Choose Your Poison

Quite often, your vendors’ contracts will include a choice of law provision and a forum selection clause. For example: This Agreement is governed by and construed in accordance with the laws of the State of California, without giving effect to its principles of conflicts of law. Any litigation arising out of this Agreement shall be brought in the courts of Ventura County, California. Each Party hereby expressly and irrevocably waives the right to a jury trial. The prevailing party shall be awarded its reasonable attorneys’ fees and costs in any proceeding arising out of or related to this Agreement.

So what is wrong with this?

It implies that this vendor gets sued by its customers often enough that they feel they have to guarantee home field advantage for themselves. It also implies that, when their customers do eventually sue them, that they think their customers are wrong in suing, and that they need to try to push all of the costs of the lawsuit onto their customer.

At the beginning of the relationship with a new vendor, be mindful of the forum selection and cost shifting red flags. If your new vendor thinks they need to gird for the lawsuit that you’ll eventually be filing against them, then maybe you need a different vendor from the get-go. Don’t ask me to choose how I will die, because frankly I’d rather not die at all.

The Best Insurance is …

You have some real estate. It’s mortgaged. The mortgage company requires you to carry insurance. So the insurance company should pay directly to your mortgage company, and not to you, if the property burns to the ground and there is no longer any collateral for the bank to foreclose on, right?

Wrong.

Your insurance policy is a contract between you and the insurance company. The bank has nothing to do with that contract. Yes, the bank can require you to carry insurance, and if you don’t carry insurance they can go buy a policy on your behalf and then charge you for the cost of that policy, but even then it’s still your policy.

What is the take away to guide your small business? Don’t count on your vendor for turning over their insurance proceeds to you if something bad happens. If something bad happens, your company and a whole host of other companies will be standing in line hoping to collect your pennies on the dollars. Mitigate your risk with that flammable vendor based upon knowledge and not hopes.

Show Me the Money

The US Supreme Court just ruled in a bankruptcy case, where the defaulting debtor used a corporate shell game to try to avoid paying its debt. If you’d like to read the nuances over what does and does not constitute a fraud exception to a creditor being able to gets dollars on their dollars instead of getting mere cents on the dollar for what the bankrupt debtor owes, click here.

But what I saw as the take-away was this: don’t ignore the warning bells.

Husky (the creditor) had been selling to Chrysalis (the debtor) for a good three years without being fully paid. Husky nonetheless kept shipping, and in the fourth year, Chrysalis’ owner (Ritz) began siphoning off money to other Ritz-owned companies, culminating in both Chrysalis and Ritz both filing for bankruptcy in an attempt to avoid paying back Husky what was owed.

Ding ding ding ding! Do you hear those bells and see those lights?

Husky should have asked Chrysalis for adequate assurances back in years one or two at the latest, instead of continuing to ship to a customer in years three and four who became progressively more lousy about paying its bills. Although, if Husky had, then today (thirteen years after the first shipments hit Chrysalis’ loading dock) we wouldn’t have this juicy US Supreme Court case to read about.

Living and Breathing the Statute of Frauds

You have probably never heard of the obscure legal phrase – “the Statute of Frauds”. And that’s good.

Way back in the 1600’s, folks finally decided that “he said, she said” is a really bad way to decide if there is a contract and what that contract does and doesn’t say. The best way to make sure that both you and I agree about what we’re agreeing to, is to put it on paper and sign it.

At your company, you have written contracts for all manner of things. So you’re good to go, right?

Maybe.

Even though you probably don’t do business merely on a handshake, if what you think you want, versus what your vendor thinks you’re asking for, versus what your vendor is willing to give you regardless of what you think you want, and regardless of what they think that you think that you want… yes, my head is spinning, too!

It’s important that your contracts accurately reflect what you and your vendors are actually agreeing to. That is where a sound contract review and approval process comes in to play. From a legal standpoint, there isn’t any contract language that is inherently “good” or “bad”. It’s good if it matches what both you and your vendor are both agreeing to, and it’s bad if it doesn’t match.

When you ask your lawyer to review a contract, I need your help to make sure I know what it is that you think you are asking for. So that I can then, in turn, make sure that the contract actually matches what is in your head!