New York Small Business Law

Spotlight on Buy-Sell Agreements

Buy-sell agreements are like prenuptial agreements for people in business together; Buy-sell agreements set forth what is going to happen when things go wrong and business partners want to, or have to, separate.  As with prenuptial agreements, people tend to overlook their importance or simply don't want to deal with the subject; after all, they are in love!

But as Iowa business attorney Rush Nigut points out in his most recent post:

"The time to enter into a buy-sell agreement is at the beginning of the business relationship when everyone is excited and getting along. It is often very difficult to negotiate a deal when something has gone wrong.  Without a buy-sell agreement, owners may end up in court and the business may suffer." 

A buy-sell agreement can stand on its own or be a set of provisions in another agreement, such as a shareholder agreement, operating agreement or partnership agreement. 

A buy-sell agreement usually covers the following issues:

Right of First Refusal
If an owner wants to leave, does he have to sell his interest to the remaining owners before selling to an outside party?

How to Value the Business
If there is a sale of an owner's interest, how is the value of the interest to be determined?

Payment in case of a sale of an interest
If there is a sale of an owner's interest, is the purchase price to be paid in installments? with interest? or in a lump sum?

Death, Disability, Divorce, Retirement of an Owner
What is going to happen in case of death, disability, divorce or retirement of an owner? 
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Related Post:  Going into Business Together - Don't Rely on a Handshake
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If you need help in preparing a buy-sell agreement, you should contact a licensed attorney in your area.

A buy-sell agreement can stand on its own or be a set of provisions in another agreement, such as a shareholder agreement, operating agreement or partnership agreement. 

A buy-sell agreement usually covers the following issues:

Right of First Refusal
If an owner wants to leave, does he have to sell his interest to the remaining owners before selling to an outside party?

How to Value the Business
If there is a sale of an owner's interest, how is the value of the interest to be determined?

Payment in case of a sale of an interest
If there is a sale of an owner's interest, is the purchase price to be paid in installments? with interest? or in a lump sum?

Death, Disability, Divorce, Retirement of an Owner
What is going to happen in case of death, disability, divorce or retirement of an owner? 
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Related Post:  Going into Business Together - Don't Rely on a Handshake
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If you need help in preparing a buy-sell agreement, you should contact a licensed attorney in your area.

On the Comma that cost 1 Million

You may have read it in the New York Times, the Legal Reader or on AboveTheLaw, a single comma in a 14- page Canadian contract may decide whether the contract was rightfully cancelled by Atlantic Canada, a telephone company.  This decision supposedly is worth 1 million Canadian dollars.

The contractual language at issue is as follows:

“This agreement shall be effective from the date it is made and shall continue in force for a period of five (5) years from the date it is made, and thereafter for successive five (5) year terms, unless and until terminated by one year prior notice in writing by either party.”

At first I thought I agreed with the Canadian regulator that had to decide the issue.  It held that the contract could have been cancelled as early as one year after its execution and not only after the expiration of the first five year term.  However, the longer you stare at the language, the less certain it becomes. 

According to the New York Times, Ken Adams, the leading expert on contract drafting, has been  commissioned by the opposing party, Rogers Communications, to write a a 69-page affidavit to address the issue in Roger's favor.

Another interesting aspect of the case is that Rogers claims that in its French version (which has equal status under Canadian law), the contract has a different statement clarifying the point. 

What is the lesson to take away from this media spectacle?  Grammar and clarity in contract drafting are important. 

In addition, whenever two languages are at play, consider including language in the agreement setting forth which language is to govern in case of a dispute over the meaning of the contract.

Guarantor not bound by forum selection clause in guaranteed contract - Quebecor v. Harsha Associates

A recent case by a federal court in New York illustrates the importance of choice of law and forum selection clauses in each and every contract or guaranty.

In Quebecor v. Harsha Associates (Quebecor World (USA), Inc. v. Harsha Associates, L.L.C., et al (2006 WL 2918797 (W.D.N.Y.)), the court held that a guarantor was not bound by a forum selection clause contained in the guaranteed contract. Only if the guaranty and the contract were closely related, one could hold the guarantor to a forum selection clause in the underlying contract.  The court listed the following factors as important when deciding whether a close relationship existed:

• whether the two documents were executed contemporaneously;
• whether the guaranty stated to have been an inducement or consideration for the contract or whether it incorporated the contract by reference; and
• whether the two documents covered the identical subject matter.

In Quebecor v. Harsha Associates, the court denied such a close relationship.

The court further stated that absent a close connection between a guaranty and the underlying contract, courts in New York were reluctant to bind a guarantor under a contract's forum selection clause, particularly where the guaranty contains a choice of law (but not a choice of forum) clause (which was the case in Quebecor v. Harsha Associates).

See below the fold for facts and the court's reasoning.

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Related Post:  How to choose New York law and New York courts in your business contracts when you have no connection to New York.

Form Contracts

Great line by Lema Korshid on Mindpetals:

"The only thing that the form contract comes with besides an “idiot tag” is no guarantees."

Read the full article "Form Contracts - Use them at your Own Risk".

By the way, I think I called her a non-lawyer the other day.  From this article it seems that she (or he) actually is a lawyer.   Apologies.

If you need help with form contracts, contact a licensed small business attorney in your area.

Attorneys Not Allowed to collect Attorneys' Fees from Clients

Thankfully, a New York court has held that the following provision in a retainer agreement is unenforceable:

"If client fails to pay for charges due under this agreement and the law firm takes legal action and is awarded such charges, client shall owe to law firm costs, expenses and attorneys' fees (including but not limited to the reasonable value of the law firm's own work) attributable to law firm's collection proceedings and/or action."

The court found the provision "to be fundamentally unfair and unreasonable."

"Aside from its lack of mutuality, the clause, even if not so designed, has the distinct potential for silencing a client's complaint about fees for fear of retaliation for the nonpayment of even unreasonable fees"

Well, I couldn't agree more.  If you see that kind of language in your retainer agreement, walk away from that attorney or law firm.

A little background knowledge to take away:

In New York,  attorneys are required to enter into a written agreement with their clients setting forth the important points of the attorney - client relationship, a so called Retainer Agreement or Letter of Engagement.  That is good a good thing, because your attorney is the last person you want to engage in a "he said, she said" kind of argument.  (There are exceptions: fees expected to be less than $3000; client already hired attorney on similar matter; for more info on the rule look here.)  But, outrageous provisions like the one above should not be part of a retainer agreement.

For more commentary on the case look here.

Memorialize that Deal in Writing!

Since I am in the business of memorializing deals for people, my repeated message of "get it in writing" might seem somewhat self-serving.  Thankfully, non-lawyers point it out too:  Lema Korshid on Mindpetals had a post yesterday entitled "Memorialize that Deal in Writing."  She writes:

Entrepreneurs, save yourselves from future headaches! Ask your attorney draw up a contract immediately after the “toast” or the “handshake”. I understand it is one more step and it costs money. But, it is a necessary step that you should take very seriously because it ensures that both parties are aware of their rights and obligations and provides a remedy if either one of them does not honor the terms.

By the way, while oral agreements are generally enforceable in New York (if you can show what you agreed to), there are some important exceptions.   For certain types of agreements, New York's so called Statute of Fraud requires a writing to make your deal enforceable in court.

Some of these agreements are:

Agreements which cannot be performed within one year from the making thereof; Guaranty Agreements; Agreements to compensate business brokers (See New York General Obligations Law Section 5-701).

Agreements for the sale of personal property over $5000 other than goods, securities and security agreements  (See New York Uniform Commercial Code Section 1-206).

Agreements for the sale of goods over $500 (See New York Uniform Commercial Code Section 2-201).

If you need help with memorializing deals in writing, contact a licenses small business attorney in your area.

How to Execute a Contract - Good Practice Checklist

You put it in writing, you aced the negotiations, and you are ready to execute the contract.  Don't let down your guard at the last minute!  The following points are worth noting when executing a contract in New York.  While neglecting to follow the below points may not result in an invalid or unenforceable contract per se,  following below "good practice" can help to avoid problems later on.  Remember, spending a little extra time to get it right the first time - a minor expense;  staying out of court - priceless.

1.  Don't let technology (or anybody else) fool you

If the contract has gone through several rounds of negotiation and revisions, don't assume that the last circulated "execution copy" is what you think it is.  Before you sign, be one hundred percent sure that you know exactly what you are signing (you'd be surprised how many people neglect this one).

Under New York law, you are generally bound by a contract which you signed even if you have no knowledge of its content.   Unless  fraud or other  wrongdoing is involved, you are presumed to know the contents of the contract. 

2. Date the Contract

While a contract need not be dated to be valid and enforceable, it is kind of foolish to not date a contract.  Dating helps to identify a contract years later and puts the contract into chronological context.

FYI, you can predate a contract under New York law.  If you provide that your contract is entered into "as of" a date earlier than the date of execution, the agreement is effective retroactively "as of" such date.

3.  Both parties should sign the contract

It might come as a surprise to you, but in New York , unless a signature is required by statute, you don't necessarily have to sign an agreement for it to be valid.  If you and the other party in some other way indicate consent to the contract, you are both bound.

However, nothing beats a solid signature from both parties when it comes to proving that a contract was entered into by the parties with an intent to be bound thereby.  Better yet, put a provision into the contract that provides that the contract is not binding unless signed by both parties.

The signatures of each party to the contract do not necessarily have to appear on the same page of the contract, as long as you both agree that only the signature pages together constitute a complete executed agreement.  To that end, parties to a contract sometimes include a provision that states "the parties may execute this contract in counterparts, each of which is deemed an original and all of which constitute only one agreement."

4. Initial last minute hand written changes to the contract

Any last minute change to a contract that is done by hand should be initialed by the parties to the contract.   Better though, insist on a revised contract reflecting the change.

5.  Sign in your correct capacity

If you are signing for an entity, make sure that the signature block properly identifies you.  For example, if you are signing as president of a corporation, the signature block should read substantially like this:

ABC Corporation

By: _________________
Name: Joe Smith
Title: President

Signing correctly on behalf of a corporation prevents later claims that you are personally liable under the agreement.

6. Check the other party's authority to sign

For example, if the other party to the contract is a corporation, you want to be sure that the corporation is in existence, that the person signing on behalf of the corporation is authorized to do so, and, particularly in larger transactions, that the corporation approved the contract by consent of its shareholders or directors.

7. Get an original executed copy of the contract for your files

Each party should have an original executed copy of the contract for their files.  In other words, if there are two parties to the contract, you have to execute two identical contracts.  One copy goes to you, one copy goes to the other party.  Each copy constitutes an original contract.

If you need help on "How to Execute a Contract - Good Practice Checklist", contact a small business attorney in your area.

How to choose New York Law and New York Courts in your Business Contracts when you have no connection to New York

I don't need to tell you that New York lies at the center of the universe.  But did you know that you can be a part of it by choosing New York law to govern your business contracts and New York courts to decide upon any conflicts arising from your business contracts, even if the transaction, you, or the other party to the contract have no relation to New York?

Choosing New York law and New York courts may be desirable, because

• you and the other contract party are from different states or countries and you wish to agree on a neutral law and a neutral place for dispute resolution; or
• you wish to take advantage of New York law and New York courts which are known to address the most complex financial and commercial transactions.

You can choose New York law to govern your contract - whether or not the contract has any relation to New York - if your contract provides for consideration of at least $250,000.  (General Obligations Law Section 5 1401).

How do you choose New York law to govern your contract?  You agree to it with your contract partner by including a provision in your contract similar to this one:

This Contract shall be governed by and construed in accordance with the laws of the State of New York.

Now, in order to ensure that your choice of law provision will be enforced when you find yourself in court over the contract, you are well advised to choose New York courts in addition to New York law.  If you have chosen New York law in your contract and your contract relates to an obligation of at least one million dollars, you can have New York courts to decide upon your contract disputes.  New York General Obligations Law Section 5 1402 provides that you can sue a foreign corporation or non-resident where the dispute arises out of a contract for which a choice of New York law has been made and which is a contract with consideration covering at least one million dollars. 

How do you choose New York courts?  You agree to it with your contract partner by including a provision in your contract similar to this one:

Each of the parties to this Contract hereby irrevocably consents and agrees that any legal action, suit or proceeding with respect to this Contract may* be brought in a federal or state court located in [_______, New York], and each of them hereby irrevocably accepts and submits to the jurisdiction of such courts with respect to any such action, suit or proceeding.

*Note that this provision makes the selection of New York courts optional.  You could also agree that the selection of New York courts is mandatory.

If both parties are not present in New York, it is advisable to agree in advance what constitutes service for the purpose of starting a law suit in New York courts.  For this reason, you could agree to a provision similar to this one:

Each of the parties to the Contract hereby irrevocably designates, appoints and empowers [insert name and address of an agent in New York], as its authorized agent to receive for and on its behalf service of summons or other legal process in any action, suit or proceeding in the State of New York.  Each of the parties to the Contract further irrevocably consents to the service of process out of any New York court by mailing copies thereof by registered United States air mail postage prepaid to each of the parties of the Contract at its address specified in this Contract.

FYI, this post has been submitted to Problogger.net's writing contest.

****Legal Information is not Legal Advice****

Picture courtesy of Absolutewade protected under Creative Commons License Attribution 2.0

Update to "Conflict Resolution"

My post on September 14 talked about conflict resolution and the resources available at the American Arbitration Association. 

In the meantime, I discovered another great resource for domestic and international arbitration issues:  Lovell's International Arbitration Guide.  This site offers extensive information about arbitration, even  a drafting engine that automatically drafts an arbitration provision for you!

The site is free, but you have to register.  Hey, there is nothing wrong with using Big Firm resources without hiring them.

Back to School: Test Your Contract Law Smarts

Even though oral agreements can be valid, we all know it is better to put agreements into writing. But are there circumstances where you must put the agreement into writing lest you go home empty handed?

Take this quiz to test your New York contract law smarts:

1. Are all oral agreements enforceable in New York?

Yes, written agreements are for the weak.
No, oral agreements between a New York business and  a New Jersey business require a writing to be enforceable.
No, New York law sets forth important exceptions to the general rule that oral agreements are enforceable in the so called "Statute of Frauds."

2. I entered into an oral agreement to exclusively deliver widgets to my customer for the next three years.  Is this agreement enforceable?

Sure, this is your biggest customer.
Yes, because the agreement is for a term of three years.
No, agreements that cannot be performed within one year require a written agreement to be valid.

3. I entered into an oral agreement to sell 25 dishwashers to a local retail store for $599 each.  Is this enforceable?

Sure.
No way, if that much money is involved something has to be in writing.
Since we are both merchants the oral contract is enforceable.

4. I agreed orally to guaranty my brother's indebtedness to his bank.  Can I get out of this?

Sure, if you leave the country and never come back.
Yes, the oral guaranty is not enforceable.
No, everything said to a bank is as good as written in stone.

picture by Vee Dub protected under Creative Commons License Attribution 2.0