companies and on the profits of any foreign company with a UK branch or office.

Taxable profits for Corporation Tax include the money your company or association makes from:

  • doing business (‘trading profits’)
  • investments
  • selling assets for more than they cost (‘chargeable gains’)

If your company is based in the UK, it pays Corporation Tax on all its profits from the UK and abroad.

If your company isn’t based in the UK but has an office or branch here, it only pays Corporation Tax on profits from its UK activities.

B The Solution

The popular solution is to pay yourself using a mixture of salary and dividends. Dividends are National Insurance exempt so you do NOT pay NICs on them. They thus represent an attractive method for taking funds out of a business.

Sounds pretty simple HOWEVER the ever changing beast that is tax is never simple. The level of salary you draw is dictated by other factors too, such as pension requirements, if you draw too low a salary you may not be able to make the level of pension contributions you would like even if your overall pay is pretty high. Also, you can only take dividends out of your post-Corporation Tax profits, i.e. from the money that you have actually earned, whereas a salary can be paid out of future earnings (e.g. by borrowing money from your bank) – if you pay yourself too small a salary, relying on a monthly dividend to cover your living expenses, then a lean month could leave you short of cash. Therefore as previously mentioned, you need an ACCOUNTANT.

C How do I issue a Dividend?
Here are the basic procedures for issuing a dividend.

  • Ensure that there are sufficient profits in the company to allow for the dividend. Print a balance sheet and profit and loss account for the period to remove any doubt.
  • Call a meeting of the directors to minute the decision and details of the dividend.
  • Generate a tax voucher for each shareholder. A tax voucher is a simple statement showing the company and shareholder details along with the individual’s shareholding net dividend amount and tax credit.
  • Issue the dividend payments along with the tax vouchers and file the board minutes and accounts at the registered office.

You can guess what I’m going to say though, you should (if you really want to be good) at the VERY LEAST, do this with a lawyer for the FIRST time. Then once you’ve got the hang of it, you’re good to go!

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Do you really care about your business? 

Posted on by thelegalknow

Sounds like a silly question right? But do you? You DO. Oh that’s great. Perfect. Then you must have a lawyer! At this point some of you are saying yes and some of you are saying no but in my opinion you should all be saying YES!!

Getting a lawyer at the outset does three magic things:

  1. Prevents catastrophic errors happening – for example signing contracts that are cleverly designed to steal your product, intellectual property or your profits, and ensuring that your business is compliant. The truth is that when you have an amazing business, everybody will want to be involved in it. When you’re just starting out, whether you like it or not, you are easy prey. The bigger businesses, the more experienced investors WILL try and get much more for their money. A lawyer will identify this and protect YOU. And what about non-compliance? Well non-compliance is costing Volkswagen a potential $17billion. They only set aside $6billion to deal with this. This is a perfect example of the consequences for breach of the laws and regulations in your industry. The law will collect payment for breach and it doesn’t care if it kills your business in doing so. A lawyer will highlight these risks to you.
  2. Speeds up the growth of your business – yes having a lawyer actually speeds up the growth of your business because you are letting the pros do what the pros do best allowing you to FOCUS on enhancing your business in the way that you know best! Everything that you need in order to be legally functioning, just happens without YOU spending precious management time trying to do it yourself. NOW you are probably thinking, hey, you always say BE LEGALLY SMART.. yes I do and a part of being legally smart is NOT trying to be a lawyer. Legally smart is about being informed so that you can give clever, well thought out instructions to your lawyer so that you do not suffer at the hand of the billable hour… “Yes the fee is high because I had to look into  X and Y and Z” compared with “No problem, I can do that for you…how long? I can get a draft to you by close of business today”.
  3. Gets you a great bargain in the long term – the client/lawyer relationship is a precious one. It is one of trust and mutual respect. What most clients ought to realise however is that lawyers take the work of their clients PERSONALLY. Once you have given a few instructions, growing THEIR business, lawyers respond in kind, prioritising YOUR business, offering free services, offering discounted rates. Looking out for you without being prompted. This is the ultimate goal for any business, to have an established relationship with a law firm because that’s when the fees get cheaper!

Ok, so some of you will literally just be starting out and you cannot afford a lawyer, in that instance there are many things you can do. If you are confident in your product/service, approach a law firm you like the look of and that you envisage you should be able to afford in about 6 months’ time and ask them if they would be interested in assisting you with a few starter contracts/services pro bono (meaning free). Pitch your business to them, explain that you like their work and can see a genuine client/lawyer relationship developing. Some law firms will show you the door but others, and I’d be one of them, would be intrigued and would do you that favour. Alternatively there are lots of firms that offer start up packages and individual standard form contracts that you can purchase and adapt. This is the next best thing to having a lawyer as such contracts are usually drafted to include key provisions. However this option should not be a long term circumstance. If you are serious about your business, your goal should always be to have a lawyer, eventually a team of lawyers protecting and enhancing your business albeit guided by YOU, the LEGALLY SMART one.

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Essential Contracts: An Overview

Posted on by thelegalknow

ostich

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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Introducing the Companies Act 2006

Posted on by thelegalknow


If you are a UK company, the Companies Act 2006 is the main piece of legislation that GOVERNS YOU in the UK.

With approximately 1,300 sections, the Companies Act 2006 was passed in order to modernise and simplify company law, codify directors’ duties, grant improved rights to shareholders and simplify the administrative burden carried by UK companies. It is basically your “go to” for all things company law! Although some lawyers criticise it for being too detailed and trying to cover every eventuality, I actually kind of like it! You can navigate it relatively easily and well, it’s all there! SO if you have a UK company and are at a loss with UK Company Law, the Companies Act 2006 is a good resource to turn to. You can access it right HERE for FREE.

So what can you look forward to educating yourself about in the Companies Act 2006? Well, amongst many (many, many, many – it is the longest piece of legislation in the UK) other things, it sets out the following:

1. a company’s formation (modernised to facilitate incorporation over the Internet…so er…what are you waiting for?);

2. a company’s duties including those that can be fulfilled electronically (YES, so much easier);

3. a company’s communications with its shareholders (this can be done electronically via a website – again, way EASIER);

4. directors’ duties (codified for the first time) including an obligation to promote the success of the company (yup you are OBLIGED to do this by  English LAW), to consider the community and the environment (this is CORPORATE RESPONSIBILITY), the interests of employees, and to be fair to shareholders (this is arguably why Google restructured its business);

5. the rights of indirect shareholders, including the right to sue the company’s director(s) if fraud or negligence is suspected;

6. company naming rules and company governance e.g. limited companies are no longer required to have a company secretary, and can be run by one director;

7. company ‘model’ Articles of Association, provided by Companies House (this is your company’s CONSTITUTION);

8. share capital rules (simplified for private companies); and

9. formalities for execution of documents.

This epic piece of legislation may be very detailed and a bit daunting at first BUT I think it is incredibly useful – it is basically Wikipedia for UK Company Law. If you have a query about your company and its operations, skim through the index of the Companies Act 2006 and see what you can find out THEN follow up with your lawyer IF you have to!

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What exactly did Google do?

Posted on by thelegalknow

In a nutshell Google is RESTRUCTURING its business. Restructure basically means to “organise differently”. The new structure will be introduced in phases in the upcoming months.

As a result of the new structure Google will NO LONGER be the top dog company, this will be Alphabet. Alphabet will become the parent company and Google will become a subsidiary of Alphabet. Google will still own search, ads, maps, apps, YouTube and Android BUT many of its more “out there” ventures will join Google in becoming separate subsidiaries of Alphabet. For example Google X (the more experimental, top secret business e.g. self-driving cars and chip-embedded contact lenses), Calico (the company with the mission of tackling age and extended human lifespan) and Nest Labs (smart homes) will be transferred to the ownership of Alphabet to become independent entities.

So WHY would a company restructure its business?

Quite simply, to CLEAN UP. Restructuring is usually implemented when there are significant problems or risks in a company, which are causing or will cause some form of financial harm that could put the overall business in jeopardy. Restructuring is a form of risk management. The truth is, Google was housing a mixed bag of businesses which affected its accountability to and potentially its profitability for, its investors. A longstanding concern on Wall Street was the lack of transparency on how the Google businesses were operating. The crazy, loss-making experiments were seen as a costly distraction to the company’s highly profitable core search and internet advertising businesses. HOWEVER the new structure separates these unconventional business ventures from the safer, money-making companies, thus improving oversight and management which is good for investor relations. As Larry Page (CEO of Alphabet) stated in a blog post accompanying the announcement, “Our company is operating well today, but we think we can make it cleaner and more accountable”.

What can YOU learn from this?

As your business grows you will find yourself wanting to explore new avenues and take on new ventures, just like Google did. At this point your current business structure may not cut it, you may need to set up a subsidiary or two to manage risk and exposure. RESTRUCTURING enables you to tidy up your business by effectively allocating risk. This keeps your financial backers happy and in the long term this keeps YOU happy as you have the legal and financial FREEDOM to explore new things, just like Larry and Sergey!

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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

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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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