Big Wide Ocean: Strategies For Worry Free Business
Author: ApproachableLawyer

Chapter 3
SWIM BETWEEN THE FLAGS

CHAPTER 3: SWIM BETWEEN THE FLAGS

Doing battle with a shark is a messy affair. Even if you come out the winner you can expect to get hurt and wounded in the process.  The answer is not to mess with sharks in the first place. But that’s easier said than done because often you don’t find out that the person on the other end of the deal is a shark until it is far too late. By then, you may be on your way to losing lots of money as well as anticipated profits.

When a deal falls over, the first step is to see your lawyer. He or she is likely to advise some form of litigation or dispute resolution process. That’s when you have to make a decision whether to invest more money in legal fees for what could be an uncertain outcome.

How to create certainty and avoid the legal fees

There is one way to avoid getting into this situation, or (if you find yourself sitting in your lawyer’s office) to give yourself a greater degree of certainty as to the outcome. That way is to make sure that whenever you do business with someone you record any agreements you make in writing no matter whether you think they may be a shark or not. Getting your documentation in order is the key.

But, not everyone does it

Invariably cases involving business transactions end up before the courts because there has been some failing in the documentation. Often this is because there is no documentation at all. It then comes down to your word against the shark’s. In that department sharks are well qualified. They will twist conversations and invent agreements to make the facts fit their version of events. That is their trademark.

How to beat the sharks

In the business context, the written agreement is the equivalent of your shark cage. How well it is drafted is a measure of how sturdy that cage is to attack. How much you decide to invest in a cage depends on the circumstances, but what you would never do is go into the water completely unprotected. That is what this chapter is all about.

Many business people enter into agreements without any form of written documentation. There may be many reasons for that which this chapter will explain and to which it will provide solutions. But the underlying message of this chapter is to avoid the shark’s trap.

Recognising the shark’s trap

If you ever suggest an agreement to someone and their reply is “we don’t need an agreement, my word is my bond” or words similar, then the alarm bells should start ringing, for that is the shark’s trap.

There should never be any reason for someone to refuse a written agreement provided it is framed up and presented properly. If they do refuse then there is a good possibility that you are dealing with a shark. Remember, sharks don’t like written agreements because they give them less room to manoeuvre and attack later on.

So the key is to get your business associate to sign an agreement: NO HANDSHAKES. That involves overcoming certain hurdles. But, follow the advice in this chapter, and you will never have a problem again. If you do, then abandon the deal.

Magazine or War and Peace? Presentation is key

How would you react if someone handed you an agreement which resembled War and Peace?

If you were expecting it, then it wouldn’t bother you. If you weren’t then you would gulp. The mere task of reading the damn thing is probably going to be hard enough. Then the doubts start to creep in…

Unanswered questions enter your head

The first question that will cross your mind is “what does it say?”. Unless you are a lawyer you may have some problems here. That leads to the second question: “Are there any fishhooks in here which I should know about? Maybe this is a trick?

This leaves you with two options: either you wing it, place your trust in the other party, and sign the agreement anyway, or, you get legal advice. If you choose the latter you enter the realm of legal costs. If the costs are too much, then you are back to option 1.

Most people choose option 3

Of course there is option 3, which is to ditch the deal altogether. Sadly that is what many people will choose. If we are the party who is suggesting the agreement we are all too aware of this option. That causes a reluctance on our part to suggest a written agreement at all. So, either the deal falls over or no agreement gets signed and you’re swimming with the sharks without your shark cage.

But, people sign agreements everyday without even thinking twice

Most people in this day and age will have either opened up a bank account or signed a mobile phone contract. If that applies to you, did you read the terms and conditions? Most people don’t bother and even those who do would probably not go and see a lawyer to get advice on the terms.

Yet, bank terms and mobile phone contracts are actually quite complicated agreements. If you presented them in normal typeface they would go on for pages and pages. But banks and mobile phone companies don’t present them as weighty documents and there are reasons for that. First, they don’t want you to negotiate them and second, they want you to sign them without thinking.  Most people do.

There is a lesson for us all here 

The lesson to be learnt here is that the presentation of your agreement makes a big difference to whether a person is prepared to sign it.  Present it as a weighty legal tome and you will run into opposition. Present it as terms and conditions of agreement, with small type and on as few pieces of paper as possible and the effect is very different.

Personal experience

A client asked me to prepare a participation agreement for a sporting event (yes, there are such things!!). The first draft was 9 pages, spaced out clauses, and in font size 11.   You can see the first two pages in Fig 1.  [to be inserted]

We were concerned that participants might be scared off by this. So we prepared some terms and conditions of participation. They are in Fig 2. [to be inserted]

The key ingredients of this latter document were:

▪          Use of the client’s logo

▪          Form / checkbox layout on front page

▪          “Standard” terms and condition on reverse

▪          Big print for form, small print for terms and conditions

▪          Less paper used

The agreements look very different, but in fact (in terms of the content) they are the same document. The only difference is the presentation. Reports back from the client indicated that no-one had a problem signing the new version.  Most did it without thinking about it.

Choose your presentation carefully

There will be some situations where a weighty legal document will be appropriate. Usually those are situations where the value of the deal is large and both parties can afford to get legal advice.

However, not all business deals are like that and where the other party to the deal is not expecting a weighty legal document then you should think carefully about the presentation.

If the agreement is one that you will frequently enter into as part of your business then you need to give some thought to having some standard terms and conditions. These are particularly useful for terms of trade but the “form agreement” need not be confined to terms of trade. Use this format for any document that you will be using often.   The advantages are that it will help persuade others not to negotiate with you: they will assume that the terms are written in stone.  It’s amazing how many people take as “read” anything that is written down, but will try and negotiate anything that is not.

Consider correspondence

The other option is to record your agreement in correspondence. This would be suitable for short and uncomplicated agreements. The advantage of correspondence is that it is less formal and therefore more likely to be agreed to.

The way to present the agreement would be to set out the terms in the main body of the letter and then have a section after your signature where the other party can countersign.  The important thing is to get the other person’s written agreement to what you have said. Make sure there is no room for ambiguity.

Problems can arise when the agreement is recorded in email correspondence since there can be no physical signature and there may possibly be arguments over receipt of the email. However, that’s not to say email can’t be used – simply make sure the other party responds with his or her agreement. NEVER take the other person’s silence to amount to acceptance.

What if you can’t decide?

There may be times when you can’t decide whether to opt for the formal agreement or go for one of the less formal options like correspondence. In these situations, there is a half way house and that is the “Memorandum of Understanding” or the “Heads of Agreement”.

The purpose of these types of documents is to record the agreement between the parties but on the understanding that the document needs to be fleshed out a bit with the detail. Often this never happens and the deal will go through without a fuller agreement being prepared. That’s fine if everything goes smoothly but it can cause problems if it doesn’t.

The important thing to note is that these documents are still considered to be written agreements with full contractual effect. The disadvantage is that it is easier to imply other terms into the agreement than are stated in the document itself. A shark could take advantage of this to give a different meaning to the agreement than was intended by you.

So there is a word of caution here with these types of documents, but ultimately it is a trade off because the other person may be more willing to sign one of these documents then invest time and money into getting a lawyer to prepare a complete agreement.  At the end of the day, it probably comes down to what is at stake.

Of course, it is not just what the agreement looks like that makes a difference, but what’s inside…  


 

 


 

Say what? Legalese

'General saving for old savings           
12. - (1) The revocation by these Regulations of a provision previously revoked subject to savings does not affect the continued operation of those savings.          

(2) The revocation by these Regulations of a saving on the previous revocation of a provision does not affect the operation of the saving in so far as it is not specifically reproduced in these Regulations but remains capable of having effect.     '

(From Schedule 1 to other Income Tax (Construction Industry Scheme) Regulations UK)

Say what?! Most lawyers would not be able to make head or tail of that, so what chance does a business owner have?!! This type of wording is often called legalese.

What is legalese?

“Legalese” is a dialect of the language commonly referred to as gobble-de-gook. It is spoken by lawyers and has its origin in the 19th Century when it was important for lawyers to be seen in a different class to their clients. Very soon lawyers found legalese to be an extremely useful way of communicating between themselves and avoiding their clients knowing what they were saying.  This preserved the mystery surrounding the profession, discouraged lesser mortals from dabbling in the field and allowed lawyers to charge bigger fees.

Over the years a perception has arisen that if a document doesn’t contain “legalese” it is not “legal”. This is utter nonsense.

How to spot legalese

Legalese is pretty easy to spot. At the end of the day, if an agreement sounds confusing, it isn’t doing its job of conveying clearly what the parties have agreed. Some lawyers now adopt a plain English approach to agreement drafting which is very refreshing, but others don’t. If you have received an agreement from the latter kind of lawyer then there are a few words which should start the alarm bells ringing: Whereas, Hereinbefore and Thereat are a few examples. Nobody uses these words in everyday language so they have no place in an agreement. Get your lawyer to find some other way of expressing the sentence. If you want more examples of legalese or gobble-de-gook go to www.plainenglish.co.uk . Here is one which they found with the plain English translation below:

Before

If there are any points on which you require explanation or further particulars we shall be glad to furnish such additional details as may be required by telephone.

After

If you have any questions, please ring.

 

 

 


 

Why legalese becomes a problem

 

 

If you were presented with a document which contains legalese would you sign it? Probably not.

Very few people would be prepared to sign something they didn’t understand.  Faced with this scenario you might ask the other person what it meant. If that person doesn’t know either, then he or she is going to have egg on their face. Now reverse the situation. You should never ask someone to sign something which you can’t explain yourself. So, the solution is to ask your lawyer to make the agreement as clear as possible so that there are no questions in the first place.

But, legalese doesn’t only come from lawyers

It may be that for some agreements you will feel comfortable putting them together yourself and avoiding the lawyer’s fees. If that’s the case and you are using old agreements to get your inspiration then don’t copy legalese from the old agreement to the new agreement. Always make sure that anything you copy across, you fully understand: never copy anything you don’t understand. Remember, legalese doesn’t make an agreement “legal”. It is far more important to make the agreement clear.

Why bother? It’s too trivial

There may be times when the thought of an agreement seems overkill. What is at stake simply doesn’t deserve the investment of time, energy and possibly cost preparing the agreement.

However, before you discard the idea of an agreement altogether, just remember that if you are entering into an agreement with someone it must be worth something to either of you. That something is worth protecting, even if it means just stringing a few words together in a letter to set out what has been agreed. There is nothing more irritating and distracting for you than for someone to renege on an agreement, even if it is not worth that much. The chances of someone reneging reduce considerably if you have some written documentation in place.

But that’s not the main reason why you should always have a written agreement.

What may seem insignificant at the time may turn out to be important later on

Hindsight is a great thing and every business owner will at some time in their business careers have wished they possessed the ability to see into the future. Hindsight teaches us that what may appear trivial at the time, may not be trivial several years later.

Let’s take the example of entering into a joint venture business relationship with someone. When you first have the idea to work together both parties may consider the venture to be a bit of a punt: an idea that may or may not take off, and probably something which you will only do in your spare time. However, you launch the business concept and it does take off. The business becomes very valuable and one day another business offers to buy you out. You then end up in a dispute with your partner about who gets what proportion of the proceeds of sale and who owns what.

It’s when situations like that occur that you will wish you had an agreement from the very beginning. Without the agreement you are locked into a bitter dispute and negotiating one now in the context of a buy out offer is likely to change people’s expectations and demands.

It applies to your terms of business as well

If you are selling something, whether it be a product or a service (and let’s face it we all sell something), then you should have an agreement with your customers regardless of how small and insignificant each transaction is likely to be.

The first reason for this is a legal reason. Without any written terms of business, your terms of business will be governed by your previous course of dealing with that customer. That means that if you have previously given that customer indulgences (such as when they pay your bills or when you will deliver etc) then those indulgences apply to all subsequent orders. If you want to get tough later you may have difficulties.

You also need protection when things go wrong.

When things go wrong the consequences could be bigger than you think

Let’s say that you manufacture and sell widgets. One of your customers buys a widget to incorporate into a machine they are building for one of their customers. The widget costs just $100 so at first glance it seems like an insignificant transaction in the larger scale of things.

However, for whatever reason, you can’t deliver the widget on time. This causes your customer to lose their contract with their customer. This contract was worth several hundreds of thousands of dollars to them and now they are asking for reimbursement of this loss from you: all over a $100 widget.

If you had written terms of business you would have excluded liability for consequential loss. You didn’t and now your whole business is in jeopardy. Even if the claim doesn’t eventually succeed you will have the cost and stress of dealing with the claim. You become distracted and your business suffers.

Poor cash-flow also creates distraction

When there is no money in the bank because customers are not paying it’s almost impossible to concentrate properly on moving your business forward. For starters there is no money to invest back into the business. Second, you’re too busy chasing people for payment. Your mind is spinning thinking up ways you can pay your bills and still keep the business afloat.

However, it is amazing how having written terms of business can improve your cash-flow. Once payment terms are written down and given to the customer in advance, they are more likely to obey them. Once something is written down it has an psychological effect, almost as if the terms were written in stone.

So, even if your average transaction size seems small, it is amazing how quickly these transactions can add up if you are doing some good volume. So make sure each transaction is covered by a written agreement. The easiest way to do this is to standardise your agreement into pre-printed terms of trade. We’ve already learnt how presentation can a make a difference to whether someone signs or agrees.

You may want to draft these yourself or you may get a lawyer, but there comes the rub: what about the lawyer’s fees?

IT’LL COST YA: LAWYER’S FEES AND HOW TO AVOID THEM

True story: A defendant in a set of court proceedings was getting dissatisfied with the service she was receiving from a top Auckland law firm. The court case wasn’t going well and they didn’t seem to be taking a proactive approach to the way it was being fought. So she sought a second opinion.

Deciding to switch lawyers she wrote to her existing lawyer and asked them to carry out no further work. They duly rendered their final invoice. The client asked for a breakdown. This is what the last line of the breakdown stated:

[date] Replying to letter from [client] to “do nothing” – 7 units - $180

The problem with lawyers’ charging rates

Generally lawyers charge by the hour. Or, to be more precise, by the 6 minute unit, making 10 units per hour.  And, there lies the first problem: lawyers work at different speeds. What may take one lawyer 1 hour to complete may take another 2 hours. That means that charging by the hour actually rewards the “slow” lawyer. In theory, the slower lawyer should have a lower charge out rate but in reality that doesn’t happen. We all know from personal experience that the longer you have to complete something, the longer it will take: lawyers are no different.

What lawyers should do is charge a fee based upon the value of the service being provided. Obviously, this would be dictated by market forces. After all, you don’t buy a car based upon how long it took to build it. Charging structures should reward efficiency, not inefficiency. And there lies the second problem.

Duplication, duplication, duplication

You may find, particularly if you use a large firm, that you will have several lawyers working on your case. There is a good reason for that, namely to allow the routine work to be done by more junior lawyers at a lower charge rate, reserving the important matters to the senior lawyers with the higher charge rate.

If done well, this delegation of work can save you money. If done badly, it can allow costs to spiral since you end up with unnecessary duplication of work. When I once worked for a large law firm, I recall an occasion when I sat in room with my supervising partner while he dictated a letter. My contribution was limited to correcting grammar, yet the client paid for both his time and mine.

Maybe I was at fault for charging my time, but there lies the third problem – budgets.

Success is dependent on hitting budgets

For a junior solicitor in a large firm part of your success depends on hitting your budgets. Now, hitting budgets is easy when there is lots of work around but not so easy when it’s quiet. So in an effort to hit budget for the month, the temptation is to “pad” time. This means recording more time than actually spent or taking longer to do something than necessary.

Law firms might deny it, but padding does occur particularly on those files which are going to end up with a big bill anyway. It’s a lot easier to hide padding on a big file than on a small file.

How to avoid the cost of getting a written agreement drawn up

If you are contemplating getting a lawyer to draft a written agreement then ALWAYS get a quote in advance. Now some lawyers don’t like giving quotes, but the best lawyers know how much an agreement will cost before they start work. They may build in a contingency for unforeseen work, and that’s OK since sometimes unforeseen work does arise.

The important thing is that once you have your quote you can then assess whether it makes commercial sense for you to engage that lawyer or put something together yourself. If the cost of the written agreement exceeds the value of the agreement itself or the consequences of the deal going wrong, then you may want to do something yourself. If, on the other hand, it will be an agreement you will use again and again the investment in a lawyer’s fees will be worthwhile.

HOW TO GET YOUR AGREEMENT WRITTEN UP

In an ideal world where cost was no issue, every business owner would consult a lawyer every time an agreement of some sort was reached. In fact that’s what the large corporates do and they are able to avoid the legal cost associated with it by employing their own in-house legal counsel. However, for any small or medium sized business you simply won’t be in a position to hire your own in-house counsel. Similarly, going to see your lawyer every time an agreement came up may be simply too impractical or too costly. If lawyers charged $10 an hour it would be a different story, but in the real world that just doesn’t happen.

So there will be times when you will have to put your own agreement together without legal assistance. The next chapter discusses the 8 most commonly made mistakes business owners make when they put their own agreements together. Before we get to that stage though, we have to decide whether we are going to use a lawyer or not. 

In the remainder of this chapter I am going to give you a series of questions, a checklist if you like, which you can ask yourself in order that you can make that decision.

What are the consequences of this deal falling over?

The first question you should be asking yourself is ‘what are the consequences of this deal falling over?’. 

When you consider the consequences, don’t just consider the monetary consequences. How much money you will lose will obviously be a very important factor to most people, but also don’t ignore the emotional consequences of a deal falling over. So, if you do decide to do business with family and friends, although the financial consequences may not be great, the emotional consequences of a relationship ending could be disastrous. A written agreement could prevent the emotional fall out.

In other situations there may be other consequences which extend beyond the monetary. So, it’s not simply a question of looking at the $ figure and making a calculation.

The other thing you must do is not just think of the here and now, but also project yourself into the future. Whilst it may not be the case now, eventually your agreement may be worth thousands, tens of thousands or hundreds of thousands of dollars to you. The more value there is to this agreement for you, then the more likely it is that you should go and see a lawyer to have that agreement bullet-proofed.  Similarly, the emotional fall out from a deal falling over may be greater after 10 years than it was on day 1.

On the other hand, if the agreement is not actually worth that much to you, and the worst case scenario is that you may lose $1,000 if it all goes wrong, then you may think it is simply not worth you having a written agreement drafted by a lawyer. What’s important here is to not only think in the present, but also to think a few steps down the line into the future.  What is going to be the situation in 5 years or 10 years time? 

To give a practical example, many people start businesses simply as a hobby which they do in their spare time.  Sometimes those businesses can really take off and in 5 years time can be worth hundreds of thousands of dollars.  If the business owners decide to sell the business but have not set it up in a proper legal structure right at the very outset (i.e. no written agreement with each other), then there might be difficulties in terms of what happens when that business sale takes place.  What is going to be the division of proceeds when the sale comes in, who’s going to make the decision to sell etc?  Negotiations carried out at that stage are likely to be very different from negotiations carried out when the business was embryonic.

So, just because something you are doing at the moment may seem small and inconsequential financially, it doesn’t mean to say that it is going to remain that way in 5 years time. Do try and think ahead about what could happen in the future and assess the consequences then, not now. 

The law may require a written agreement

The second thing to think about is the law, because there are some situations where the law actually requires a written document.  Now, that doesn’t mean you need to go and see a lawyer of course, but it probably is a situation where you should consider it carefully. 

One example of where a written document is required is in the employment situation.  Every employer must have a written agreement with their employees. The Employment Relations Act sets out things which must be in that agreement and if certain things are not in there, then essentially you are in breach of the Act and potentially liable for a penalty of up to $2,000. If you are putting together the terms and conditions yourself you need to be very sure that you are including everything that is required. 

So that is one situation where an agreement drafted by a lawyer is definitely recommended.  Another example would be if you are assigning copyright to something; that is an area where the law says that you must have a written agreement and if you don’t have one then the assignment of the copyright is not effective. 

The other party is expecting it

Sometimes the other party may be expecting a formal agreement drafted by a lawyer and if you turn up with something that you’ve done yourself, then they may think twice about entering into the deal with you. This is the case particularly if it is a high value transaction: your credibility could be at stake.  They could think that you are the Shark!

Remember that the way you present yourself and the way you present the agreement says a lot about you and the way you approach your business.  If you turn up with a properly drafted agreement then that will give the other party some reassurance that you are a professional in business and know what you are doing.

Are you entering into this type of transaction frequently?

There are some types of agreement, particularly those we make with our customers, which as business owners we make very frequently. That’s because they are part of our core business.  The most common example of this is your normal terms of trade.  Now, in some cases the amount of money at stake in an individual transaction may not be that much, but in other cases the transaction could be worth several thousands of dollars. Whichever is the case, the terms of conditions are important because you are doing this type of transaction all the time. If your customers aren’t paying you on time because your terms and conditions are non existent, it doesn’t take long for those small amounts to add up. 

So if you are entering into certain types of transaction frequently, I would suggest you go to a lawyer to get your terms set up.  Whilst there may be an initial investment, that investment will pay itself back many times over.  A good example of this would be an employment agreement.  It may well be that you may only have one employee, but it’s likely you will have several more employees further down the line and employees will leave and new ones will come, but you will use the same agreement template time and time again providing the law doesn’t change.  So it’s not just about employing that one employee right at the beginning, it’s about putting in a place a system or structure for your business that is going to endure over the years.

How easy will it be to draft the agreement?

Sometimes agreements can be complicated documents, other times not so.  For example, where the negotiations have been protracted and there have been a few things suggested along the way it may be difficult working out what to include in the agreement and what to leave out.  For example, one party may promise something to help the negotiation which was never intended to be in the agreement itself but was more of a “reasonable endeavours” promise. It’s common for unspoken misunderstandings to occur during the negotiation process, where one party thinks the other party is on the same page and then it transpires that he or she is not.  It’s important to clarify these things from the onset and ensure that they don’t get into the agreement, because anything that goes into the agreement is an obligation that must be fulfilled.

You may even forget things which have been agreed along the way. We’ve all been to meetings where we have volunteered to do things and then forgot all about it until the minutes came out reminding us.  A written agreement is just like the meeting minutes: a reminder of our responsibilities.

In all these circumstances, explaining the agreement to a lawyer can help to ensure that everything that should be included is included (and anything not meant to be included is left out).  The drafting process, if carried out by a lawyer, can tease a lot of these issues out, mainly because the lawyer will know the type of issues which normally arise in that particular type of situation. He or she can then prompt the parties to think about things which otherwise they may not have thought about, or clarify things which the parties thought were clear, but in fact were not.

Can you trust the other party?

The last thing to consider is whether you trust that other party? 

Now this is really where we came in when we were talking about how to shark proof your business and how to keep yourself safe.  If you think that you are dealing with a shark, or the alarm bells have started ringing because you feel as if you are being lured into the shark’s trap, then trust will be a big issue.  Sometimes there will be situations in business when you need to enter into agreements with people who you don’t quite trust because the benefits may outweigh the disadvantages. You will need to go with your gut feel.  Some business owners are very good at this and others not so. The ability to spot a shark or a bad deal is probably what makes the difference between those who are really successful in business and those who are not.  However good you are at spotting sharks, you can significantly minimise your exposure by having a watertight agreement. If you need a watertight agreement you are better off consulting a lawyer. 

The 8 most common mistakes made by business owners putting together agreements themselves

If you have decided that going to a lawyer to get an agreement drafted is simply not worth it, either from a cost perspective or otherwise, then the next option is to put an agreement together yourself. But as you can imagine putting together an agreement can be tricky for the unwary. If you are going to swim with the sharks there are certain things you must know: it is the same when putting together an agreement. Use the eight mistakes below as a helpful “not to do list” when you start to put pen to paper.

Mistake 1: not specifying who the agreement is between

The first thing you must work out is: who are the parties to the agreement?  You may think that the parties to your agreement are obvious: after all there is you and the other guy or girl.  But that is not necessarily the case because you may be negotiating on behalf of your company, or the other person may be negotiating on behalf of theirs’, or some company within a group of companies.  So it’s very, very important to work out exactly which party is going to be a party to the agreement. This is exactly the type of thing which may get left out if the agreement is not committed to writing.

From your perspective are you entering into this agreement as an individual, or are you going to take the advantage of limited liability protection if your company enters the agreement?  Consider the consequences carefully because if anything goes wrong it will be the parties to the agreement who get sued, not necessarily the people doing the negotiation. If it is your intention to enter into it on behalf of your company, you must make that clear in the written documentation. 

An example of where it may not be very clear is if you’re putting together the agreement by way of an exchange of letters and you’re writing on a letterhead that belongs to a company which is not meant to be a party to the agreement.   For example, if you are entering into an agreement in your personal capacity, but you write the agreement on your company letterhead, then the implication is going to be that it is the company entering into the agreement and not you.

Similarly, you may only want to enter into the agreement with the person you are negotiating with and not his or her company because you don’t want him/her to hide behind limited liability protection. This would especially be the case if the company had no assets – who would you sue then? If you do have to enter into an agreement with such a company then you may want to get a guarantee agreement from one of the Directors.

Also have a think about whether any other party needs to be part of the agreement. Sometimes, the Directors of a company will need to sign in their own capacity as well as the capacity of the company (particularly if giving guarantees).

Sorting out the parties is crucial.  So just be careful and don’t always assume that the parties to the agreement are obvious, have a think about who they really should be:

▪          Always specify the identity of parties to the agreement.

▪          Don’t miss anybody out.

▪          Never prepare an agreement on the headed notepaper of a person who is not a party.

▪          Make it clear in which capacity a person is signing.

 

Mistake 2: Not spelling out the parties’ obligations properly

There are basically three types of obligations in an agreement which are required to make the agreement work:

▪          Things a party must provide.

▪          Things a party must do.

▪          Things a party must not do.

When you are listing out the obligations of each party, keep these three types of obligations at the top of your mind.  Now you may think this is obvious, but when drafting an agreement a common mistake is to leave out the obvious; always be specific because it’s very easy to assume that somebody else understands what you mean when it wasn’t actually written down in an agreement. 

To give you an example, say that there is an obligation upon the other party to pay you $1,000.  Now, there are a number of issues with that.  As well as the obligation to pay,  consider:

▪          How is that money going to be paid?

▪          When is it going to be paid? 

▪          What happens if that person doesn’t pay on time?

▪          Is there going to be some kind of interest provision if payment is not made?

▪          Can you terminate the agreement if payment is not made?

▪          Can the other party get an extension of time?

All these issues surround that one obligation to pay, so think about the things that could go wrong and give yourself remedies to make the operation of the agreement easier – don’t simply assume that everything will go according to plan.

To make sure you cover everything I suggest you follow this simple plan:

▪          State the obvious;

▪          List out both parties obligations on a piece of paper as best you can then,

▪          Be specific and use this formula:

o        What

o        When

o        How

o        Where

o        What if…

Mistake 3: Not having a clean exit strategy

If you are jumping into the big wide ocean with an oxygen tank you would want to make sure that you knew how much air was available so you knew when it was time to get out.  The other thing which you will need to bear in mind is, if the shark starts attacking you then you are going to start breathing more quickly and using up the air in the tank a lot more quickly. 

That’s when you need an exit strategy.  Even if the person you are dealing with is not a shark, you may still need an exit strategy. Sometimes, despite everyone’s best intentions, business deals just don’t work out and a parting of the ways is simply the best option. However, the other party may simply not see it quite like that. Again, that’s when you need an exit strategy.

When you’re putting together an agreement you need to start thinking about when does this agreement start, when does it end, and how can I end it if I need to midway through the term? 

The first consideration is the term of the agreement?  Is it a 2-year agreement, a 3-year agreement or a 4-year agreement?  Now that may not be applicable for a transactional type of agreement where it is a one-off transaction, but where there are ongoing obligations then you’re going to want to think about a start date and a termination date and whether that termination date then gets renewed automatically or at someone’s discretion, or by negotiation. 

The second consideration is break clauses.  If this agreement doesn’t work out for you, or if something goes wrong, how are you going to get out of the agreement as quickly as possible?  For example, is there a provision in the agreement to serve notice to end the agreement, does the agreement allow the agreement to end in the event of a breach of the agreement by the other party, or if they go bankrupt or are liquidated, or are convicted of some criminal offence?  You need to have these exit strategies otherwise the agreement could end up being a liability.

Examples of clean exit strategies would be:

▪          Fixed term agreement (with option to renew).

▪          Termination on notice: think carefully how long that notice period should be. Having it too long or too short could work against you;

▪          Termination on the occurrence of events: what type of events should trigger termination?

▪          Termination for breach of the agreement.

Mistake 4: relying on oral statements

If you watch the movies, you may have seen how sharks can attack shark cages and break them apart so they can get at their dinner inside: basically you or your business.  In a business situation, sharks will try to undermine your legal agreement.  They will do that in a variety of ways. 

First of all they will attempt to rely on verbal agreements.  So, for example, they will say things like:

Despite this written document we had a separate verbal agreement prior to this agreement which should be taken into account when interpreting this written document.  So the written document is only part of the story, there was a separate agreement that runs side by side, which alters the meaning”: 

To get round this type of trick you need to exclude all verbal agreements, assurances or promises that may have been said during the negotiation phase prior to signing the agreement, so that the agreement you are signing is the whole agreement between you, nothing else. 

Then your shark may say:

“Well that may have been the agreement when we signed it, but since then we decided that we weren’t going to enforce those strict terms and we came to a separate verbal agreement later, so therefore the written agreement doesn’t really take effect and the verbal agreement takes effect instead”. 

To avoid this trick you must say that any variations to the agreement must be in writing and can’t be verbal. 

They may then point to a document and say:

“Well that is the written agreement, but this document which came up in negotiations is also part of the agreement and you need to have a look at this”. 

So when you’re putting together your agreement there may be a necessity to refer to other documents such as price lists etc which you are not necessarily going to attach to the written agreement itself.  If you’re going to do that, be very specific and say that the agreement incorporates the price list, or whatever other document it is and exclude anything else.  Make sure it’s very clear when you read your agreement that the document comprises the whole agreement and that anything that gets agreed subsequently is going to be documented as well. 

This is important because having gone to all that effort to have a written agreement put together, don’t allow that shark the opportunity to undermine it. 

Mistake 5: not specifying how disputes will be handled

As said previously, doing battle with a shark can be a messy affair.  Anything you can do to reduce the collateral damage will help.

In your agreement you should have a clause which sets out how you and the other party are going to handle disputes which may arise between you.  The reason for this is because resolving disputes in the courts can be an extremely expensive exercise.  Legal proceedings can be a very frustrating and not very satisfactory way of resolving disputes – for example, it may well be that you win and are able to get an order that the other party pay your costs.  However, the problem is always that you are never ever able to get an order that the other party pay ALL your costs.  It is only ever a fraction of the money you have actually spent on your own lawyers.  Generally speaking you would be most unlikely to ever be able to recover more than two thirds of your costs.  Sometimes it’s even less than that. 

So you can see that almost immediately there is an element of money which you are never going to recover if you end up resolving your dispute by going through the court system.  If your claim is not very big it is possible that the costs which you are not able to recover are equal to, or greater than, the actual value of the claim.  So you’ve gone through all the stress of fighting court proceedings and at the end of the day you’ve not actually come out financially any better off.  In some cases you can actually come out worse off, despite the fact that you’ve won. Remember it’s not just the money you are spending on legal fees which adds up, but also the time investment on your part.  For example, you may have to give evidence at trial, you may have to spend time with your lawyer preparing witness statements, or going through possibly a long discovery or disclosure exercise where you have to sift through documents, and go through boxes of documents in your own office to make them available for the other party to have a look at.  So all these exercises from instructing your lawyer to doing the whole discovery process, to providing witness statements and actually attending trial, takes a lot of your time and of course that is time which could be profitably spent in your business. 

So, as I mentioned in previous chapters, not only are you paying your lawyer but you’re also damaging your profits by the investment you are putting into it.   That’s not to mention all the stress that goes with it as well.  Litigation should really be an option of last resort and preferably, if you can, you should look towards other methods of dispute resolution. 

So – what are those methods?  Well they can be reasonably formal to extremely informal.  So one way of resolving a dispute is just simply to negotiate with the party you are in dispute with.  Now if there’s a lot of emotion tied up with the dispute, then that may not work and that is quite often the case.  So you may need assistance, which can be something like both having legal advisers to try and negotiate the settlement on your behalf, or another option could be to consider having some form of mediation.  Mediation is a situation where you have two of you trying to negotiate and there is a third party, called the Mediator, whose job it is to try and help you come to a resolution. 

Mediation can work well as the mediator can give his/her opinion as to the rights and wrongs from a legal perspective, or from a factual perspective, and so bring the parties closer towards some sort of agreement.    The mediation process should not be under-valued.  It’s very informal, it’s very cost effective and it often achieves a resolution without having to go down the litigation route.  And of course, it’s much cheaper!   There is also arbitration.  Arbitration is similar to court proceedings, but a little less formal and can be a lot cheaper as well. 

So when you are putting together your written legal agreement, I would suggest that you set out in your agreement that if a dispute between you and the other party does occur, then you go through this series of steps before you get to the stage where you’re going to end up in court.  So you should include a clause which runs something along the lines:

 ‘If there is a dispute between us, we will first attempt to resolve the dispute by negotiation and if that doesn’t work we agree to go to mediation’

Then you need to say something about how you are going to appoint the Mediator and only then if that mediation doesn’t work would you look at arbitration or going down the litigation route.  So I think that is quite important as it then sets the parameters of the dispute resolution process.  But the reason it is there is really to save you a lot of money later on down the track.  You may not think that you will ever get into a dispute with the person you are negotiating with, but it  can happen even with the most straight-forward of agreements.  Before I leave this mistake, just a short note on international agreements:

International agreements

An international agreement is one where the two parties are in different countries. For international agreements, always put into the agreement the actual law that the agreement is governed by and which courts have jurisdiction over that agreement.  So from your perspective you would want the agreement to be governed by the laws of New Zealand and you would want New Zealand courts to have jurisdiction over that agreement, because the last thing that you want to do is end up fighting a legal battle in another country.  If you don’t, the cost of trying to sue the other party in another country could be prohibitive.

Mistake 6: forgetting to protect your Intellectual Property

Most commercial agreements will require some form of clause which protects one or other party’s intellectual property. The clause may be as simple as a confidentiality clause or a more complicated clause which protects the ownership of various different types of intellectual property rights. 

Confidentiality: For example an employee may come into contact with information which is confidential to your business.  So the last thing you want is that confidential information finding itself in the public domain and especially in the hands of your competitors.

So if you are entering into any negotiations with anybody, the chances are that that other party is at least going to be exposed to some form of confidential information owned by you, perhaps even trade secrets. That means whenever you are putting together a written agreement you should always have one eye on confidential information and how, potentially, this agreement could compromise that information if things don’t work out.

A confidentiality clause is very common in most agreements.  Really, there are two types of confidentiality clause:

▪          the clause that any confidential information which the other party is exposed to must not be disclosed to somebody else or used for a purpose not contemplated; and

▪          the clause which requires the parties to keep the terms of the agreement itself confidential. 

Other intellectual property: Sometimes a simple confidentiality clause won’t be adequate, particularly if either party is contributing some form of intellectual property to the transaction or together will be creating new intellectual property.  For example, say you are embarking upon a joint venture with another business to create a new product. The likelihood is that both parties will be contributing their expertise to the project, and the result of the combined expertise will create a new product.  Chances are that there will be a sharing of IP to create new IP.

In these situations it is important to maintain ownership of whatever it is you contributing, and if you are creating something new, to decide who or how that intellectual property is going to be owned once it is created.  It’s just like baking a cake: you and the other person are both providing a share of the ingredients.  These ingredients are going to be combined in a bowl, put in an oven and baked, until out comes the cake.  You need to ensure that you retain ownership of your ingredients, the other party retains ownership of theirs’, and that you both own a share of the cake.  What you don’t want to happen is for the other party to take your ingredients and use it for some other purpose or later find that the other party claims all rights in the cake.

Going back to the employment example, it may well be that during the course of the employment your employee will create some intellectual property (i.e. will bake that cake for you), but you will want to make sure that you own that cake and not your employee, so you need a clause in your employment agreement which says that any intellectual property that they create is actually owned by you.  In the employment situation you have a master and servant agreement and if the servant bakes the cake, the cake still belongs to the master and not the servant.  In a business venture, though, it may be very different: there may be joint ownership of that intellectual property.  Intellectual property basically comes into every aspect of business, because it is your intellectual property that will put you ahead of your competition and it is very important that you protect it.

Mistake 7: forgetting to exclude liability

We have all heard of the exclusion of liability clause and it’s one of those clauses that make us think that we really need a lawyer to draft it.  What you need to do is just unravel it a little bit more and deal with them in a step-by-step approach, because they’re not actually as complicated as they seem. 

The starting point is to ask: ‘what would be the worst case scenario if this agreement went sour?’  In other words, if something happened which meant that you could not fulfil your obligations under the agreement (the ones that you have listed already), and the other party then sued you for not fulfilling them, could you afford to compensate that person?’ 

For example, the other party may, as a result of your breach of the contract, lose millions of dollars in lost profits.  Is that possible as a result of you failing to fulfil your obligations?  If it is and you can’t afford that, then you are going to need to exclude some liability. There are effectively three ways of getting round this problem: 

▪          Excluding the liability altogether; or

▪          Minimising the liability by limiting any subsequent claim to a certain dollar value; or

▪          Shifting the responsibility to a third party insurer. 

Example: a lawyer gives advice to somebody and charges $1,000 for that advice. The client relies upon the lawyer for that advice. If that advice is wrong not only have they lost the $1,000 they paid the lawyer, but they could also suffer lost profits if as a result of the advice another transaction goes wrong.  In those circumstances, the claim could be a lot higher than simply the price paid for the advice. 

So what does the lawyer do in that situation?  Most lawyers will have indemnity insurance, so in effect they have passed the risk to somebody else and have paid a premium for it.  However, it is not always possible or practicable to get indemnity insurance in every situation. So, the alternative may be to restrict your liability to the cost of the product or the advice you have supplied.  In that case, you could then only ever be held liable up to the value of what the other person paid you in the first place.  What you have done here is to limit your liability and in doing so excluded what is called “consequential loss”: loss which occurs as a consequence of the failure to comply with the contract as opposed to the price paid.

So while it sounds complicated, it isn’t, and you just need to think of it in terms of the worst case scenario … ‘if I can’t deliver on my promises in thi

 

Notify me when...

"This extract remains the exclusive property of the author who retains all copyright and other intellectual property rights in the work. It may not be stored, displayed, published, reproduced or used by any person or entity for any purpose without the author's express permission and authority."

Please rate and comment on this work
The writer appreciates your feedback.

Book overall rating (No. of ratings: 
38
):
Would you consider buying this book?
Yes | No
Your rating:
Post a comment Share with a friend
Your first name:
Your email:
Recipient's first name:
Recipient's email:
Message:
 

Worthy of Publishing is against spam. All information submitted here will remain secure, and will not be sold to spammers.

No advertising or promotional content permitted.