It is virtually impossible to prove the terms of a verbal contract, which invites trouble when things go sour with vendors, employees, contractors or business partners.  Written contracts help clarify what the terms of the agreement are, make sure both sides are in agreement, and give legal protection in case one party doesn’t live up to its obligations. Contracts relating to real property, commercial loan agreements, contracts for the sale of goods more than $500 are specific transactions that must be in writing in North Carolina to be enforceable.

A binding written contract can be formed by exchange of emails, even where the parties don’t both print and physically sign a document.

Contracts do not need to contain much “magic language” to be valid, but they do need to name the parties,  be signed by both parties, and the price needs to be stated or determinable.  If certain terms are missing, often the Uniform Commercial Code can fill the gaps, such as delivery or shipping terms, risk of loss, warranty.  In addition, both sides need to give “consideration,” which is the exchange of something of value. Usually one party promises to provide a good or service, and the other side promises to pay for it.  Sometimes one party offers not to do something (called forbearance), and the other party promises to pay, such as where one party agrees to settle a claim.

Contracts, however, are one of the most important devices to help a business minimize its risks.  The indemnity, limitation of liability and warranty provisions address what happens when things go wrong, and who will pay for them.  Take a look at what my colleague, Tom Bowden, thinks about do-it-yourself contracts.

Related articles

• How to simplify and improve any contract (vabizlawyers.com)
• Offer, Acceptance (illegitcode.wordpress.com)
• Drafting Non-Competes Is Risky Business (virginiaworkplacelaw.com)

Oh when will they ever learn?
(Pete Seeger – Where Have All the Flowers Gone, Copyright 1961 (renewed) Fall River Music Inc.

It seems that internet and social media titans Google and Facebook have once again, to no one’s surprise, gotten themselves in some hot water with the FTC and some privacy watchdogs again. They just can’t seem to get the hang of this “privacy” thing. Hence the start of this post.

Google has settled with the FTC over a little faux pas concerning its fabulously fizzled BUZZ service. Trying to combine the best of Facebook and Twitter, they announced BUZZ with typical Google style and fanfare, and just to be hip, they phrased their sign up options thusly:

“Sweet! Check out Buzz”

Or

“Nah, go to my inbox”

Minor problem: The “Sweet!” option gave less than a full and transparent statement of the degree to which users’ information would become public. In essence, Buzz capitalizes on all those emails you never deleted, scanning them for connections that you have or might want to make, or something like that. In other words, they use your private information to build a public social network. I’m sure they studied the 2009 Facebook Privacy policy fiasco in detail, but apparently concluded that Google and BUZZ were somehow “different” as in not subject to the same rules and regulations as their competitors. When folks started to realize that their private information was being shared far more than the casual “Sweet – Check out Buzz” message indicated, they were less than amused, but then, as they dug further they discovered that checking the “Nah” box did not have the effect one might have expected either. Notwithstanding a clearly checked “Nah” box, Google dutifully went right ahead and collected all sorts of information about the non-subscribers, perhaps with the thought that they would be pleased to see all that information stored and ready to go once they finally decided to join the flood of ecstatic BUZZ users, now measuring in the hundreds, or even thousands.

For its thoughtful and condescending violation of its users’ privacy expectations, Google was invited to discuss their philosophy of privacy with the FTC in court, leading to a proposed consent order that requires Google to submit to rigorous FTC audits for the next 20 years.

Facebook’s latest gaffe was to introduce its facial recognition capability as an “Opt Out” feature in June. Described by PC Magazine as “Creepy” and “terrifying,” Facebook’s tool works in the background scanning and analyzing the 200 million or more pictures uploaded every day by its 600 million users. By comparing faces in the pictures in its database with pictures in which your friends have “tagged” you, or you have tagged yourself, Facebook develops an incredibly powerful capability to analyze your movements, your activities, and your associations. Of course, by participating in Facebook in the first place, you already give them a lot of raw material, but this new tool goes one step farther. And it’s a big step.

Even if you opt out, how can you know whether Mr. Zuckerman’s elves won’t continue to analyze your photos with this capability. Or, having opted out, what if being tagged in one photo with one “suspect” and in another with a different “suspect” might provide a link that law enforcement officials would just about do anything to know. Did I say ‘suspect”? Sorry – I meant “subject.” Facebook is not a government agency of course. But then, what, if any, new surveillance capability has not eventually been commandeered by law enforcement, with or without a warrant? I’m not sure I would want to count on Facebook not to give up the goods if the FBI or Homeland Security brought enough pressure to bear. In fact, their privacy policy pretty much makes it a foregone conclusion:

6. How We Share Information

 

 Facebook is about sharing information with others — friends and people in your communities — while providing you with privacy settings that you can use to restrict other users from accessing some of your information. We share your information with third parties when we believe the sharing is permitted by you, reasonably necessary to offer our services, or when legally required to do so. For example:

……..

To respond to legal requests and prevent harm. We may disclose information pursuant to subpoenas, court orders, or other requests (including criminal and civil matters) if we have a good faith belief that the response is required by law. This may include respecting requests from jurisdictions outside of the United States where we have a good faith belief that the response is required by law under the local laws in that jurisdiction, apply to users from that jurisdiction, and are consistent with generally accepted international standards. We may also share information when we have a good faith belief it is necessary to prevent fraud or other illegal activity, to prevent imminent bodily harm, or to protect ourselves and you from people violating our Statement of Rights and Responsibilities. This may include sharing information with other companies, lawyers, courts or other government entities.

Time will tell whether Facebook and Google use these powerful capabilities for good or evil, but they are here to stay, and growing everyday. Even if there is little you can do to block their intrusive reach, you owe it to yourself to actually read the privacy policies of Facebook and any other site to which you submit personal information.

How carefully are you reading the Terms of Service and Privacy Policies of the online sites you frequent?

Imagine you are the owner of a business with about 50 employees.  Your product is well-known and there are limited suppliers in the United States.  Your best salesman generates about 50% of your company’s gross sales – or about $100 million a year.  He is on salary plus commission under his employment contract and is earning at least three times as much as any other employee. 

Now imagine that this super-star has a very messy personal life, and he’s well-known around town for partying and womanizing.  He’s been divorced three times (once after being discovered in bed with another woman by his first wife),  experienced a brutal custody battle, was accused of beating his second wife and now he’s missed a key sales meeting in New York.  Turns out he was found by hotel staff drunk and naked in a hotel room that’s been trashed.  He is hospitalized in New York (his mother rushed to be with him and says it is very serious).  Upon his release, he enters a three-week rehab program. 

He comes back to work.  At the local Arts Council fundraising dinner, where your VP of Marketing is getting an award and your company has a table, the employee  complains loudly about what a “stupid, stupid man” you are, how your company is exploiting his sales experience and contacts, he doesn’t get paid enough for all the crap he has to put up with — and your company would be nothing without him. 

Can you even fire someone for their outside conduct that reflects unfavorably on your company?  What are your potential legal liabilities?  Does it matter if the employee had an illegal drug problem? A booze problem? Would it matter if he were bi-polar or otherwise mentally ill? 

Would the answer be any different if the employee were Charlie Sheen? 
 
If we were the employment attorneys advising the company and its owner in this scenario, first we would look to the employment contract.  Is this employment-at-will where the employee can be fired at any time for any reason that is not discriminatory?  Are there notice provisions?  Or are there specific guidelines for termination that must be met before the employee can be fired?

We would make sure the personnel record is up to date and all performance-related conversations and observations are entered. We would look at how the company treated other employees in similar situations. 

In light of the very liberal definitions of disability under the Americans with Disabilities Act (ADA), we would have to consider whether the employee is in a protected class and whether the termination would be in violation of the ADA.  And if his “stupid, stupid boss” comment is made in front of co-workers, we would also consider whether this public comment is protected activity under the National Labor Relations Act. 

The stakes are high if you handle it wrong.  Charlie Sheen was in fact fired after his off-the-clock antics, and in fact sued the studio, the producer and the production company for $100 million.  The complaint alleges breach of contract, conspiracy, and breach of state and federal laws that protect ill employees. 

What do you do when your super-star employees lose their Sheen?

My business lawyer’s heart sank when I first read about the fees associated with the “Kardashian Kard.”  While recent federal legislation has attempted to corral fees and abuses related to bank-issued credit cards, prepaid debit cards remain free in the wild wild west. 

My first thought was that the Kardahians saddled their brand name onto a disreputable product.  Was anyone really surprised when that bronco bucked them?

My second thought was utter disbelief that they didn’t have lawyers or business managers managing the details and their brand.  I counsel my clients constantly on the legal aspects of trademarks, marketing and branding issues. This is the kind of problem that is 100% preventable with a good attorney in your stable. 

If your name were attached to a product or service of any sort, wouldn’t you investigate the nature and quality of the product first?  Especially if you were a celebrity brand that was essentially famous for no discernible reason? What else do you have but your reputation?

So, the moral of the day is a two-fer:

1.  The devil is in the details; and

2.  Read the contract before you sign it. 

What’s the biggest mistake you would have made if you hadn’t actually read the fine print?

It is not always easy to determine who a copyright owner is, particularly where a business hires someone to produce a “work of art” (such as software, logos or other graphic design or a web site). If the work is a “work-made-for-hire,” it is owned by the company commissioning the work.

Section 101 of the Copyright Act defines a “work made for hire” as:

• a work prepared by an employee within the scope of his or her employment; or
• a work specially ordered or commissioned for use:
  as a contribution to a collective work,
  as a part of a motion picture or other audiovisual work,
  as a translation,
  as a supplementary work,
  as a compilation,
  as an instructional text,
  as a test, as answer material for a test, or
  as an atlas,

if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.

This is a rather esoteric list, and the upshot is that an independent contractor graphic artist or web designer may end up owning the software, logo or web site that was commissioned. Many companies assume since they paid for the work, they automatically own it. Other companies never even realize there is an issue. Complicating matters is that if an employee creates the work, the employer does automatically own it, but if a contractor creates the work, it is likely that the contractor owns it.

While there may be implied licenses, it is important for companies to address ownership issues up front via contract.

An ounce of prevention:

1. Have an attorney prepare your terms and conditions to maximize the enforceability of your contract, and to provide for collection interest, collection costs and attorneys fees.
2. Vet the customer thoroughly before you extend credit. Ask for trade references and do a credit check.
3. Familiarize yourself with the Fair Debt Collection Practices Act to know what you can and can’t do to collect the debt.
4. Require prepayment or partial payment from a new customer.

A pound of cure:

1. Call promptly after the first payment deadline is missed as a reminder and to make sure there was no problem with your goods or services. The longer you wait the harder it is to collect.
2. Follow up with a formal demand letter after another month. Give a firm deadline before further action will be taken and state what that action is.
3. Work out a payment plan if necessary. A small monthly payment or a reduced lump-sum payment may be better than nothing.
4. Know the North Carolina collection laws if a lawsuit becomes necessary. But your goal is to prevent filing a lawsuit in the first place.

Remember the classic Monty Python skit? Eric Praline (John Cleese) walks into the Post Office to get a fish license for his pet halibut (also named Eric) and gets into an argument with the man behind the counter (Eric Idle). Here is an excerpt*:

Praline (pulling out his “cat license” to prove such things exist):
What’s that then?
Man: This is a dog license with the word ‘dog’ crossed out and the word ‘cat’ written in crayon.
Praline: The man didn’t have the proper form.
Man : What man?
Praline: The man from the cat detector van.

It gets sillier from there, but I digress…

Of what possible relevance is this you ask? Simple, this happens all the time in small business. Understandably, business owners want to control costs. Legal fees in particular. In light of the huge volume of legal documents accessible from the web, who can blame a business owner for finding what looks like a perfectly good form, marking it up and using it for a critical contract. This is commonplace, but very risky. I spend a significant portion of my practice time trying to extricate clients from unfortunate situations caused by this casual approach to contracts.

Here’s an example. Suppose business is tight, and you need some additional help, but you’re not prepared to hire a full-time employee. That’s when many businesses turn to “independent contractors” or “1099s” (in reference to the tax form the company sends to the contactor at tax time). This can be an excellent solution to the business problem, but a casual approach to the contract can have consequences far more expensive than the withholding tax that might be saved. In these situations, I have seen numerous examples where the business owner simply takes their standard “employment at will” agreement, does a search and replace substituting “contractor” for “employee” and “contract” for “employment.” What could be simpler?

But here’s the rub. Many of the pro-employer terms in a good employment agreement can have disastrous tax consequences if they remain in an independent contractor agreement. The IRS is not bound by your contract, but it can certainly give them lots of ammunition to use against you. The IRS has a list of 20 characteristics that determine whether the relationship is truly an independent contractor relationship, or merely a disguised employment. One of those key points is whether the relationship is terminable at will by the “employer.” If it is, then the IRS will likely take the position that this is an employment relationship.

So the standard “at will” clause in an employment agreement is the last thing you want to see in an independent contractor agreement. That’s just one of many examples. If the IRS decides your independent contactor arrangement is really just employment in disguise, they will not only assess the employer for unpaid withholding taxes, they can also impose a heavy 100% penalty on the “control persons” who write the checks or authorize the payments. That would generally be the owner. And what’s worse, if the IRS recharacterizes the independent contractor relationship as one of employment, then the contractor/employee may even have a claim against the employer for unpaid overtime, which would include significant damages and legal fees.

Take the same situation, but reversed. If the company dusts off what is really an independent contractor agreement, and tries to use it as an employment agreement, they have probably tossed away their right to terminate the employee “at-will” because the contractor agreement was for a specified task at a set price. As long as the contractor performs the specified task, they have a right to finish the job and get paid. Is this what you want in an employment agreement? Probably not. Keep that in mind if you are considering the DIY approach. Sure, you will probably save some legal fees, but from our experience, they will be dwarfed by what it will cost to untangle the “hairball” you may create.

For more merriment from Monty Python’s Flying Circus, go here.

Volunteer lawyers will be available to advise on entity formation and start-up issues, contracts, leases, employment, termination, collections and other general business questions that face starting and growing businesses.

The clinic will be held at the Small Business Center, SOUTHBank Building, 400 W Main Street, Durham, NC 27701, from 10 a.m. to noon. Space is limited. Please call for an appointment, 919-686-3448 .

NC LEAP assists low-wealth entrepreneurs with their legal needs in starting or expanding their businesses through pro bono service by North Carolina business and transactional lawyers. Services range from basic transactional legal needs as struggling entrepreneurs strive to establish their business and create jobs, to potential long term client-counselor relations as their businesses grow.

The Durham Technical Community College Small Business Center is a state-funded organization which is part of the Small Business Center Network of North Carolina. The Small Business Center provides small business owners with information they need for success, including advice on marketing, sales, bookkeeping, and management.

But companies need to be careful when hiring contractors and setting up the engagement structure. Just calling someone an “independent contractor” does not mean the person is a contractor and not an employee for Internal Revenue Service purposes. And if the IRS audits, a company that has mis-characterized a worker can face significant fines and penalties for failure to pay and withhold payroll taxes.

The IRS has significant guidelines on the difference between contractors and employees. The key issue is whether the company directs or controls the means and methods of producing the work, or just gives the contractor the job specifications and timelines and receives the results from the contractor. The more the company directs the sequence of how the work is performed, the more likely the contractor will be characterized as an employee. Other factors the IRS will consider are who provides the tools/supplies, where the work is done (at the company or at the contractor’s place of business) and whether the contractor has other clients.

Another downside to hiring contractors instead of employees is that you may not be their only client, and it may be difficult to schedule your projects.

Before you hire someone as a contractor, particularly if you are replacing an employee with a contractor, you should talk with your accountant and attorney about the nature of the work, the frequency of the work and the way in which the work is going to be performed.

After you set up the structure, a good enagement agreement is essential to set out the work specifications, timing, payment amounts and times, liability, insurance and ownership of work product. Companies generally assume that because they are hiring someone to create work product for them, they will automatically own the work. While employee work almost always is owned by the company, this is not often the case with a contractor.

But it has staggering implications for limited liability companies that do not have operating agreements or other written agreements between the members.

For companies without operating agreements, this case means that if one member wants to leave the company, the company must dissolve, liquidate its assets, and pay all members their proportionate share of the proceeds. The other members would have no ability to maintain the company, no matter how small a minority member desired to leave. One dissatisfied member can bring down the house of cards.

As a practical matter, members want to leave companies all the time, and members generally come to a buy-out that saatisfies everyone. But business breakups can be like divorces. The parties become emotional and irrational, the negotiations become personal and nasty, and the former partners do not agree on the buyout terms/price. The only legal remedy available under North Carolina statutes (which will be applied in the absence of a written agreement) is dissolution of the company and distribution of the assets.

An operating agreement is not required under North Carolina law, but every business law attorney strongly recommends one, for situations just like this.

A good operating agreement will supplement the general provisions in the Limited Liability Act with a wide range of business issues such as: the identities of initial members; present and future capital contributions; the respective members’ shares of profits and losses; distributions of cash and other assets; the identity of managers and their powers and duties; indemnity agreements between managers and members; buy and sell provisions among members, including the circumstances under which a member can voluntarily leave or transfer his/her membership interest; and tax treatments of various LLC transactions and operations.

If you have formed a multi-member LLC without an attorney, use this case as a wake-up call to protect yourself with a written operating agreement. The same goes for multi-shareholder corporations without shareholder agreements.

But should a business owner really draft important contracts without counsel? I have to say, that with my writing background, drafting and negotiating contracts is one of my favorite things to do, but I think few lay people would be energized by warranties, disclaimers, severability or indemnifications. Indeed, I work with many small business owners who often do not realize the significance of the standard terms and conditions in their contracts.

I am all for educated and empowered clients, and often work collaboratively with my clients to save on legal fees.

But contracts have far-reaching and high-dollar ramifications. The safest course of action is to bring in an attorney every time. Many experienced, sophisticated business people don’t truly understand limitations of liability, warranties and indemnifications. They don’t know to include venue or choice of law, or a host of other things that seem to be mere boilerplate.

This week, I am negotiating with a business owner who hired my client to develop a software component to be incorporated into a larger project. Standard procedure is to include a mutual indemnification agreement that balances the risks faced by each party. The business owner steadfastly refuses to include any indemnification provisions. He says– and I believe him and respect his stand-upness — that he will stand behind the final product 100%. But it is not up to him. An end-user who gets notice that the product infringes a third-party’s copyrighted software will sue everyone involved. It doesn’t make a lot of sense, and I truly wish the other party were represented by counsel.

If you don’t understand what’s wrong in the previous paragraph, I submit that you should concentrate on your core business competency and let me concentrate on mine — protecting your business.

How can you decide whether it makes sense to draft your own contract? As with whether a business owner should incorporate without an attorney, it depends on a variety of factors:

• How simple is the transaction?
• How experienced is the business owner?
• What is the value of the transaction?
• Can the business afford an attorney?

Obviously, the simpler and lower value the contract is, the more sense it makes for the business owner to draft the contract himself or herself.

From my point of view, the earlier you bring someone like me on, the cheaper and easier it will be for usto protect you. It can be very time-consuming to find and fix all the “gotchas” in an existing contract. It is even worse to have to tell the client he has no recourse for poorly manufactured goods he bought, there are no penalties in the contract for non-payment, or they lost their intellectual property protection.

What is your experience in drafting legal documents?