Tuesday, August 14, 2012

It's Not Just the Contract

Your Deals Can Trump No-Amendment Language

For your ongoing projects with your service providers and customers, do you have written contracts spelling out the work to be performed and stating that any changes must be in writing?  Good.  If there are any changes or expansions to the project from the initial scope of work or purchase order, do you document them?  Great.  Will taking these steps prevent all disputes over what services are included in the project?  Not always.

Many companies use contracts stating that all changes must be in writing.  (If yours don’t say so, have a lawyer review your contract forms now.)  The provision alone, however, is not enough.  The law in many states provides that a course of dealings between parties will trump a provision that says contracts may only be changed in a signed amendment.  This can lead to expensive disputes about whether the work to be provided under the contract or any amendment was really part of the services included in the price.

What can you do to best protect yourself?  Document any changes to a contract or purchase order.  When there are changes, employees should inform management and counsel to make sure that there are no changes to either party’s expectations as to what work is be done and the price.  If there’s a possibility of different understandings, you might want to discuss them with the service provider or customer early on so that there are no surprises later.  Doing so can help ensure a better long-term relationship with your business partners and avoid expensive litigation.  Finally, consult with your lawyer to review your contracts and tailor best practices for your ongoing relationships.

Document Retention Tips

Reduce Your Costs Now and In Possible Litigation

Technology has made it easier and easier to store incredible amounts of information indefinitely, with instant online backups and seemingly endless storage capacities.  With all of this added data comes the risk of enormous costs to review and produce documents if a lawsuit should ever arise.  In litigation, parties typically request and often obtain a wide range of documents, including years of financial records, emails, and other files, in both paper and electronic form.  Companies with years of backup tapes are often shocked to learn the costs just to restore those tapes – before even reviewing them – could be in the tens or hundreds of thousands of dollars. 

The need to maintain key company documents has to be balanced against costs of storage, review, and production, as well as the possible harm in a lawsuit.  The time to act is before any litigation is imminent, because the obligation to preserve all potentially relevant documents prevents any file deletion once a dispute arises. 

Companies use many techniques to reduce their information overload:  automatically deleting emails after a certain time, limiting the storage capacity for each employee, requiring regular review and destruction of outdated files, and others.  There is no single approach that works for every firm, so managers, I.T. staff, and counsel should work together to tailor the best solution.

Your lawyer should review your company’s technology and backup policies to ensure that the company keeps what it really needs for business and compliance purposes and then filters out the rest.  Doing so can save a great deal in storage costs now and potentially much more in litigation costs and headaches later on.

Protecting Your Partnership

Time to Review Your Company Agreements?

Sometimes, even the best relationships between business partners can end badly.  It can be stressful enough when partners decide that they should no longer work together.  But it can be far worse when the business break-up paralyzes the company’s operations. 

One of the best ways to limit the harm from a “business divorce” is to spell out in the company’s governing agreements how the partners would separate.  One common tool is a buy-sell clause that sets a process and valuation method for one partner to buy out another, potentially avoiding very expensive disputes.  Another useful provision would set forth who has authority to run the company’s operations while the business split-up or winding-down is taking place.

Unfortunately, many companies’ shareholder, partnership, or operating agreements omit essential provisions like these two.  In too many cases, companies without a single majority owner find they are unable to run their business and have to rush to court in order to ensure that ongoing operations, such as invoicing, sales, and payroll, can continue normally.  These suits often include additional claims of breach of duties and mismanagement that could be avoided.

With business disputes, an ounce of prevention can be worth far more than a pound of cure and be far less expensive, time-consuming, and damaging to the company’s owners.  Have you reviewed your company’s governing documents recently?  If not, consider sitting down with a lawyer to plan ahead.

Legal Trivia Question of the Month

The scope of Congress’ taxing power was the center of the Supreme Court’s most recently decided case.  The taxing power was also the focus of the first-ever high court case to address the constitutionality of an act of Congress.  In 1796, the Supreme Court held that an excise tax on carriages was constitutional, after an impressive argument on behalf of the government by a Founding Father.  Who was the first person to successfully defend a constitutional challenge to a federal law before the Supreme Court?  Hints:  among many other things, he was a Cabinet secretary, but was never Attorney General.  Email scottsinger@ymail.com for the answer.