New York Small Business Law

"Terms and Conditions" may work for your Business

If you are in a line of business where you repeatedly have to enter into agreements with your customers and the basic terms of those agreements rarely change, you may want to consider the adoption of "General Terms and Conditions."

Rather than having every contract spell out all terms and conditions, your individual contracts with customers could be rather short and refer to your General Terms and Conditions.

The General Terms and Conditions could contain all the terms of the business relationship that rarely change, such as:

The representations you do or do not give about the quality of your products or services,

the general nature of your goods and services,

when you expect payment for your products or services,

when you or your contract partner are allowed to terminate the contract and the consequences of such termination,

any elements of the price of your goods and services that never change and

all those boilerplate legal provisions you don't understand but your lawyer tells you to put in there anyway.

By using General Terms and Conditions, you standardize a large part of every customer relationship.  The individual contracts with customers would become much shorter and easier to draft and execute.  You just have to make sure that every individual contract or oder specifically incorporates your General Terms and Conditions.  For example with language like this:

"The General Terms and Conditions dated _____ are incorporated into this work order by reference and are a part of this work order as if fully stated herein."   

In addition, you may want each individual customer acknowledge receipt of your General Terms and Conditions, so that there is never any doubt which version governs the business relationship.

You could even consider allowing for changes of your General Terms and Conditions without the agreement of  your customers who are already governed by the General Terms and Conditions.  Be aware, though, that not all changes without proper notice may pass muster with the courts if challenged.  Check out this post by Techlaw on the subject.

The individual contracts could be called anything you want, but terms like "work order," "service order," "project order," "project specifications" may make sense.

Beyond being a time saver, there are other potential benefits of General Terms and Conditions:

You can post your General Terms and Conditions  on your website and give your customers immediate access to what a contractual relationship with you would look like;

You can create the appearance that your General Terms and Conditions are non negotiable and deter your customers from trying to change the terms of the business deal.  While you and I know that every contract is negotiable, for some reason many people think that General Terms and Conditions are set in stone.

**This post is for informational purposes only and does not constitute legal advice**

How to Amend a Contract

When you enter into a contract (or agreement, same thing really) you cannot possibly foresee all future developments of the relationship that is governed by that contract.  As a result, you may find yourself in a situation where you have to amend an existing contract.

How do you amend a contract?  By entering into a new contract, which provides for the terms of the amendment.  Let's say you entered into a contract on August 10, 2006, which contract provided in its Section 10:  "This contract terminates on August 1, 2010."  Now you and your contract partner decide that the contract should really go on until August 1, 2012.   You plan on amending the original contract.

The amendment of the provision should be in writing and clearly reference the agreement that is being amended.  The amendment doesn't have to be very formal, it could be in a simple note or letter, but it should be in writing and signed by all the parties who signed the original agreement.

By way of example, the amendment could look like this:

Amendment

Joe Junior and Daphne Danzig entered into the Service Agreement dated August 10, 2006 and wish to amend the Service Agreement.

Joe Junior and Daphne Danzig hereby amend Section 10 of the Service Agreement by replacing such section in its entirety with the following:

"This Agreement terminates on August 1, 2012."

Other than as amended hereby, the Service Agreement shall remain in full force and effect.

So agreed, this ___ day of August, 2007.

Joe Junior (signature)

Daphne Danzig (signature)

There you have it.  You can do this as many times as you want, so that you may end up with Amendment No. 1, Amendment No. 2 and so forth.  However, if there are many changes to an Agreement at the same time, you may be better off by "amending and restating" the Agreement.  I'll explain what that means another time.

**This post is for informational purposes only and does not constitute legal advice**

Think of your Agreements as Marketing - Six Things to Avoid

Have you ever thought that the contracts you hand out to your customers are another part of your marketing strategy?  If not, think again.  Everything you present to your potential customers (i.e. market) is marketing.  Here are six things that can damage your otherwise perfect marketing script:

1.  Agreements that are too long.  Almost every agreement can be shortened.  ("Unless you are going to pay me to read your never ending agreement, I am not going to hire you"). 

2.  Agreements that are full of "fine print."  Use a decent sized type font. 

3.  Agreements that are disorganized.  Price in the beginning, payment terms in the middle and payment due dates at the end of the agreement is confusing, results in missing or duplicative terms and leaves your customers irritated and suspicious ("don't make me think").

4.  Agreements that are full of legalese or have sentences like this one:

The parties hereby and herewith agree that any and all, heretofore and hereinafter existing, documents, including but not limited to, papers, letters, briefs, postcards, white sheets made out of trees, received by one party, its subsidiaries, affiliates, partners, agents or secretaries shall be forwarded to the other party by certified mail, return receipt requested, double stamped, blessed and notarized.

I made this up, but you get the picture.  Nobody likes it, it is rarely necessary, so get rid of it.

5.  Agreements that have a rude and suspicious tone to them.  Granted, you are trying to prevent disputes and cement rights and obligations.  Still, an agreement can be phrased so that it doesn't sound like the other party is already guilty of having breached all of the terms under the sun.  In other words, if you already have a right under the law to sue for damages if your customer breaks your equipment or whatever, why state it again in your agreement.  It will irritate the customer.

6. Agreements that look like you bought them for $9.95 at AgreementsOnline.com.  In other words, your agreements should tell your story.  The story of your particular deal with your business partner.  The drafter of the $9.95 version has never heard of you, your business or your deal.

Do you have to have a Signature on your Contract? Is an E-Signature enough?

This comes as a surprise to some people: In New York, unless there is a special law that states otherwise, you can become bound by a contract, even though you have not actually signed it.  As long as you have somehow shown that you agree to the terms of the contract, you can be on the line.

But what if a signature is required, as for example, when executing a personal guarantee?  What is a signature?

The term signature includes any memorandum, mark or  sign, written, printed, stamped,  photographed,  engraved  or  otherwise  placed  upon  any instrument or writing  with  intent  to  execute or authenticate such instrument or writing.  (See New York General Construction Law Section 46).

This now includes electronic signatures, i.e. any electronic sound, symbol, or process, attached to or logically associated with an electronic record and executed or adopted by a person with the intent to sign a record (See New York State Technology Law Section 304).

(Some exceptions apply to electronic signatures, in other words, they can't replace hand signatures in all cases, see Section 307.)

If this is all too complicated and ambiguous for you, you can say so and state in your contract something along the lines of:

This contract is not binding on the parties unless both parties have signed their handwritten signatures on the signature lines below.

Otherwise, learn how to get your electronic signature in this post.

Don't get Roles mixed up when signing for a Business Entity (plus case in point)

When signing for a business entity, such as a corporation or limited liability company, an officer's signing capacities can get confusing.  Is she signing on behalf of the entity only, or in her personal capacity and on behalf of the entity?

Check the following points:

1.  When only the business entity is supposed to have obligations under the agreement, the signature block should look like this:

ACME INC.

By: _______________
       Name: Jane Smith

       Title:   CEO

2.  When both the entity and the officer are supposed to have obligations under the agreement, insist on two signature blocks and put all provisions that establish the officer's personal obligations before the signature blocks. Example:

ACME INC.                                                                        

By: _______________                                    
       Name: Jane Smith                                       

       Title:   CEO

JANE SMITH

____________________

 

3.  If you are the officer signing for the entity, carefully read every agreement you sign, despite the fact that you are only signing on behalf of the entity.  Even if there is only one signature block for the entity, you may end up having to defend yourself against personal liability, because there were personal obligations hidden somewhere in the agreement. 

With respect to No. 3 above, it so happened to a CEO of a New York limited liability company (See Integrated Marketing and Promotional Solutions Inc. v. JEC Nutrition LLC, decided December 12, 2006; via the New York Law Journal, subscription required).

The CEO signed a seven page agreement on behalf of the LLC.  The first three pages of the agreement contained the main obligations between the LLC and the other party to the agreement. The fourth page contained the parties' signatures.  The CEO signed on behalf of the LLC only, i.e. only one signature block.   Three unsigned pages followed the signature page.  Page six of the agreement (unsigned) contained the following language:

The undersigned (that is the CEO) for the client (that is the LLC) personally guarantees the payment of client's debts.  In the event that agency is unable to secure payment from the client, the undersigned personally guarantees all liabilities, including interest, collection costs and attorney's fees.

The LLC didn't pay, so the LLC and the CEO got sued.  Should the CEO be personally liable under the guarantee provision above, despite only one signature, which was clearly on behalf of the entity?

The court wasn't in a position to decide this issue yet, but it stated the rules:

In order to determine whether the CEO's signature on the agreement was intended by the CEO to bind the LLC and herself personally, the court must look at five factors:  1. the length of the contract, 2. the location of the provisions that made the CEO personally liable in relation to the signature line, 3. the presence of the CEO's name in the agreement itself, 4. the nature of the negotiations leading to the contract, and 5. the CEO's role in the corporation.  In addition, the court stated that although two signatures are not required in order to impose personal liability on the CEO, the existence of only one signature weighs against imposition of personal liability. 

The court applied the factors and found that factor 1, factor 3 and factor 5 weighed against the CEO.   The contract was only 7 pages long, the CEO's name was mentioned in the agreement, and the CEO had a position of "prominence and control" in the LLC.  Factor 2 weighed in favor of the CEO; the provision that established liability against the CEO was located after the signature block.

Still, it will take further court proceedings and additional convincing evidence to show that the CEO did not intend to be bound by the agreement.

__________________

Related Post:  How to execute a Contract - Good Practice Checklist

CORI K-Base Contract Research Expands

In one of my previous posts I mentioned  Cori K-Base, the resource for free contract forms and research sponsored by the University of Missouri.  I just received an e-mail from them informing me that they have made some major improvements:

"First, we have partnered with QL2 Software, Inc., to enhance our ability to acquire and incorporate contracts from EDGAR and other on-line sources. Expect an explosion in the number of documents you will be able to access using our full-text search functionality! The new system will also increase the utility of Company Name searches to include all contract parties, not just the filing company'€™s name.

Second, we have created an opportunity for individual firms or for groups of firms and trade associations to maintain secured, on-line collections and archives for their firm'€™s or association members' exclusive use. Participating members can search and retrieve contracts exclusively within their private collection or expand their search to include the public collection in order to compare private and public documents. This is an excellent opportunity for smaller companies to create a central, electronic repository of their contract agreements, or for groups of firms and trade associations to add value to their group members by creating a pool of contract resources unique to their group's members. As an additional value added, CORI can conduct periodic analysis of contract forms and identify trends in new contract designs and prepare white papers reports those results to group members. For more information on how CORI can provide a solution for your organization, please contact us!

These are exciting milestones in the development of the CORI K-Base.  But we need your assistance to keep the K-Base available and to support continued improvements.  Please consider a tax-deductible, year-end donation to support CORI'€™s continued efforts to reduce the transaction costs of contracting and of doing research on contracts. You can even give online through the University of Missouri's online donation! s site: http://donatetomu.missouri.edu.*  For more ideas on how you can support CORI, see the Support CORI page on our website.

Thank you for your support. We look forward to a new year of working with you to make CORI your first destination when researching contracts."

I think this is a great service.  If you have the money to spent, why not donate some towards the greater good of contract research.

   

Resources for low cost or free Form Business Contracts

I've posted on web resources for form contracts before; however, this is supposed to be a comprehensive list.

First the Disclaimers:

There is no assurance that any agreement that was not drafted for you and your individual circumstances is worth more than the paper it was written upon.

An agreement develops through negotiation.  You must be aware of the legal consequences of each and every change to your original form.  There may be major consequences to minor changes.

There is no assurance that any agreement form is of any quality, even if your circumstances exactly mirror the circumstances of the parties it was originally drafted for.  There is a lot of junk in cyberspace.

The law that shapes and governs agreements is mostly state law.  An agreement drafted for a Florida transaction may have different legal consequences for a New York transaction.

The forms you are likely to find on the internet are often taken from public filings with the Securities and Exchange Commission.  This means they have been drafted for rather large companies and may have a lot of "overkill" provisions that are inappropriate, or even harmful, for a small business.

But now, without further ado, my resources for low cost or free form business contracts (in no particular order):

1.   Findlaw

2.   Onecle

3.   Digital Contracts Library of the University of Missouri (free registration required)

4.   Creative Google Searches: do an Advanced Search for "_______ agreement" and, under file format, limit the search to word documents or pdf documents.  This will result in more relevant hits than a plain search.

5.    RealDealDocs (starting at $9.95 per day): I've kind of praised this one before, but it seems you can get similar results from the above free resources.

6.   The NVCA Model Venture Capital Financing Documents:  For venture capital transactions only.

As I find more resources, I will add to this list and make you aware of the update.  If you know of another resource, let me know, and I will add it with a "tip of the hat" to you.

If you are interested in my firm's services relating to business contracts, click here.

 

Seal of Approval for Forfeiture for Competition Agreements

You may know that non-compete agreements between an employer and an employee are problematic since there is always the real possibility that a court may find that the restrictions put on the employee in the agreement are unreasonable.  There are even websites trying to help employees break their non-competes.  Nonetheless, businesses would like to be protected from an employee leaving the job and competing with them or joining a competitor.  Thanks to a recent case* decided by the New York Court of Appeals, employers can be even more confident than before that a certain type of non-compete agreement will hold up in New York courts.  (For the scholarly article on this see Friday's New York Law Journal, "Noncompetes With No Reasonableness Hurdles" by Fagie Hartman, subscription required).

The type of non-compete agreement is a so called "Forfeiture for Competition Agreement."  The gist of these agreements is "we'll pay you a chunk of money and benefits to be vested at a later time, but if you leave your job with us and go to the competition, we'll pay you nothing."  New York courts have found these agreements to be valid without going into the tedious question whether they are reasonable or not in each individual case, because they figured it was the employee's choice whether to compete and forfeit the benefits, or take the benefits and refrain from competing.  However, this was only legitimate, if the employee left on his own devices and was not fired.

The  New York Court of Appeals cemented this favorable legal rule for employers by holding that post-employment forfeiture for competition agreements will be enforced without regard to reasonableness.  But the employee in question claimed he was as good as fired, because he was demoted and thus the employer "fired" him from the job that he was doing before and wanted to keep.  He had no choice other than to leave and that is why the non-compete agreement should be invalid.  The court disagreed.  With respect to what constitutes leaving a job voluntarily versus leaving a job involuntarily (i.e. being fired), the court said that an employee only leaves a job involuntarily if the working conditions at the time of his resignation were so intolerable that a reasonable person would have been forced to leave the job.  Whether the employee was asked to do a job that was not comparable to his earlier job responsibilities was irrelevant. 

*Morris v. Schroder Capital Management, 2006 N.Y. Slip. Op. 08638 (N.Y.Nov 21, 2006)

Confidentiality Agreements between a Business and an Employee

A confidentiality agreement (also known as a Non-Disclosure Agreement) is meant to protect a business from misappropriation of valuable proprietary information by employees.  Often it is a good idea to have one in place with your employees.

When drafting or reviewing such a confidentiality agreement, check the following points (and consult with your attorney):

1.    Use the proper form of Confidentiality Agreement

Make sure that the form of the confidentiality agreement that was used to draft your agreement is appropriate for the business-employee situation.  Confidentiality Agreements designed for a business to business transaction where both parties disclose confidential information won’t do.

2.    Define Confidential Information

There must be a definition of what constitutes confidential information.  Be specific, but also include a more general “catch-all” provision.  Do not make confidential information depended on whether it was expressly marked as such.  Exclude information that is public or already in the lawful possession of the employee.

3.    State the Confidentiality Obligations

No disclosure of confidential information, unless to authorized other employees or compelled by court order (but we will have right to defend against court order before disclosure);

No removing of confidential information from business’ premises;

No poking around in confidential information to learn more than we disclosed (i.e. reverse engineer any data, software and so forth);

No reproduction of confidential information from memory;

Use of confidential information only for job purposes;

Obligation to notify business immediately upon learning that confidential information was disclosed or used inappropriately;

Upon notice by business, return of any confidential information in employee's possession.

4.    State your Remedies

Money damages are often not sufficient to make whole for a business’ loss caused by disclosure of its confidential information.  A business must also be able to stop an employee in his or her tracks when disclosure is imminent.  To make courts give those remedies, it is advisable to state that in the agreement. In legalese, these provisions might be called  “Equitable Relief” or “Injunctive Relief.”

5.    Make the employee pay for the consequences of his or her breaches of confidentiality

In legalese, these provisions might be called “Indemnity.”  Make sure the indemnification clause includes “including reasonable legal fees incurred by the businesss.”

6.    State the Term of the Agreement

Usually as long as the confidential information remains confidential.

7.    Remember the limits of a Confidentiality Agreement

Confidentiality Agreements only offer so much protection.  Don’t neglect very practical protective measures:

Limit access to “as needed”;

Clearly identify confidential information (if verbal, say so), but don’t make that a prerequisite for your definition of confidential information (see above);

Monitor dissemination of confidential information by any appropriate means;

Continuously remind employees of confidential nature, i.e. verbally, in work manuals and so forth);

Implement security measures.

Have I forgotten any important point?  Feel free to comment.

The LLC Operating Agreement - Keep it Simple

Here is a little known secret about limited liability company (LLC) operating agreements:  They are often more complex than necessary.  Pick up any "standard" operating agreement from the internet or elsewhere and you will see a lot of provisions incomprehensible to a mere mortal.  Most of these provisions deal with so called "special allocations" among members of the LLC.   "Special allocations" describes a scenario where members of an LLC share profits and losses of the LLC in percentages different from the percentage of ownership in the LLC.  When members of an LLC opt for special allocations, the corresponding operating agreement has to incorporate certain tax rules in order to pass muster with the IRS.

Example:  A and B each contribute $500 to the LLC and agree to share profits and losses of the LLC equally.  Result:  No special allocations.

A and B each contribute $500 to the LLC and agree that for the first two years A is to receive 70% of the profits and losses of the LLC and B only 30% of the LLC's profits and losses.  Result:  Special Allocations.

If you and your fellow members  share profits and losses of the LLC in proportion to your membership interests (i.e no special allocations), you don't need any complicated provisions dealing with  special allocations. 

If you need help with drafting an LLC operating agreement, you should contact a licensed attorney in your area.