Archive for the ‘Business Contracts’ Category

Insurance companies are not in the business of defending your company and paying claims. They are in the business of collecting premiums and avoiding paying the claims and the costs of defense. Forget the commercials touting the insurer being on your side. The insurance contract (the policy) and insurance laws form the basis of your relationship with your insurer.

I’m not being overly critical of insurers, but they are in business to make a buck, not to look out for you. Insurers have, literally, hordes of in-house and outside lawyers. The deck may seemed stacked against you, because it is. But some knowledge and the assistance of a qualified attorney can even the playing field (to mix the metaphors some more, you can put the shoe on the other foot).

Understand that you are required to promptly put your insurer on notice of any claim or potential claim. Failure to report a claim can give the insurer an argument that it has been prejudiced and thus can disclaim coverage. You also generally must to cooperate in the defense of the claim.

It’s great if your insurer assumes coverage of a claim. You likely won’t need to worry as much about the claim, other than assisting in the claim, so long as the coverage is adequate. The insurer will assign one of its panel attorneys from a local firm to represent your company in the suit. You will likely not get to choose the attorney. The insurer will pay any settlement it negotiates, or any judgment within the policy limits. Keep in mind that the costs of defense may diminish the policy.

However, the insurer could deny coverage altogether, and assert that it has neither the duty to defend, nor the duty to indemnify. In that scenario, you must promptly defend the case yourself with your own attorney before you the court defaults you. But don’t give up too easily. Insurers often deny coverage. A call or letter from your attorney familiar with insurance coverage issues may get the insurer to reverse its decision. It’s easy for the insurer to deny your claim if they have at least a colorable argument.

If you don’t challenge it, the insurer has saved tons of money, so it is in the insurer’s interest to deny claims when arguable. You can also file a Declaratory Judgment lawsuit to ask a Massachusetts Court to rule that the insurer has an obligation to defend and/or indemnify you. If you win that case, the insurer could be on the hook for your legal fees, as well as paying its own lawyer, and the lawyer who defended the original claim. It is a risky proposition for the insurer. Given that exclusions are strictly construed against the insurer, you may have a fair argument on coverage.

The insurer could also agree to initially cover you under a “reservation of rights.” This means that the insurer believes it might not have to defend and/or indemnify you, or that it acknowledges the obligation to defend only (the duty to defend is broader than the duty to indemnify). But it is covering the costs of defense until it can work through the coverage questions. The insurer may even file its own Declaratory Judgment action to have a court declare that it has no coverage obligations.

The reservation of rights does not come without consequences for the insurer. In Massachusetts, you will usually have the right to choose your own attorney, at the insurer’s expense. Some insurers are sneaky and will not inform you of your right to choose your own attorney. They will try to steer you toward their panel counsel, with whom they work on hundreds of other cases. Although the attorney will represent your business, will he be loyal to you, his one-time client? Maybe, but are you better off with a lawyer you choose who does not have an economic relationship with the insurer?  You should at least consult with your own lawyer to make sure your company’s best interests are being represented.

As always, the above is meant for general information, and is not legal advice.

By Adam P. Whitney

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They say that half of marriages end in divorce. This (perhaps made-up) statistic is equally true for business partnerships. Like an in-love, engaged couple, entrepreneurs often see their business partner relationship through rose-colored glasses. It hardly enters their mind that they could disagree on things, have different visions, and expectations, or that one side would abuse the relationship.

An operating agreement (for simplicity, the term will refer to all types of agreements between business partners, shareholders, members, etc.) is akin to an engaged couple’s prenuptial agreement. But it can and should be much more than that. Like the name implies, it should govern how the business is to work. In particular, what are the agreements among the partners? What role will each partner have in the work, in the management, in the finances? Will any partner receive a salary? How much? Are partners entitled to a job? What fiduciary duties does each owe to the business? How will profits be distributed. What about losses; will the partners have to invest more in the business? Will there be other employees? What happens if there is not enough business income to pay employees? What will the exit strategy/buyout be? Are the parties married to one another for any future business of the same type?

Many entrepreneurs have not even addressed all of these and other critical topics. This can be a recipe for future disagreements, or worse. Sometimes people go into a business in good faith, but they have different expectations about the business. If you are the primary financial backer, is your sweat equity partner expecting a salary from day one? If so, are you okay with funding the salary until the business generates substantial revenues?

Having litigated major and bitter disagreements between business partners, I have seen the ugly divorces of the business world. The infidelity. Desertion. Dishonesty. No one believes it will happen to them, but business partners lie, cheat and steel. They will fire you and freeze you out of a business. They will expose the company to liability. They will become drug addicts or non-functioning alcoholics. They will hire their do-nothing son-in-law who drives you crazy. They will spent all the profits on their own salary and salary of family members. The will start a competing business and try to take all the clients. They will exploit any ambiguities in an “off the shelf” operating agreement you got on-line. They will die, and their clueless spouse will become your business partner (a cross-sell agreement with life insurance is a topic for another day). Or you will die and they will take advantage of your spouse. I’ve seen all these things and more.

Your best first defense against misunderstandings is misdeeds is a specifically tailored operating agreement. This doesn’t mean that it is a panacea, or that you are defenseless. But courts respect operating agreements, especially if they are negotiated and tailored to the business at issue. You hope that your operating agreement keeps you out of court, but if you have to litigate or arbitrate over your business, you will be in a much, much better position. The relatively small amount of time and money that you spend at the beginning of the business formation (or before significant disputes develop) is some insurance against spending that same money hundreds of times over.

By Adam P. Whitney

No business is an island. You need allies. These include loyal clients, service providers, vendors, business referrers, contractual partners, strategic partners and others. What type of allies you need depends upon what industry you are in. If you are a general contractor, you may need alliances with design professionals, subcontractors and suppliers – persons and entities who you know will treat you fairly and who will support your position when things go awry. If you’re in the real estate business, you may need allies who are brokers, bankers, appraisers and inspectors.

 

When I recently left my law firm to start an independent practice, I saw firsthand the value of business allies. Clients have not only continued with me, they have provided me with IT support, referrals, names of key service providers, support and encouragement. Vendors and service providers have given me special or at least fair deals. The lawyers and support staff at my former firm continue to be valuable allies in many aspects of my business. I get by with a little help from my friends.

 

Most any business needs trusted lawyers, accountants and insurance brokers. Don’t make the mistake of thinking that every professional with the same letters after their name is the same. Search out someone who you trust and have confidence in. Someone who has your back. Forge a long-term relationship that will last for many years. The efforts that you put in to find the right people will be repaid countless times over.

 

Business alliances are always a two-way street. Be ready to give something back, whatever that may be. It may simply mean paying your bills on time without complaint. My best clients do this, and I try to pay them back in spades. I’m much more likely to cut down my time for loyal, long-term clients. I will bend over backwards to find them the right professional that they need for a certain problem. I will consult with them for no charge on certain personal matters not within the scope of the normal business representation. Giving something back may mean referring others to your ally. It may simply mean being fair and honest in your financial dealings. It could just mean being available for advice and support. As stated above, it means having each other’s back when the going gets tough.

 

Trust and loyalty are the grease of private business and industry operations. This is especially so for small and mid-sized businesses and all service industries. Find loyal, trustworthy business allies, and running your business will be that much better.

 

By Adam P. Whitney, 617.338.7000

It’s easy to plug in a standard arbitration form into your business or employment contract and think that you’ve covered yourself.  If only it were that easy.  A sophisticated client recently had to good sense to ask me to modify the standard arbitration clause.  The client saw the arbitration forum as a quicker and less expensive way to resolve disputes.  This can be true, but the devil is in the details.

For example, some arbitration agreements or clauses call for a panel of three arbitrators.  Guess what?  You just tripled the cost of arbitration.  Arbitrators do not work for free.  The parties pay them for their time.  I don’t begrudge their getting paid for their work, but they are expensive.  In a perfect world, three arbitrators would be nice.  But I reserve that for disputes that will have very significant dollar values.  Otherwise, arbitration becomes cost-prohibitive.

You may want to have a mediation requirement prior to entering into arbitration.  Mediation can be an excellent way to resolve disputes.  And it’s much cheaper and quicker than arbitration.

You may want to specify the type of arbitrator who will be chosen.  If you have a construction contract at issue, you will want an arbitrator with experience in the construction industry or construction law.

You will want to consider what rules apply to the arbitration.  Most arbitration firms have different sets of rules, including expedited procedures for quick resolutions.

You should consider where arbitration should be held.  Arbitration in another state will cost you time and money.  Of course you want to agree to your home forum in most circumstances.

Finally, consider the scope of the arbitration clause.  Not all disputes lend themselves well to arbitration.  For example, you may want a carve out for injunctive relief and prejudgment security.

If you need help drafting an arbitration clause or modifying your “standard” clause, please call me at 617.338.7000.

By Adam P. Whitney

 

 

With apologies to Mitt Romney, corporations are not people.  Neither are LLC’s, Limited Liability Companies. That’s true for giant, publicly traded companies.  It’s equally true for your small or mid-sized business, even if you are a 100% owner.  I think that what Romney should have said is that corporations are made up of people.  They are owned by people.  They are operated by people.  People sit on the boards of directors.  People work at corporations.  In fact, corporations can only take action through people, their officers, employees, agents, etc.

But business entities are not people.  You don’t want them to be.  Do not think of your company as your alter ego.  This kind of thinking can get you in trouble.  The reason that you filed incorporation papers in the first place was to limit your personal liability.  While even that is not foolproof, do not undue your good business decision to incorporate by treating your business like your alter ego.

It should go without stating that you should not use your business accounts to pay your personal debts.  But I want you to go further and to stop thinking of your company as you, and you as your company (unless you are truly a sole proprietorship).  Do not think or say “me” when you really mean “Me, Inc.”.  As a business litigator, I see this all the time – in contractual dealings, in depositions and in court.  Don’t do it.  Get out of the mindset that your company is you and that you are your company.  While you may be the face of your company, don’t unwittingly expose yourself to personal liability by allowing people to think that you and your company are one in the same.

When you sign a contract for your company, be clear that it is a company contract, and that you are signing “as President,” or whatever your title is.  I’ve blogged about these issues before:

https://damnedif.com/2011/03/15/youre-damned-if-you-dont-respect-corporate-formalities/

If you need helping separating yourself from your business to avoid personal liability, give me a call at 617.338.7000.

By Adam P. Whitney

Summer is over and it’s time to get back to work.  For me, that means back to blogging and protecting my clients’ business interests.  For you business owners, consider it a good time to review your business contracts.  As a business litigator, I frequently see poorly drafted contracts that result in companies being dragged into court, or in a weakened position if they have to file suit.  You may find free contract samples on the internet, and they may be worth every penny.  Contracts need to be tailored to your industry, your state law, and to accomplish your particular goals.

While contractual language may seem routine and mundane and full of boilerplate, the language of contracts can make the difference between being sued and not sued, between losing a trial or prevailing on a summary judgment motion, and between paying triple damages or just single damages.

Here are a few of the more important provisions.  I’ll add some more provisions in later segments.  I know that the attention span for contractual clauses (at least for me) is not that long.  No one actually needs these provisions …. until things fall apart and they need these provisions.

Choice of Forum Clause

Getting sued is never pleasant, but getting sued in a state other than your home state can be even worse.  You’ll have to find an attorney in the other state to represent your company.  You’ll have to travel to the other state for depositions and trials.  You may be concerned that a judge or jury will view your out-of-state company less favorably than the local company.

This can be avoided with a very simple, commonly enforced clause.  Better yet, you can reverse this by making your opponent come to Massachusetts to sue you.  This creates a disincentive to sue you, and makes your opponent spend all the travel related expenses.

Whenever you have the bargaining power, and especially when you are contracting with an out-of-state company, insist on a choice of forum clause.  You can also insist on what law applies, which doesn’t necessarily have to be Massachusetts.

Merger/Integration Clause Plus.

Many contracts have boilerplate merger and integration clauses which essentially state that the contract contains the entire agreement and that all prior negotiations are merged into the agreement.  This gives you some protection from the other party claiming that there were different oral terms discussed.  This is fine, as far as it goes.

But you can do better.  The “plus” that I would include would be language that would protect you (to the extent possible) from claims of misrepresentation and fraudulent inducement.  This is important, because your opponent will use these claims to get around the plain terms of the contract.  Worse yet, your opponent will make a claim under Chapter 93A, which provides for potential double or triple damages, plus attorneys’ fees and litigation costs.  This area of law is very tricky.  There is a line of Massachusetts precedent that states that boilerplate language will not protect you against claims of fraud.

As a lawyer, it’s frustrating that the courts disregard tried and true contractual language by simply dismissing it as “boilerplate.”  But we have to play the hand we are dealt.  There is another line of cases that allow sophisticated business entities to set forth the entirety of the representations that they are relying upon.  There is no one-size-fits-all provision that works here.  You’ll need to spend a few dollars in legal fees to protect yourself from a potentially big judgment.

Limitation of Liability/Damages Clause

Parties can agree to a maximum limit of the amount and type of damages for which they will be liable.  This is more important if you are the party who is more likely to be sued for consequential or punitive damages.  For example, if you are providing services, you may want to have a provision that your liability is limited to the total amount that you are being paid.  If you are providing goods, you may want to limit any remedy to replacing the goods.

You can have a provision that precludes punitive and exemplary damages, and provides that the parties will pay their own attorneys’ fees.  There are dozens are variations, depending on your particular industry and your goals.  Not every provision will be enforceable for every industry, which is why you should not just pluck some provisions from the internet and hope for the best.

If your business contracts need a tune up, give me a call at 617.338.7000.

Adam P. Whitney