Draw the Law: Government and Business, Part III: The Legislature

Personal Update

Aloha everyone!

I apologize to all my loyal blawg readers, that have missed on so many months on posts from me.  I have been extremely busy, but have a lot new and exciting information, as well as simple little sketches to help you understand the law.  First off, let me state that my law firm will now be offering notary public services here in the State of Hawaii.  Therefore, if you need something notarized and are in the Kaka’ako area please contact my office to schedule an appointment.

Second, the reason I was not posting for the past several months is I was working for the Hawaii State Legislature for the House Judiciary Committee.  This was fascinating and informative work on the drafting of legislation, and I do recommend any young attorney get some legislative experience if they intend to work in government or even in private practice; it is an invaluable experience, and goes a long way if you intend to do lobbying or public interest work.  With that work finished, Draw the Law should be returning to semi-regular postings, as I will be holding regular office hours at my Ward Avenue location.  Of course with my legislative knowledge, I will be using it for today’s post to follow-up where we left off, and of course I will be talking about the Legislature and how it affects your business.

Lastly, you can expect New Law in the Brief posts, a series of posts of the legislative process, as I have interacted with many local business owners and advocates who have no idea how the Legislature operates, but are interested, and finally there will be new content updates, such as events, one-sheets, slides, etc . . .

Anyway, I’ve written enough on me, let’s get back to Draw the Law!

Draw the Law: Government and Business, Part III: The Legislature

The 3 branches of the federal and local state government balance and check each other.  Specifically, when it comes to lawmaking, the legislature creates the law, while the executive enforces, and the judicial shall interpret the laws application to a case.

So last time I discussed how the judicial branch of the government (both US and Hawaii) interacts with businesses when they sue each other or receive a suit against them by a customer or possibly an agency of the government charged with enforcing the law.  This brings me to the Legislature, as it is the place where the laws are made.  It is what gives a consumer the right to sue you for a defective product, it’s what gives the police and government agencies to chase you down for speeding tickets or having to go to the liquor commission for a license to dispense alcohol.

So why should a business owner care about what the legislature, state or federal or both do?

Let me generalize for a bit, so that you can understand what is happening.  Typically, what happens is that a new industry or business practice is implemented, sometimes with little problems to society, but other times causing problems for people.  In the case when it is not, the company is likely injuring a number of people, but sometimes that injury does not give those people a cause of action (aka a right to sue) the company doing the damage.  Therefore, people become advocates for a change in the law making a company responsible for the harm.  They do so by interacting with their elected official, which may either be a senator or representative and they introduce a bill into the legislative process.  Other times, the change in or the addition of a new law need not come from the advocacy of protecting consumers and clients, but many industries see benefit in engaging the government by either having access to information, resources, or possibly legitimacy.

So here, we have a widget plant in a neighborhood. The community does not like the smoke, and asks their elected official to speak to the legislative body and convince them to pass Bill 55 on the issue.  The legislature then passes Act 10, which orders any widget plant to put a red cap on their smoke stack.

Many times laws do not just benefit one company, but an entire industry. Therefore, the companies that mak up the industry will bandwagon together and form some type of organization to lobby for changes in the law on behalf of the greater whole.  A good example of this is the Hawaii Chamber of Commerce.

So the widget plants do not like putting a red cap on their smoke stack. Red paint is too costly, and they would rather put blue caps, which are more pleasing to the eye. So the widget companies band together to form the Widget Association of America, which hires a lobbyist to make their case heard in the legislature to change the law.

While, some business owners live in a legislative district separate from where their business is located, this should not prevent them from knowing who the representatives are for the area.  The reason being is that the local neighborhood business provides a valuable resource to the community, and in turn that community elects the representative.  Therefore, consider finding out who your representative of both where you live and do business in, and consider joining or forming some type of association to get more involved with the legislative process if you feel that their may be benefits to your business in influencing the lawmaking process, as the laws your legislator passes may affect your business. If you are in the State of Hawaii, you can find out who your elected officials are by using this website and entering your address in the top-right corner search box.

Next time I will touch upon the executive branch, the part of the government charged with enforcing the laws.

LEGAL DISCLAIMER: The information provided here is meant to be general information, and should not be taken as specific legal advice that pertains to any particular situation.  The reader should not base any decisions on the information here to act or refrain from acting regarding a legal problem.  If you believe you have a legal problem please seek legal advice from a licensed attorney in the relevant jurisdiction.

Draw the Law: Government and Business, Part II: The Judiciary

Hello readers, mahalo for stopping by and checking out this second of a series of Draw the Laws on government and its interaction with business.  For this week’s post, and the next two, I fill do a brief survey of the three branches of the US government (as well as the State of Hawaii).  So I am going to start off with one that attorneys are quite familiar with, the judiciary.  Fellow attorneys, this is meant for laypeople and is a bare bones run-through, don’t tell me what I missed because I am trying to keep this brief (pun intended).

Purpose of the Judiciary

The judiciary, if you remember your civics class, is comprised of a series of courts that are meant to apply the laws of the government. It is a formal mechanism for dispute resolution.  While there may be some quibbling over this, the reality is courts and judges do NOT make laws.  They can strike down laws made by legislative bodies that are unconstitutional, this is known as “judicial review.”

The Federal System: US District Courts

The federal court system is broken into different regions, and the starting point for a plaintiff is district court.  If a party does not like the verdict they can always appeal to the appellate courts, which are in turn checked by the US Supreme Court, which rulings affect the entire country.

A lawsuit begins in the judicial system when a plaintiff files a suit.  If this is a federal lawsuit this suit begins its journey in a trial court known as US district court.  Without getting things complicated and preventing you from getting too bored with this post, know that there are several US districts broken apart by region. Further, know that you cannot just file a federal suit and any court can hear it.  The Congress must grant the court the jurisdiction (power) to hear the subject matter of the dispute.  For example, US district courts can hear matters when it is a civil action between citizens of different states.

Why does this matter?  If you are a business here in Hawaii and you get into a contract lawsuit with a California business, the California business may pursue a suit in federal court, which may be more costly than a state lawsuit if it was between two local businesses.

This is why we transactional attorneys put in jurisdiction and choice of forum clauses to prevent a lawsuit in another state and applying the laws of that state when engaging business with someone from another state.

The Federal System: Appeals Courts

The Appeals Courts is where you turn to next if you don’t like the ruling of the District Court.  Just note that Hawaii is located in the 9th Circuit Court of Appeals.

So for a party that loses, and wishes to appeal, that party will find their lawsuit at this level of the judicial branch.  Due to the fact that the US Supreme Court only hears fewer than a 100 cases a year, the United States Courts of Appeals tend to be the final stop for cases appealed.  Further, the process of appealing is expensive and less open in terms of the scope of the lawsuit.  District courts gather evidence and judges or juries make a decision based on the evidence presented.  However, with appeals courts that is NOT the case.  Appeals courts only review the decisions of the US district courts to see if there was an error in law. They do not take in new evidence, such as hearing witnesses, from the parties, and only the parties’ attorneys are allowed to speak to the court.  Therefore, this mechanism as you can see makes it difficult appealing a lower court’s ruling.

In district court the two sides present evidence to the judge or jury through evidence, testimony of witnesses, etc . . . however, once a verdict goes up on appeal the judges at the appellate level can only review what was presented at the lower court and cannot take in new information.

As a business what you need to understand is that if you lose a lawsuit at the lower level, you and your attorney need to weigh the risks and costs of appealing such a loss, and seeing if it is worth it to get an appeal.  Sometimes it is used a negotiation strategy to bring a party that is exhausted from a suit back to settlement talks.

The Federal System: The US Supreme Court

The Supreme Court of the United States (aka SCOTUS) is the highest court in the United States.  It has the ability to hear all federal court cases and over state court cases involving issues over federal law.  It should be known to anyone seeking to get their case to this level is that it is a long and costly road, as you would have had to gone through district court, appeals court, and lost at those rounds, and then ask SCOTUS to hear the case.  The chances of you bringing up a controversy that meets the hearing criteria of the 9 Supreme Court justices is rare as I stated above.  Lastly, there are only certain lawyers and firms that handle Supreme Court cases.

However, the influence of the Supreme Court can be felt throughout the land. The (in)famous decision of Citizens United vs. Federal Election Commission basically held that the First Amendment prohibited the government from restricting independent political expenditures by corporate entities.  Rightly or wrongly, depending your take on this, your business entity, association, or union may spend its money on independent communications, such as television whereby you can endorse or call to vote against specific candidates.

The State of Hawaii Judiciary

Basically, the State of Hawaii’s court system is broken up similarly to the federal system. We have circuit courts that handle different islands of the state, with the First Circuit handling Oahu. After the circuits, we have an Intermediate Court of Appeals (ICA). Finally, the Hawaii Supreme Court functions much like SCOTUS, but at the state level.  For the most part, these courts will handle Hawaii cases and controversies.  Therefore, if your employee sues your company for violating Hawaii worker laws it will be in a state court, and if you lose you may appeal to the ICA, and if the case warrants it the Supreme Court may hear it.

Why does this Matter to Your Business?

So in this example business A had a judgment against it for injuring its customers, and now that the damages are awarded that would invariably effect business B's decision to buy A. Even if the lawsuit is over, does that mean that Business A's practices will lead to another suit? Can it pay off the judgement? All things to consider when entering a lawsuit in the court system is things become public.

While this post is brief in terms of its coverage of the scope of the judicial branch, the main thing I want you to get out of it is that if you are a business consider a) if you go through a lawsuit all of that information becomes public, you are exposing your business information becoming public record; b) because of this is a deal to buyout a company, attorneys go through a “Due Diligence” phase where we basically dig up everything, including court records, that may affect the valuation of the business, including court documents; and c) if you have a business that requires its employees drive on behalf of the organization you may want to obtain a traffic abstract or traffic court report, as it is a part of your duty to make sure an employee is fit for driving for your company.

The courts exist to resolve disputes, and many times your business will engage with customers, clients, other businesses, and the like that the results may not end the way you expected and sometimes that will draw you into the judicial system.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Draw the Law: Government and Business, Part I: The Overview

Happy New Year! Pardon the delay, but I have had a lot of work and been trying to deliver new interesting content and helpful services for local small businesses and startups here in Hawaii. So I hope you all are off to a roaring start with your business plan, startup, second round of financing, or expanding your business to new markets.  However, if you were like me you were concerned with the “fiscal cliff” debate that raged with the US Congress at the beginning of the year.  Now in the upcoming weeks, here in Hawaii, as in Washington DC, lobbyists and stakeholders are preparing for a new legislative session to influence lawmakers.  Many of these lobbyists represent consumer advocacy, environmental protection, trade, and business groups.

So this brings me to a new series for Draw the Law, government and business.  I have a background in government, law, business and politics and I find that many small business owners do not appreciate the interaction of government. I realize that many business owners have not had civics in a while, nor did their class cover the nuances of government, regulation, and lawmaking, but that is why I think these posts should bring some clarity. So let's get to it.

The Federal System

So let’s start with a refresher, our government is a federal system. This means there is a national government, located in Washington DC, and fifty state governments, one of which is the State of Hawaii, with its state capitol being located in Honolulu.  What this means is usually you have to worry about two sets of laws.  For example, your income taxes, you have federal income tax, and a state income tax.  Another area is labor law; federal law prohibits gender discrimination, as does Hawaii state law.  However, each of the states, in some areas, are allowed exceed federal law, such as how Hawaii law prohibits discrimination against domestic violence victims or gender expression.  Finally, there are some areas that federal law only exists, such as the registration of copyright or patents.

Imagine that there are 2 sets of systems, that there is a federal government in black, and 50 state governments in red. When you start a business you start it in a state and are subject to state taxes, as well as federal taxes.

The Three Branches

So we have two levels of government, but within these layers there are three parts of each government.  There is the Executive branch, which has the United States President if it is the federal government and the Governor of Hawaii if it is the state.  The Executive branch is responsible for carrying out laws. For example, the US Department of Agriculture Food Safety and Inspection Service is the public health agency responsible for ensuring the safety of meat, poultry, and egg products is safe. At the state level the Department of Commerce of Consumer of Affairs of Hawaii is under the governor and is responsible for registering your corporation or limited liability company with the state.

The Judiciary is made up of the courts, which have judges that rule on cases. We have federal courts and state courts, and there are specific rules and procedures that allow a court to have jurisdiction over your case (i.e. they have power to hear your problem).  So for a business, if their product or service injures a customer and the customer goes out, finds an attorney, and then sues the business they will get this resolved in a court.  Another example is if you were an independent contractor and did work for a client for $3,000.00, but never received payment, you could consider suing the client in Small Claims Court.

Finally, there is the Legislative branch, which in my personal opinion most people find confusing, unless they are a politico.  This is the case because of the politics played among all the personalities of senators and representatives. For the United States Congress there is the House of Representatives and the Senate, similarly Hawaii has a bicameral (2 chambers) legislature.  The sole goal of the legislative branch is to make laws.  Therefore, many businesses, by trade or industry, bandwagon together to lobby for the creation of laws that are favorable, such as the US Chamber of Commerce, the National Restaurant Association, as do other groups, such as unions, like the ILWU or HGEA, as they interact at the two levels of government.

The executive branch (blue) is responsible for enforcement, such as through the department of taxation (taxes). The legislature (red) creates laws and lawmakers are subject to lobbyists, voters, and stakeholders influencing them. Finally, the judiciary (green) decides on cases through laws made by the legislature, such as class actin law suits.

Upcoming Weeks

In future weeks, I will go over how public policy affects management of businesses, lobbying, where nonprofits fit in, and how legislation is driven by stakeholders, as well as other topics that business owners interested in government may be interested in.

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

What’s With All this Paperwork, Part VIII: Loans with Security Interest

Hey everyone, pardon the delay for this week’s Draw the Law, but many of my clients have been requesting services preparing for the end of the year or getting ready for the coming year.  How about yourself? Do you have New Year resolutions concerning the conduct of your business? Better policies? New agreements? Finally, converting that sole proprietorship into a business entity like a limited liability company or corporation? Whatever it may be, just remember you will inevitably need good documentation and record keeping, so be sure to set-up a good process for storing all your data and information.

Anyway, let’s get back to Draw the Law, which we are still covering paperwork you may see starting a business.  Last week, I covered a promissory note with a balloon payment type of structure.  Recall, that this is a transaction whereby the loan is paid off by making small  payments throughout the term of the note, but has a large "balloon" payment in the end of the term. Today’s topic is still about loans, but this one focuses on the use of a security interest.  This method is used to provide greater assurances to a lender by providing collateral from the debtor.

So How does this Work?

Typically, a promissory note shall state that there is a secured interest in the promissory note.  It will state who the lender is, the personal property items that a security interest is attached to, and the borrower’s business. In addition, the promissory note commercial lenders, such as banks will prepare additional documentation, usually a security agreement.  If this is an agreement between you and a friend, family, or some other person you and the lender will need follow up on these details.

The security agreement outlines that grantor (the debtor) has assigned a security interest to the grantee (the lender in the transaction) with respect some sort of collateral (the personal property that is being secured for the loan).

Typically what happens is if your business goes under and is unable to repay the loan, the lender now has the right to recover the collateral as a means to satisfy the debt.

So the debtor (black) will put up some kind of collateral (the machine) for a loan (black agreement) for money (in green).  However, if repayment fails (in black) the lender (the bank) has a security agreement (in red) securing the collateral. Further, the lender will notify the public of its secured interest in the machine by filing a UCC-1 statement with the proper agency (in blue).

What Works as Collateral?

Almost anything can work as collateral.  It can be tangible items, such as equipment, fixtures, inventory, but can also be intangibles, such as accounts receivables, patents, or promissory notes owed to you.  However, be aware that the lender will consider the cost and expenses of trying to collect the item, its value after use, the size of the loan, etc . . . and various other factors when even deciding if your collateral is sufficient for the size of the loan.  The special machine you imported from Italy may cost you a huge chunk of money, but if you go out of business the bank will have to find a buyer and may have to rip it out of your store as well so that may not be worth a whole lot to the bank.

When going for a secured transaction (a loan with a security interest) be aware of what you are putting up as collateral.  It may be valuable to you, but the lender giving you money needs to figure out how to extract value from the personal property should you go under to recoup the loan given to you.

Further Documentation by the Lender: The UCC-1

This whole process of securing a loan via a security interest is basically a method for the lender to secure their spot among creditors and know for certainty if your business fails where they are in line against other creditors as to extracting value from the defunct business.  Without getting into a subject matter that law students dread studying for the bar exam, understand that a UCC-1 financing statement (UCC stands for Uniform Commercial Code) may be completed by the lender, which is then filed with the appropriate state agency with regard to the property that has an interest attached to it. This serves as notice to future creditors that the lender holds a lien on the listed assets. However, if your business is successful and can pay off the loan you should make sure that a release is filed in the same public office where the original UCC-1 was filed.

Last Word: Background Check for Buying Businesses

As this is the end of the year, I would like to recognize many people view the New Year as a time to begin new adventures, such as starting a business.  However, remember long ago rather than from starting from scratch you may consider buying an established business.  Why am I bringing this up?  Well, you just learned about security interests whether you are doing an asset purchase or an entity purchase it is wise to do some research.  Sometimes that research includes digging through UCC-1 filings to make sure the business or its assets that you want to buy don’t have outstanding loans or security interests on them.

This is the last Draw the Law post for 2012. Check back in the beginning of next year for new posts!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

What’s with All this Paperwork VII: Promissory Note (Balloon Payment)

Hey everyone, it’s amazing, it’s already December 2012 and it feels like January 2012 was just yesterday.  Anyway, I just wanted to let you know that this is second to last Draw the Law of this year.  There will be one more, continuing the paperwork theme that I have explored for startup owners for the past couple of months.  After which I will do a couple of sporadic updates to the blog and site to continue being a resource for Hawaii small business owners and entrepreneurs. So let’s get to it! So you started your business, now you need cash to run it.  Several earlier Draw the Laws talked about raising capital and financing your startup.  However, today’s topic is specifically about one of the written agreements that you may want to use.  It is a Promissory Note that uses the Balloon Payment method.

What is a Promissory Note?

Without getting too much in legalese (which I will save for another day) know that a promissory note is a type of negotiable instrument.  A negotiable instrument is a document that promises payment to a specific person.  If you don’t use Paypal or your banking debit card to pay off expenses, you are familiar with a more common negotiable instrument, a check.

For a document to be a promissory note it is dated and signed.  Further, it contains an unconditional promise by the payor to a payee on demand or at a specified future date.  What is a payor and payee?  Click here to find out for the legalese explanation.

For our purposes in this post, know that the payor is the person who is going to pay the payee the money owed.  Put another way, the payor is the person who asked for the loan and then will pay the payee, or the person who made the loan.

Why do I Need this Written Document?

For a promissory note to be valid, notice it has to be signed, thus you need it in writing.  Onto the practical matter, many times people switching out of their careers to pursuit their own business do not have enough cash for equipment or other upfront expensive items.  Therefore, they need a loan.

A bank might not give them credit and the startup owner may be an area that is not Silicon Valley or sufficiently networked to get an investor.  Therefore, they turn to Auntie or Tutu for money.  However, your family member (or friend) may be wary of you repaying the loan and wants to get in writing.  Ignoring the legal part, the effect of memorializing the loan in writing also gives you a metric to measure your business by . . . basically, if you are failing to meet monthly payments to your relative that might say something about your business.

What is a Balloon Payment?

A balloon payment is a way of structuring a loan so that the monthly payments are on the low end and toward the end term of the loan, the payor makes a one big lump-sum payment to pay off the remaining principal.

To understand this concept, let’s start off without the balloon payment.  Let’s say both parties agree that the full amount of the loan, plus interest, shall be paid off in four years.  However, the yearly rate of 8% interest would make it unfeasible for a business just starting to make monthly payments based on that rate scheduled at four years.

So with the balloon payment you reduce the yearly rate to 4% (which would be under a loan over an eight-period), which helps ease the monthly payments, BUT the payor still has to pay the remaining amount within 4 years, but the last payment has “ballooned” due to the reduced monthly payments.

Last Word: Drafting

While, it is possible to draft your own promissory note, and possibly in very causal relationships that might be ok there are other things to consider other than the amount, interest rate, and ending date that an attorney might be helpful for drafting. For example, the date of the installment payments, application of payments, accepting prepayment, loan acceleration, taking a security or collateral, and of course what happens if they fail to make payment.  In addition, you may want to talk to a tax expert because that also may shape the loan and repayment.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

 

What’s with All this Paperwork, Part VI: Authorization Forms

Today’s Draw the Law will be simple, as I am working to get my enewsletter out as well.  Interested in finding out what my practice is about or what else I am up to?  Send me a message and I will add you to the subscription list.  Even if you ever get tired of my newsletter you can always unsubscribe as the service I use is CAN-SPAM Act compliant.  Anyway, let’s get to it. In last week’s post I discussed notice, minutes, and written consent.  This week I will talk about authorization forms.  This is another piece of paper you will find in a situation with multiple shareholders and officers.  Notice a trend about corporate formality and recordkeeping?

What is an Authorization Form?

This question and this post would be better put into context if I discuss today’s paper in the terms of an “Authorization of Treasurer to Open and Use Accounts” form, which might be called something else depending on who is doing the drafting, but for all effect it authorizes the person who is the treasurer to open bank accounts on behalf of the business as well as other types of financial accounts.

There is no single correct form as this all depends on what the agreement among the board was on what powers were granted in the treasurer.  The authorization can be as wide or as narrow as the corporate body wants to make it.   The point is remember long ago when I discussed agents acting on behalf of the principal.  In this case, the treasurer is an agent of the corporation, who is the principal.  We all know that corporation is a legal person, but as it is not living person it must act through its agents, namely the officers and directors.

Generally, most financial institutions dealing with your corporation’s treasurer will want to see an authorization form and to have it on record as does your corporation’s owners.  Why?  Accountability.  Typically, in these authorization forms some kind of power is being granted.  In the case of the treasurer, it tends to be able to not only open bank accounts, but to also use the money in them.  Therefore, take a look at today’s “Practical Last Word” for addressing this issue.

How Specific Can These Forms Be?

They can be very specific.  In many ways, you can consider them an instruction to how the officers, directors, employees, and other agents of the corporation are to behave. Once again using the issue of the treasurer and bank account.  Instead of a general authority to open and use banks may be you have it so that other officers, employees, and agents can endorse checks (and other instruments) for deposit purposes only.  However, when the corporation has to pay out may be the treasurer can sign out checks that under $5,000.00, but for anything over it requires both the president’s and the treasure’s signatures.  May be the account is a checking account, may be it is for petty cash.  Bottom line: choices need to be made about how you want your organization to look like and operate, but you also need to work with professionals, such as financiers, accountants, attorneys, bank employees to make sure that what you decide on the inside is matched by conduct with outside third parties.

Practical Last Word

In theory, a written agreement should give you a right of recovery against the bad treasurer who abuses their authority.  However, typically the bad treasurer has run off with your corporation’s funds and you cannot find them.  So once again, an attorney can draft safeguards and protocols into your bylaws, employee agreements, etc . . . but it is up to you to enforce them and to watch out who you partner with.  In addition, work with your fellow founders to create checks and balances on the authorities granted when divvying up duties.  Finally, you may want to ask yourself can you trust this person with the money?  If you find yourself trying to have your attorney draft as many safety measures of accounting for the money, multiple signatures needed, and that the treasurer is only allowed to open a bank account with a small amount of money do you really want to be working with that person?

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

 

What’s with All this Paperwork V: Corporate Records

In last week’s post I covered some unique features of an operating agreement.  This week, continuing on our tour of paperwork that startups and small business owners should be familiar with, we go back to corporate paperwork.  Today, I will talk about three general documents that you will repeatedly see running a corporation.  They are Notice, Minutes, and Consent documents.

The Purpose of Creating These Documents

Recall that bylaws are a series of rules that the owners of the corporation, the shareholders, agree to be bound to when running the corporation.  Among these various rules you will discover how meetings are to be announced, what can or cannot be done in a meeting, what constitutes quorum, and a variety of other matters that shareholders and directors must know being a part of the corporation.  For instance, recall that shareholders are not directors.  The shareholders select directors to run the company.  In this vein, the delegated powers between shareholders, directors, and officers may be different from corporation to corporation, and the only way you would know is by reading the bylaws.

Therefore, the bylaws become important for what is considered Notice for Shareholders’ Meetings and Directors’ Meetings.  Further, minutes are used to record the meetings.  Lastly, sometimes instead of holding meetings may be the group will decide to act through signed consent forms.

Sticking to the rules is important because if you remember way back when I started talking about limited liability these documents are a part of the separate entity feature that shows that the people running the corporation are separate from the entity.  The lack of good corporate records and following your bylaws could make the shareholders’ personal assets vulnerable to a creditor or subject to IRS challenges to the legitimacy of the corporation or transactions.

For brevity purposes I will mainly focus on corporate records from the viewpoint of shareholders, as typically in a small startup these shareholders are also the directors that run the company. Let me take each one in turn now.

Giving Notice

So bylaws, dictated by state law, will tell you how to give proper notice of a shareholders meeting.  Why is it important for you to do this correctly?  If proper notice isn’t given to a shareholder, that affected shareholder may have a claim and further the actions taken at the meeting may be null.  Meaning you will have to redo the meeting all over again to take the same action.  Many small corporations like to play politics when a fellow founder and shareholder is not living up expectations by not giving them notice.  This is a big mistake. Like it or not, as a shareholder they are entitled to proper notice of a meeting.

Further, notice that Notice means something particular in corporate law.  Generally, it is in writing, and can be delivered through a variety of means, and finally the manner of delivery will change the timing of effectiveness.

Minutes

At a shareholders meeting the minutes serve to memorialize the actions taken at the meeting. Usually, if there is a position of Secretary, it is their role to record what was said and decided upon so that it serves as a record.  What should be noted is what your bylaws say about quorum, if they default to what the law says, then a majority of shares is considered quorum.  This need not always be the case, but you want to be familiar with your own bylaws and especially quorum.  You may have given proper notice to all the shareholders, but due to unique bylaws the shareholders that show up may not be enough for quorum or to take action.  It all depends.

*This is not legal advice, just for practical purposes: For my minutes, for smaller corporations, I like to put the names of the shareholders at the top, how they appeared for the meeting (in-person, phone, or if you allow via internet), and sometimes their share amounts to see if you have quorum. The main thing is accurately recording what took place, which is why the minutes are usually never approved right then and there, as the secretary preps them for a following meeting for approval.  Once the minutes are approved they are kept with the other corporate records.

Written Consent

Sometimes, you don’t want to hold a meeting for everything.  Thus written consents step in to save your time.  This is especially important for startup corporations, where the founders cannot be burdened to call a meeting for every non-controversial issue to act.  Moreover, with the advent of Internet and tech companies, there may be shareholders in Hawaii, California, and Washington of a single company.  Therefore, it is best to act through written consent, especially when there is agreement among all the shareholders.

However, even if all the shareholders do agree, going back to what I mentioned earlier in this post, you still want to record your acts to be in corporate compliance.  Also they are great tools to deal with after the fact that you messed up on Notice, and did not have a proper annual meeting.  Having all the shareholders sign a consent form will serve to fill the gap of the messed meeting.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

What’s with All this Paperwork? Part IV Operating Agreements

Pardon the gap in my weekly posts, but I was away and setting up my new office.  This week I will be picking up right where I left off as we survey the documents that a startup founder will likely see as they launch a new business entity.

Quick Recap

Last time, I left off with the corporate bylaws.  Recall that a corporation must have bylaws, which is one of the formalities that face a corporation.  Remember that a LLC is a much more flexible entity and need not have an operating agreement, but will default to the rules provided in the statute.  For more on the differences click here.

So Why Draft an Operating Agreement?

Though you technically don’t need an operating agreement there are two practical realities that you face, which is why should get them drafted anyway.  (1) most major banks and financial institutions, as well as any possible investors (though usually they prefer corporations) will want to see your operating agreement.  (2) If you have a multi-member LLC the default rules are just that, they are default, and they may not capture the business relationship you have among your co-founders.  Further, I have recently had several clients lament to me they wish they had taken advantage of the flexibility of a LLC for getting rid of a lazy partner, getting a better handling of the profit/losses and distributions for tax reasons, etc . . . .

Shameless Self-Promotion: Read My One-Sheet!

So I provide this handy-dandy one-sheet that provides a topical overview of the LLC’s operating agreement.  I urge you read it when you have time.  However, as I appreciate you reading this post, today, I would like to cover things not in that one-sheet.

What is NOT Flexible for Laws Governing Operating Agreements?

So, while many people extoll the virtues of the flexibility of the LLC many people do not know what are the default provisions that cannot be changed by the written agreement.  They are non-waivable provisions and I have run into instances that one or a couple members of a startup would like to oust a lazy member, or someone tries to pull a fast one by drafting the operating agreement this not allowable by law.  So I’d like to cover two areas that come up from to time to time.

(1) Access to Information

When you are a tiny company with 2 or 3 founders trying to navigate your way in a deluge of information, massive competitors, and high costs it is easy to get lost in doing what you have to do and one founder takes over recordkeeping, in some ways becoming the overprotective librarian that does not want to let the kids borrow the books from the library.  This is not possible in a LLC.  No member may unreasonably restrict a member’s right to information or access to the records relating to the LLC’s business or its affairs.   Further, the member or the member’s attorney has every right to access the records so that they may exercise the rights and know their duties under the operating agreement.  So they must have the opportunity to inspect and the ability to copy records during ordinary business hours.  However, for the expense and time the LLC may impose a reasonable charge for furnishing and making copies of the records.

(2) Expulsion of a Member

Similar to family attorneys who oversee a prenuptial agreement and then must face the unpleasantness of divorce, I as a transaction attorney face the same, I happily help founders start their business, but every then and now I face the disappointment that the business relationship does not work out.  Expulsion of a member is  not automatic.  Often times, the interested members of the business just stop talking or communicating with the one they are seeking to oust. Do NOT do that, the member, even if they are lazy or have not shown up for a month, is still a member and has rights.  However, they also have duties.   Thus, the nonwaivable rules provide that the LLC or its members have the right to seek a judicial order to expulse the member for the following reasons:

  1. wrongful conduct hat adversely and materially affect the company’s business;
  2. willfully or persistently committed a material breach of the operating agreement or of a duty owed to the company or the other members or under the applicable law; or
  3. engaged in conduct relating to the company’s business which makes it not reasonably practicable to carry on the business with the member.

Last Word: Records Access for Former Members

This two nonwaivable provisions, which I just wrote about invariably sometimes brings up the discussion of former members.  They were once members and having been expulsed they are trying to clean things on their own end for personal reasons.  The LLC cannot still limit access to the records after they are gone.  However, the former member only has the limited right to access the information to when they were a member of the LLC.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

FAQ: Should My Startup Issue Stock Certificates?

Sorry, no Draw the Law this week (or next week), as I am working on a something important.  I will announce what it is tomorrow. As for today, this is a follow-up on a FAQ that a lot of founders and startup corporations ask me.  Should they issue stock certificates?

Is It Required by Law?

As I said last week, no. In Hawaii, a corporation, through its board of directors (under the authority of the articles of incorporation or bylaws) may issue shares without certificates.  In general, most, if not all jurisdictions, have done away with the requirement of a piece of paper signifying ownership in a corporation.

Even social media giant, Facebook, scrapped its plans earlier this year to issue paper stock certificate to its shareholders.  More and more companies are turning to electronic registration as a way to keep track of shares.

What about the Startups?

It's true large, publicly traded corporations are moving away from the traditions of paper, but does that mean you should.  There are some attorneys who feel you should as it signifies ownership and allows a small group of founders to have a check on each other given the fluidic nature of startups.  Others embrace the digital and just say keep good electronic records and documentation.  Not to mention paper certificates are actually costly to print, which is an added cost your young corporation may not need.

For startups, the founding owners should discuss whether or not they want to issue paper certificates or not.  It really is a personal preference, as some people enjoy having the tangible proof of ownership and nostalgia of the paper.  In fact, Scripophily.com buys an sells original paper stocks for people interested in collecting.  Still others prefer the cheaper method, and just keep an electronic spreadsheet to keep track and just send updates.

If My Startup Decides to Issue Stock Certificates What Does it Require?

Hawaii Revised Statute §414-86 states the following required items to be on a stock certificate if you choose to issue them:

 (b)  At a minimum each share certificate must state on its face:

(1)  The name of the issuing corporation and that it is organized under the law of this State;

(2)  The name of the person to whom issued; and

(3)  The number and class of shares and the designation of the series, if any, the certificate represents.

(c)  If the issuing corporation is authorized to issue different classes of shares or different series within a class, the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the board of directors to determine variations for future series) must be summarized on the front or back of each certificate.  Alternatively, each certificate may state conspicuously on its front or back that the corporation will furnish the shareholder this information on request in writing and without charge.

(d)  Each share certificate:

(1)  Must be signed (either manually or in facsimile) by two officers designated in the bylaws or by the board of directors; and

(2)  May bear the corporate seal or its facsimile.

Last Word

Personally, on a practical level, I do not think you need them, but that isn't a legal opinion.  It just has to do with startup expenses and printing out specialized paper may not be necessary and would only drive up your costs at the beginning when you need to focus on your business model.  However, in some cases it may be warranted, but everyone's situation is different.  Therefore, consider speaking to an attorney to provide advice and their thoughts given your situation on this matter and all that other paperwork that you need!

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

What’s with all this Paperwork? Part III Corporate Bylaws

Last week's post was about the differences between the internal documents of bylaws and operating agreements, and what their purpose is as opposed to the Articles documents.  This week and next, I will take a closer look at the in-depth documents, bylaws and operating agreements, separately and mention a couple things that startups and small businesses should know about bylaws.

Adopting Bylaws are Required along with Certain Provisions

Recall last week that I mentioned as opposed to a LLC’s operating agreement, that a corporation’s incorporators or board of directors MUST adopt initial bylaws for the corporation.  However, what is also required are certain provisions that control how shareholders and directors behave with regard to the corporation.  Further, there are provisions that the owners of the company may consider.

*The Difference Between “May” and “Shall”

I don’t normally give grammar lessons on my blog, but when it comes to business law, especially corporate documents, many people get bored, confused, (sometimes angry), at the tedium of the words we use.  Thus the need for clarity in the matter.

Without getting into the mechanical linguistics of it all, when “shall” is used it is something that you MUST do, whereas “may” gives you the option of doing the act.  I am going to use an example when it comes to Annual Meetings.

You Must Have Annual Meetings, but You May or May Not State the Place of the Meetings

What does that mean?  Let me show you the relevant statute and break it down:

(a)  A corporation shall hold a meeting of shareholders annually at a time stated in or fixed in accordance with the bylaws.

(b)  Annual shareholders' meetings may be held in or out of this State at the place stated in or fixed in accordance with the bylaws.  If no place is stated in or fixed in accordance with the bylaws, annual meetings shall be held at the corporation's principal office.  Notwithstanding the foregoing, the bylaws may authorize the board of directors, in its sole discretion, to determine that the annual meeting shall not be held at any place, but may instead be held solely by means of remote communication as authorized under subsection (c).

So notice in section (a) it states that a corporation shall hold a meeting of shareholders each yeah and that the bylaws shall state that time.   However, notice in section (b) it states that these shareholders’ annual meetings may be in Hawaii or not, and that the bylaws may state this place. However, if you do not state a place it shall be the corporation’s principal office.

Please note that is just part of the “Meetings” statute as it is to the Hawaii Business Corporation Act.   What you should take away from it is that there are some provisions required in bylaws and there are others that you have flexibility with.

Why is this Relevant for People Starting a Business?

Yes, paperwork is tedious, but it also creates accountability and a method of controlling your business.  More often than not with a start-up there is the idea person, the money person, and the person who can engineer/produce/implement the idea.  With three people involved there has to be a way to control how the interact.  Further, once the business develops, the goal may be to seek more investment, and thus new additional owners of the corporation (shareholders) join the entity.  Thus the need for bylaws to dictate how this all operates.

Some Other Typical Provisions that Appear in the Bylaws

These other provisions are in no particular order, and some may or may not appear in the bylaws.  Further some of them may be required, and others just appear as it is customary.  The point for a business owner using a corporation should know that some of these things appear in your bylaws, the way you govern your business.

Sample Subjects of Bylaw Provisions:

  1. Special Meetings (as opposed to the Annual Meetings)
  2. Required Officers, Duties of Officers
  3. Record Date (this refers to what date a record reflects what shareholders are entitled to notice of a shareholders’ meeting)
  4. Number if Directors, Director qualifications and Duties
  5. Notice (how notice is given for certain circumstances)
  6. Stock Certificate Signatures
  7. Restriction on Transfer of Stock
  8. Shareholder Agreements

There are other provisions that more often than not appear in bylaws, but this is just meant as a sample.  Finally, please take heed you should consider seeking an expert’s help when drafting your bylaws, as this is a foundational document of your corporation.  I have seen many founders wanting to start fast and adopting poor or wrong bylaws, and then requiring “cleanup” work, which is often more costly and time-consuming after the fact of initial adoption.

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

 

What’s with all this Paperwork? Part II Bylaws and Operating Agreements, Keep it In the House!

Quick reminder before I dive into this week’s Draw the Law, I have a talk under Pacific New Media on Social Media and that Law.  Check out the info here. So last week I talked about Articles of Incorporation versus Articles of Organization.  Recall, that the former were for corporations, and the latter was for LLCs.  In addition, remember that these series of posts are meant to deal with a startup person’s guide to all the paperwork they have to deal with when forming a company.

This week is all about bylaws and operating agreements, which are internal documents as opposed to last week’s documents, where are what get filed with a state agency, so become a matter of public record.  One of the easiest analogies to get is that if the Articles are the birth certificate, then the bylaws or operating agreement represents the skeleton of the company.

Are these Documents Public?

As stated above, these documents are internal. That being said the government and institutions may require you to reveal them in order to do business.  Certain trades or industries a regulating agency may require the filing of your bylaws or operating agreement to do business. For example, to obtain a liquor license in the City and County of Honolulu a LLC must submit its operating agreement.  In addition, financial institutions, like banks (this is just an example of one local bank and is NOT an endorsement of them) will require you to submit your bylaws or operating agreement in order to open a business account.  Finally, for startups venture capital firms, potential investors, etc . . . will definitely want a look at your business structure and may even require you to change them to protect their interest.

So What are These Documents Used For?

Both bylaws and operating agreements are internal documents that guide the behavior among shareholders and members, respectively, as well as officers, directors, and managers.   The documents are contract, agreed upon by the owners at the onset of the company.   Therefore, if the rules are not abided by an offending shareholder, member, officer, director, or manager a breach of contract claim may exist for them not following the rules.

Do I Need to Have these Documents?

This question should show how LLCs are more flexible whereas corporations are more formal.  You must adopt an initial set of bylaws for the corporation you form if you are an incorporator or part of the board of director.  However, with the LLC you may enter an operating agreement with fellow co-members, if you don’t you will have the statute as your default rules for guiding the LLC.  This is one of several differences between the corporate structure versus that of a limited liability company.  As stated in previous posts and my law talk, corporations tend to be more formal, but sought after for startups due to investment and tax benefits whereas LLCs are used for their flexibility and ability to be less formal (thus less administrative costs), and that these differences can be seen when drafting these internal documents.

A Word on Negotiating and Drafting these Documents

Many times, startups and small business co-members like to create their own bylaws or operating agreement without an attorney.  What should be realized about this is that in both cases there are certain provisions that are not waivable.  Further, due to the formality of the corporation and the flexibility of the LLC the distribution of ownership, allocation of profit and losses, etc . . . is not necessarily something that should be done without advice and consulting.

In addition, many of people try to only use one attorney to draft a document that reflects the interest of people coming together for an endeavor. What they don't realize is that is basically intended to be a long-term business deal and sometimes genuine disagreements amongst the starting owners of the company may force each of them to get an individual attorney to negotiate on their behalf.  Another misconception many people have is that they must adopt Robert’s Rules to guide their meetings in their bylaws or operating agreement because they see it on television or see another organization using them.  Remember I said that these documents are a contract?  Consider that if you fail to live up to your own agreed upon rules you are in breach of the company’s internal guiding document.  Finally, consider that these documents are NOT set in stone and operating agreements and bylaws usually have a method to amend them. Whether the process to amend them is easy or not is up to you.

On a personal note, I would like to impart I have dealt with several companies where the people started out friends and thought they could have an informal situation and ignored their own bylaws or operating agreement.  Then a falling out occurred, and well let’s just it was ugly. Others have tried to draft them on their own with disastrous results not realizing further legal work needs to be done when they want to sell the business or attract investors.

So next week, I will tackle bylaws, and some specifics about them, and the following week after that I will tackle operating agreements.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

What is all this Paperwork? Part I: The Difference between Articles of Incorporation and Articles of Organization

So this is continuing the trend I started two weeks ago, as I realized Startup Weekend Honolulu was approaching, and a lot of first time startup people have frequent questions.  By the way, other fun events are coming up in Honolulu (with me speaking or people who are more entertaining because it is not with legalese speaking), so check out my calendar later this week for information on them. Anyway, I spoke about the differences of trade names, trademarks, and trade secrets as it is a source of constant confusion for people starting up their business.  I’ll be honest, it actually is still confusing even for people who have been in busy for a long time and should know the difference.

Today’s topic is one that I discuss during my business entity formation talk.  Today’s post is much more abbreviated, but it’s goal is to clear confusion about all that paperwork we attorneys like to make for you when you start a business.  So frequently, when a person gets an idea in their head they know they have to protect it and themselves, so they know to set-up a business entity.  Remember that very first Draw the Law on Limited Liability?  (If you don’t remember or know, go ahead click the links.)  So the only way you get to have a legal entity is by filing information with the state you plan on doing business in.  Therefore, in the State of Hawaii you turn to the Department of Commerce and Consumer Affairs to file your Articles of Incorporation OR Articles of Organization.

What’s the Difference between the Documents?

Articles of Incorporation are filed for a corporation whereas Articles of Organization are filed for a limited liability company.  They are similar documents, but the wording indicates what the entity is which for let’s say transfer of ownership, buying-selling the business, matters for tax consequences and other important aspects of a business deal.  I always tell people it’s like your business’s birth certificate. Once filed and registered with the state your company is born and can do business.

 

What Information do these Documents Contain?

Your articles contain information about your company that is accessible by the public.  It’s things like your mailing address, who owns the corporation, if there is corporate stock, or if your limited liability company is managed, and if there is a registered agent for the company.  All things you have to discuss with your co-founders, and usually with an attorney, before you set-up.   Sometimes your articles may also need to contain certain purpose statements like that for a nonprofit corporation OR a B-corporation.

What’s the Difference for between Articles and Bylaws/Operating Agreements?

Articles of Incorporation or Organization, depending on your entity, MUST be filed with the state you are transacting business in (*note it is not the same department or agency as it depends on your state, so check with your local government).  Therefore, you can kind of think of it as an external record, your business exists and the whole world now knows it.  However, bylaws and operating agreements are INTERNAL documents. You do NOT need to file them with the state. They are your agreements with fellow co-founders and how you operate internally.  I will follow-up next week about their differences between each other, and then individualized posts on each document.

So that is a good place to leave off for this week.  Next week, I will focus in on those internal documents, the bylaws and the operating agreement and the differences between the two and addressing some of the more frequently asked questions about them.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

It’s all About the Trade, Part II: What Constitutes a Trade Secret?

Congratulations to all winning teams at this past weekend’s Startup Weekend Honolulu.  I look forward to meeting you all. Good job by The Box Jelly for hosting a great event! So last week was trade name versus trademark.  Today is another area that a lot of startups get confused.  They find a programmer, designer, consultant, and other similar professions to help them bring their idea to reality, but want them only as an independent contractor, and if they have enough capital, possibly an employee.  However, no ownership, thus how do they protect their most sacred moneymaking idea that they slaved over a weekend trying to pitch?

Make them sign a nondisclosure agreement (NDA), is usually the first conclusion, then when a Client comes to me to draft them a NDA. I then ask them what they want to protect with the NDA, and they then to proceed to tell me everything including the kitchen sink . . . isn’t everything internal a trade secret?

No, just because you don’t want your competition to know does not make it a trade secret.

So What IS a Trade Secret?

Where we start off with trade secrets is the legislative definition, which is found in Hawaii at HRS §482B-2. This is the definition section under the Uniform Trade Secrets act and it states the following:

"Trade secret" means information, including a formula, pattern, compilation, program device, method, technique, or process that:

(1)  Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(2)  Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

So right off the bat, the definition indicates why a lot of business owners feel they have a trade secret.  Their information is precious (to them), they created a “new” “method” or “technique” (which was tried already and the market doesn’t think it is valuable), etc . . . . As you can tell by my commentary in the parentheses a trade secret has to be more.

Let’s use the famous example of a trade secret The Coca-Cola Company’s formula for coca-cola. First, it satisfies the first element. It’s a formula.

Second, the formula must have an independent economic value from not being known. In this case, it is clear that it does. No one has successfully replicated Coke’s formula AND it’s major rival Pepsico does not have the same formula.  Through its distribution deals and keeping the formula unattainable by normal means (such as experimenting) they have built a beverage empire.

Lastly, Coke has kept this secret for so many years, which supports the last element, which is the efforts to maintain secrecy.  At this point it may be beyond reasonable, but the efforts by Coke to maintain the correct amounts to the formula are legendary.  From bank vaults, to shopping around to different suppliers, etc . . . you name it, they have probably created an elaborate strategy to foil would be corporate spies.

What does this Mean for a Startup?

If you want to make a sound NDA, then you need to know what your company is all about.  Before, you think that is easy, remember you have gone around itching the idea to get investors, employees, etc . . . what have you told them?  Remember it’s a balancing act of trying to sell the idea without giving up the process, the secret has to be generally not know.

This brings me to another situation where people rely on public data, government information, etc . . . I will give them they have come up with a clever way to put disparate knowledge together, but if someone can readily replicate that “cleverness” on their own their really isn’t anything to protect.

Finally, the shotgun approach to NDA use should not be your method of maintaining secrecy.  Medium and large companies go overboard and have their janitors sign them when the have no intention of enforcing it against them and they aren’t privy to the company’s core secrets.  So for you, don't make everyone you come in contact sign it, especially investors. They aren't going to do it.

The rule of thumb is what your trying to protect your core strength and are you deriving that strength because no one else has figured it out.  This includes things like next year’s marketing plan, your competition not knowing how you will expand your product lines is a) valuable b) it is not known and c) if you are keeping it under lock and key, encrypted files, etc . . .  then you do have a trade secret. Obviously, it will no longer be a secret as to when you role out these new product lines, but before that time you need they are worth protecting. Then on the NDA side you only make people sign one if they can make use of your idea on their own (i.e. an engineer who knows the process to make a new material).

Anyway, the lucky winners from Startup Weekend Honolulu will get this information in a lecture and more regarding contracts, HR, Internet laws, and organizing their company as part of their winning package as provided by my firm.  So I urge you participate in Startup Weekend, as you may be the one asking, can I protect my business idea?

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

It’s all About the Trade, Part I: Trade name vs. Trademark

Last week, I discussed equitable remedies in breach of contract situations.  I would like to shift gears for a while and do some information specifically aimed at startups, as this upcoming weekend is Startup Weekend Honolulu at the Box Jelly, coworking space.  If you have not signed up, you can check out the info here, and recommend trying it once as it is a very unique experience and you meet a lot of people. My goal with the next month’s worth of posts is to deal with frequent misconceptions by people who are starting up their business.

Anyway, this post and the next one is aimed and clearing up some of the notions about the various “trade” legal aspects. Namely, I will be discussing the difference between trade names and trademarks, and what is a trade secret. I frequently run across clients and people who are very confused when they first start out their business and it is crucial for your legal protection of your business that you get the differences.

Trade Name vs. Trademark: Explaining the Difference

A trade name is NOT the same as a trademark.  While, both are definitely a part of trade and business they both operate and serve different roles.  Let’s use an example to walk through the way these two legal concepts are different.

Let’s say Mr. Joey Nakamura wants to sell his specialty brand of shave ice.  Let’s say Mr. Nakamura ignores my very first Draw the Law post, and does not want to create some kind of business structure with limited liability.  Therefore, he is a sole proprietor, but he does not want to sell his specialty brand of shave ice under his personal name.  So he registers a trade name and does business as JN Specialty Shave Ice.  This is his trade name.

While, developing his shave ice Joey then decides to create several unique flavors that are his signature products.  So he creates the Joey Jabuticaba and Nakamura Nectarine and begins packaging and labeling the bottled flavors as such.  These products in the marketing world are his brand names, which are advertising and marketing terms, but in the legal world these are his trademarks.

Thus the difference is a trade name functions to identify the particular business, and for a lot of people they know this as “doing business as”, but the concept actually includes corporate, llc, partnership, and fictitious names.  It is simply the name you are using to identify your business.

Trademarks, are any words, names, symbols, or devices (or a combination of those things) that are used to identify and distinguish your goods from those of others and to indicate the source of the goods (or services for service marks), even if the source is unknown.

Where the Confusion Comes In

Why do people mix these two up?  Well, it is very easy because many businesses use their name to identify their goods and services, for instance here in Hawaii, “American Savings Bank” and “Hawaiian Airlines” both are a trade name and trademark.  Your name can function both as a trade name and as a trademark, so long as it does not infringe on the rights of another.  Furthermore, a single business can own dozens of different trademarks to identify their various brands.

Why is the Distinction is Important?

Well, for some starting businesses they start out and register a business, then want to use another name.  Therefore they register a trade name thinking they are protected from trademark infringement.  As shown above, they are different and function so.  Further, when you start using your trade name you may be giving rise to trademark infringement on your part.  That’s right your name may be causing confusion in the marketplace because it may exist as someone else’s registered trademark.   At that point you would have to get a new name, which as experienced marketers will tell you is a blow to your marketing strategy and will force a costly re-branding.

So be careful when choosing your business name and be careful on how you market your product or service. See you next week, when I talk about trade secrets.  Startup competitors I'd definitely say you might want to check that one out as well.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

DRAW THE LAW: CONTRACT DISPUTES – EQUITABLE REMEDIES

So last week I rounded out the discussion about what you can expect in terms of damages from a lawsuit. Just a brief recap, there will be no punitive damages via a penalty clause in the contract and it is possible other statutory damages may be available based on what the situation is for the breach (was there any fraud or misrepresentation?). This week I will focus on what are known as equitable remedies.  The prior discussions on damages are legal remedies.

What’s the Difference between Equitable and Legal Remedies?

My goal is not to turn you into a legal expert, but you should understand there is a distinction between the two. I will be brief. Generally, legal remedies provide for monetary damages as was discussed in the prior posts.  However, equitable remedies deal with the notion of equity or “fairness”. Equity remedies were created to deal with situations where the rule of law’s answer was too harsh (i.e. monetary damages were not enough). Therefore, equitable remedies care more about a particular person’s knowledge and their state of mind and motive. These things go to whether or not a court will grant an equitable remedy.

Why are Equitable Remedies Important for Delaware Corporations?

In general, most states in the US have granted their courts merged powers over equitable and legal remedies (that is you can go to court and ask for both where appropriate). However, of significant note to startups, Delaware’s Court of Chancery remains separate as a court of equity, therefore you would go there to receive equitable remedy. This is significant and why some people suggest that when you intend to go the startup corporation route seeking to do a public offering you incorporate in Delaware due to the significant experience and knowledge that this court of equity provides.

The Equitable Remedies for Contract Situations

Since we are focusing on a contract matters I am only going to talk about 3 equitable remedies, but know that for the variety of situations that a lawsuit might arise out of there are more.  The 3 are as follows: (1) specific performance; (2) rescission; and (3) rectification.

Specific Performance: Make the Wrongdoer do What was Agreed Upon!

Specific performance is as it sounds. The court will order the wrong party to do something. Typically, in contracts this becomes an appropriate remedy when the subject it in question is unique and no other remedy is available.  For example, if the seller fails to deliver a valuable painting by a specific artist.  What you should note is that this almost a goods-specific remedy, as a court will almost never force a person to do what was agreed upon in a personal services contract.  For example, forcing a singer to sing when they ditch out on a concert.

Rescission: Banish this Bad Contract to the Void!

This remedy is basically terminating the contract and putting the parties back in the position they were before the contract was agreed upon.  Basically, it is kind of like those time-travel alternate reality type of movies.  We treat the situation as if it never happened (in legalese this is known as void ab initio).  Common situation is where insurers will rescind an insurance policy due concealment, material misrepresentation, or breach of warranty.  In this scenario, the insurer will send the insured a notice and send a check in the amount for the premium paid back to the relevant policy period.

Rectification: Judge, Fix the Contract!

Rectification (more commonly known as Reformation) basically is the court rewriting the contract to reflect what a written document should have said in the first place. Typically, there is a situation which is known as unilateral mistake where one party mistakenly believes a term or provision is in the contract, and the other party is aware of this mistaken belief and the mistake is to the benefit of the second party knowing the error.

Bottom line: Remedies of Last Resort

Understand that equitable remedies are not the court’s first position.  We place significant value on parties of full capacity to bargain out their contracts.  Therefore, to force someone to do something (which goes against the theory of “efficient breach”) or for a judge to tear up the contract or edit it is not taken lightly.  In most contract breaches, your first stop will be damages, and you only get to equitable remedies if that is not enough and unfair.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Draw the Law: Contract Disputes - Types of Damages, Part II

So last week I discussed about the main types of damages that you would likely ask for in a breach of contract lawsuit. While that post covered compensatory, consequential, and liquidated damages there are few other types of remedies in a lawsuit that you should be aware of when you enter into the calculus of whether to sue or not, or if you are entering into a shaky contractual relationship that may expose you to the risk of a lawsuit.  So let's get to it for this week!

Penalty (Punitive) Clauses: Don't Hide Masquerade Them as a Liquidated Damages Clause

So remember last week that I mentioned that a often times in sophisticated contracts that the parties know what is the value of the deal, and would like to prevent the other side from non-performing.  Many times this clause is a Liquidated Damages clause that says if Party A does not perform it will owe Party B X amount of dollars because of non-performance.  Sometimes, overzealous business owners, fearful that a valuable deal will go under try to turn a Liquidated Damages Clause into a penalty provision.  They would rather punish the other side for their non-performance. Penalty (also known as punitive) damages are virtually NEVER enforced.

Let me say this in all caps to be clear: A LIQUIDATED DAMAGES CLAUSE THAT IS ACTUALLY A PENALTY CLAUSE WILL NOT BE ENFORCED UNDER HAWAII STATE LAW. Kona Hawaiian Assocs. v. Pacific Group, 680 F.Supp. 1438, 1449 (D.Haw.1988). Furthermore, under Hawaii law, liquidated damages contained in a contract can only be enforced if there is a "reasonable relation" between the liquidated damages and the amount of the party's actual damages. Shanghai Inv. Co. v. Alteka Co., 92 Hawai'i 482, 993 P.2d 516, 528 (2000),

Bottom line: when calculating how much the deal is worth to you and reducing it to a written agreement be "reasonable" in your assessment of what the other side will owe you in non-performance, as you don't want to pay for an expensive contract that is not going to be enforced. Also don't let emotions get the better of you, as you trying to put the hurt on the other side because they broke the deal and it will hurt your honor is not something that is a part of contract law.

Statutory Damages: The Government is on Your Side

Statutory damages are legal penalties . . . I know what you are thinking, he just wrote that you can't get punitive damages.  Yes, that is absolutely right under contract law.  However, in many instances the breach of contract is not the only claim that is brought in a lawsuit.

A good attorney gave me a great analogy for the way the court system works.  The goal of the plaintiff's attorney is to throw a plate of spaghetti at the wall, this represents the claims that the injured party (the plaintiff) is making against the other side.  The goal of the defendant's attorney is to take the spaghetti off the wall, that is defend from each claim and argue why they should not "stick" to the defendant.  Let me add to this analogy, imagine that the noodles represents certain kinds of claims (in this case contracts) and the meatballs are another set (torts).  Without getting into further legalese, suffice it to say each claim works in a different way, and if the plaintiff's claims remain successfully "stuck" on the defendant's wall, they must pay.

For contract claims, we have already gone through the four.  However, as I just said you will likely not just see a breach of contract claim in an expensive lawsuit.  A plaintiff will likely bring in other claims, such as fraud, misrepresentation, interference of contractual relationship, etc . . . . All of these claims are not ones directly on the contract, but the surrounding facts that could be argued that the defendant owes the plaintiff more.  You see the government has created some of these laws (statutes) to deter certain kinds of behavior. The government, for the sake of business health, it would rather not see people lie or intentionally damage the other side's reputation. Therefore, statutory damages represents a deterrence and compensation.

Bottom line: the facts in a breached contract situation may give rise to statutory claims due to the other side's misdeeds,but these are NOT a part of the contract law. Notice, that for all the contract damages you can only recover so much (as they are stipulated under the contract), but non-contractual claims are not bound by the agreement, and may give the non-breaching side greater damages.

That's it for this week. Next week we will cover another set of remedies, such as can you make the court force the breaching side to actually perform under the contract as originally agreed upon?  See you then!

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

RETURN OF DRAW THE LAW: CONTRACT DISPUTES - TYPES OF DAMAGES, PART I

So the contract has been broken and you have gone through all the prior posts on this subject matter: ADR is not working, the threat of nonpayment won't get the other side to perform, and they stopped talking to you. So you are left with a lawsuit to try and recover, but what can you recover in terms of damages? Today's post is all about the types of damages that you may be awarded in a breach of contract lawsuit. So seeing as Draw the Law has been a long vacation, let's dive right into it.

General: Damages

In general, damages are awarded in a lawsuit to the party that brings a claim and successfully makes that claim under the facts of the case. The most typical type of award is money.  The rules vary based on the type of the claim, and as exemplified by the recent ruling in the Apple v. Samsung case the assessment of damages can be complicated (see the sheet the presiding juror had to fill out here).  If you are curious how the breakdown of that patent infringement case came out here is a helpful link.

For today's discussion, I am only focusing on a breach of contract claim.  There are other claims and types of damages, which I will follow-up with in Part II, but for today it is all about the other party did not live up to what was in the agreement and what it will cost the other party for breaking its promise.  Therefore, the most common damages we are concerned about are compensatory, consequential, and liquidated.

The Most Common: Compensatory

Compensatory (also called expectation) damages are the most commonly awarded in a breach of contract suit. The concept is simple: what amount of money would put the nonbreaching party in the position it would have been if the breaching party had performed under the contract?  The rationale behind it could not be more simple as well, we want to give the nonbreaching party the benefit of the bargain, therefore we make the breaching party pay for not living up to the promise.

Example: Let's say Ron accountant contracts with Annabel web marketer and consultant to do his web marketing and drive his SEO up for fifty-hours at a favorable rate of $50.00 an hour for 1-month. Therefore, he owes her $2,500 for her web marketing services.  If Ron breaches the agreement, Annabel would expect $2,500 as her compensatory damages, which is the economic loss she suffered.

Now, let's reverse the situation, if Annabel breaks the contract and Ron has to get a new web marketer. To replace her and the new person costs $70.00 an hour for a total amount of $3,500. In this case, Mavis would owe Aaron $1,000. Why?  It is the difference from the benefit of their bargain, $2,500 and the amount he had to spend to deal with her breach, $3,500.  Therefore, a $1,000 from her would put him in the position of the original bargain where he was only going to pay to Annabel $2,500.

What Flows from the Breach: Consequential

Consequential damages are what would be received from all the harm caused by the breach in the contract.  One way to understand this concept is think that the original breach as the starting point of the damages (compensatory), but as many of you business owners know you order product and services in-turn to drive your own business goals. You order parts to build machines, you use web marketers to deliver your message, etc . . .  in order to make a profit.  If there is a delay in your goods or services you are expecting it causes more loss down the line.  These losses stemming from the breach are consequences of the breach, thus they are the consequential damages.

Example: Let's continue with Aaron and Mavis as the example situation.  Aaron has told Mavis that he needs her services because he will be rolling out new services, in time for filing income tax returns, and he knows these service will generate an additional $3,000 in revenue. If Mavis breaches, and Aaron cannot announce his message on services in time, she will owe in addition to the compensatory damages, $3,000.00 in consequential damages.

Built-in: Liquidated

Liquidated damages is a very simple concept, what is the the amount of money built into the contract in the event of a breach?  That amount represents liquidated damages.

Example: Aaron and Mavis agree that Aaron's assessment that he will receive $3,000 in additional revenue thanks to the new web marketing campaign over a 30-day period.  Therefore, Aaron makes Mavis agree to a damages clause, stating each day late from the day she is to deliver is $100.00 a day. Therefore, if she is delayed in implementing the web marketing campaign by 5 days, she owes Aaron $500.00 in liquidated damages as stated in the agreement.

Last Word: Limiting Damages

With consequential damages and the ability to build in some sort of formula into a written agreement there is definitely a way to limit damages for a breach.  This is sometimes an effective tool in allowing parties to purposefully breach and pay a known quantity for breaching.  In addition, with consequential damages no party wants to be responsible for everything that happens if they fail to live up to the agreement.  Contractors are keenly aware of this as someone who installs your electricity, water, and the like does not want to be on the hook for loss goods that need be refrigerator, damaged carpets from leaky points, and other nightmarish scenarios.  So usually, there is a warranty in the contract that specifically excludes consequential damages.

The way damages are calculated are always of concern in a business deal because you always should have in the back of your mind, what if this doesn't work out or what if something more lucrative comes along, should I breach?  If you have a firm calculation it might pay to breach the contract and pay the damages or in negotiating you feel that the value of the benefit is too low or too high based on the risk of a breach.  As always, seek expert help or outside information when calculating for these things.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

NOTICE: RELAUNCHING OF WEBSITE - WWW.HAWAIIESQUIRE.COM

UPDATE: WEBSITE RELAUNCHED (9/4/2012)

So to all my clients, readers, and friends, thanks for bearing with me on the delay! I wanted to get this new site to you as soon as possible, but have been swamped with work! Very grateful to have new clients who are understanding and work with me on helping their business objectives become realities.  So a lot of new content and features on this site, as opposed to my old site.  Please look around and get a feel for the site, especially if you are a small business owner or entrepreneur I would like you to have this become a resource and tool for you as you consider the legal aspects that touch upon your trade or industry.

As always, I am appreciative of meeting new clients and remember the initial consultation is always free up to an hour, and I am happy to meet with you in-person, talk to you over the phone, or type up a thoughtful email.

Please enjoy my new website and its content.

Mahalo.

-RKH

P.S. Some functions and features are disabled at this point and will be rolled out later. Also pardon some of the graphical errors, as I am also my own graphic designer for a lot of the pictures you see on the site. Bear with me as I fix the kinks.

--END OF UPDATE--

-- PRIOR POST BEGINS--

(8/9/12)

Dear clients, readers, and friends I am letting you know that starting next week I will begin migrating content from www.hawaiiesquire.wordpress.com to www.hawaiiesquire.com. This represents a disruption in my posting schedule and you will not see new content from me on both sites (old and new) for 2 weeks.

While I realize that may seem simple, I assure you that my friends in the tech community have long advised that I do this and my awesome IT and web management crew are working hard to do it as soon as possible. Expect to see a better user experience, which means more resources and content to be useful for small business and startup owners.

In the meantime, please continue following me on Facebook, Twitter, and Linkedin, as I will be doing frequent updates through those social media avenues - I will be doing another speaking event soon, so please follow, as it will be a good one.

Finally, I would like to say that wordpress.com has been a great home to my website and blog for over a year. I highly recommend those of you starting a business to do a blog and a website if you are not savvy enough, and start here, as they make it easy and accessible. It has definitely made my practice better and gives me a unique voice in the crowded field of legal services.

So I will see you all soon again and please favorite, bookmark, subscribe, or just write a note to yourself to in the future go to www.hawaiiesquire.com.

Mahalo!

-RKH

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Draw the Law: Contract Disputes, Breach Remedies - the Lawsuit

So talking it out has not work, denying payment isn’t getting them to perform, the mediator cannot get you two to sit down and compromise, your last stop is suing for breach of contract.  Before I go any further, the importance of this topic cannot be misunderstood for small business owners and startups.  For those two groups, my main target audience, you are almost always in precarious position, as many times you do not have the resources to pursue costly litigation, and if the other party is a big company (they usually almost always realize this to be the case). So let me be clear, today’s post, as all my post have been, is filled with general legal information.  Nothing here in this post is specific advice, your situation should be reviewed with an attorney, and when it comes to considering a lawsuit they can render specific advice to your situation to allow you to think about the pros and cons of such an action.

Does the Breaching Party Even Have Money? Do you have the Time and Money?

One of the first considerations for a lawsuit is it even worth the time for you to pursue a suit?  If the other side did not perform because they are having financial troubles they may be heading to bankruptcy, which means they have bigger headaches to concern themselves than performing under your contract.  In addition, consider that if they are going to enter bankruptcy your contract will not be valid.

As I have done at some of my speaking events, consider the business a box and that box is held up by a series of strings. Those strings are contracts. When a business enters bankruptcy only special creditors will be able to collect (i.e. the strings remain attached to the box). All the other strings are cut. So typically, in your small B2B contracts you are not in the habit of secured financing, therefore it is likely you will be able to collect anything from your now bankrupt breaching party.

In addition, consider the amount of time and money you are expanding for the value of the breached contract? This infographic on Mashable shows how valuable your time is and consider that in a lawsuit: a) you will be dealing with attorneys; b) you may have to produce documents for evidence; and c) you have to be a witness.  All of this takes time and money.

Finally, consider that your situation may be one can be heard by a Small Claims Court. In Hawaii, Small claims are handled in an informal process, where people with small claims can turn to this court for claims valued under $5,000.00 and counter-claims (counter lawsuit) for $25,000.00.  For more information click here.

What does the Contract Say?

Ok, so you determined they got enough cash/assets for you to grab in winning a suit and you have the time and willpower to go after them.  What next? Before you even get there, your attorney is going to ask to see the contract.  Why?  Well, take a look at my Boilerplate Blurbs (as well as if you have attended my talk on Basics of Contract Law), and you will see large time place of suit, how much you can recover, what type of laws govern, etc . . . are already built into the contract.  Therefore, if you pursue in the wrong venue your claim main be dismissed.

Therefore, do not take these clauses lightly. The “Miscellaneous” provisions become the important ones in a breach of contract lawsuit or when one side is considering using a threat of a lawsuit to get the other side to perform. While, I cannot stress enough that an attorney should draft and at least review your agreements – I understand with small business owners and startups that may be too costly.  I still say you should get something in writing, consider turning to Docracy or other sites to have a starting basis for your agreements. In the end, it is better to have something reduced to writing rather than it being a “he said, she said” matter.

The clauses of the contract, your resources (time and money), and their resources (money), and the possibility of suing you back (remember nonpayment may be grounds for a breach by you) are all things you need to consider before suing. An attorney can help you discuss the pros and cons of pursuing a suit. These are not things to take lightly and are a harsh reality of doing business.  You may one day also find yourself in a breach of contract suit situation. Therefore, it’s always good to have an attorney to reach for when building your business as you are bound to make mistakes. Your local bar has a reference resource, and you can find Hawaii’s at this link.

As lawsuits are lengthy affairs, this post is broken into two parts.  So come back next week and I will discuss the type of damages that come under a breach of contract lawsuit, other types of remedies, and a few other things to consider.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Draw the Law: Contract Disputes, Breach Remedies – Alternative Dispute Resolution!

Practice Updates: Business Entity Formation Talk Tomorrow (August 1)

Hey everyone, sorry for the week delay, but the talk on Basics of Contract Law was fun and went well with Docracy. I hope to do this talk again in the future, as it is clear a lot small business owners, startups, and freelancers do not have a firm grasp of what they are getting into in business deals.

Bottomline: You are NOT a consumer, so you do not have the same protections as consumers do when you are a business owner.

Next, thing, I have a talk tomorrow night (August 1st) at the ING Direct Café in Waikiki from 6-7pm. This talk is on Business Entity Formation, and will mainly focus on the differences between LLCs and Corporations. So come learn the pros and cons, and what might be appropriate for your business. This talk is free.

Today’s Draw the Law: Using ADR to Remedy Your Contract Breaches

We all know how costly lawsuits can be, and sometimes the value of the contract is just not worth going toward that direction. Therefore, many times the best way to resolve the breach is to talk it out, but sometimes you are too close to the deal. You need a third-person to look at the situation and come to a decision or help resolve the dispute. This is where alternative dispute resolution (ADR) steps in.

There are two types of ADR: (1) mediation; and (2) arbitration. They are NOT the same process. In addition, you can put in an ADR clause in your contract to determine what the procedure is in a dispute. It can be one or the other, it can be both, or it can be neither. This is a negotiation matter.

Mediation: No Judging, Just Identifying the Problem

In mediation, a mediator does not act like a judge. Nor are they the lawyer for either side. All they do is help both sides resolve disagreement by identifying and defining the items you disagree with. The goal here is cooperation through informal and problem-solving processes, and is NOT adversarial. Generally, this is suitable for divorces and neighbor-to-neighbor disputes, but can work out situations among business partners, customers, and misunderstandings that need clarification.

If you are curious for more information and our in the State of Hawaii, go visit the Mediation Center of the Pacific‘s site by clicking here.

Arbitration: Informal Court

Arbitration functions like an informal court proceeding. On the one hand it is more formal than mediation, but less formal than going to court. It is usually faster and cheaper than a lawsuit because it eliminates many of the processes of formal litigation and trial work. Everything is sped up.  Typically, the arbitrator is a former judge, but has extensive knowledge in your trade and industry.  They will take in witnesses and evidence, and then issue a written decision. More often than not this decision is binding on the two parties; if you lose in arbitration, you may not be able to go to court even if you disagree with the outcome. Usually, to be binding, you and the other party has put in the ADR clause that arbitration will be binding.

Last Word: Partnership Agreements, Operating Agreements, and Bylaws are Contracts!

I think one thing I want this post to impart, and the fact that I did a Basics on Contract Law talk and have a Business Entity Formation talk coming up is that people who join together to start a business is that the internal document that guides the arrangement, whether a partnership agreement, operating agreement, or the bylaws, they are contracts.

Why is this important? Because many times the owners of a business get into arguments or disagree, and sometimes there is a breach of the internal agreement. At that point you have to ask yourself: Do you want to sue your business partner?

Sometimes, the answer is yes, but sometimes the answer is ADR is the better solution and remember you can always use ADR clauses or agreements to force everyone into this less costly route than a suit. You may save money and your business venture.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.