Quicktip: Arbitrate Disputes and Save Time and Money

BIG CONFESSION: I’m involved in litigation with former business partners.

As much preaching as I do about business partners having a good quality written agreement, we didn’t have one. You know the story about the cobbler who lets his kids run around with holes in their shoes. My bad.

It’s a long, sad story about how we got here. Mostly it’s the result of strong personalities and differing opinions about how a piece of commercial real estate should be managed.

Hindsight being 20/20, as we now progress into the second year of litigation, a side battle with my first set of lawyers, and generally a lot of aggravation, the dispute has greatly changed my opinion about the use of arbitration clauses in commercial contacts.

In any contract, the parties can agree to arbitrate any dispute that may come up.

Arbitration is a form of alternative dispute resolution (ADR), that allows parties to resolve disputes outside the courts. One or more “arbitrators” are selected who hear each party’s side of the story. The arbitrator makes a decision about the outcome of a case, and their decision is legally binding on the parties.

Once you enter into an agreement to arbitrate, absent a new written agreement from both parties to change the terms of the arbitration clause, courts will not let either party "opt out" of arbitration. By the way, our over-burdened court system LOVES arbitration clauses.

Arbitration can be a lot like achieving a settlement in litigation. Unlike the final verdict in litigation, where there is usually a "winner" and a "loser", arbitration panels take into consideration each party's interests when rendering a decision. Rarely are there ever pure winners or losers.

The downside, of course, is when you are 100% "in the right" and would likely win a claim in litigation (eventually), you could end up with a decision in arbitration for an award that is something less than 100% of what you feel you are entitled to. Also, if you don't agree with the award, you are stuck with it--appeals are not an option in Arbitration.

In my opinion, this is a small price to pay for getting yourself into the dispute in the first place. Most disputes are avoidable by drafting good agreements at the outset of a relationship and picking partners, customers and vendors selectively.

In the end, parties who resolve disputes in arbitration wind up with a final outcome that is fairer and rendered more expediently than in litigation. The result is less time wasted and a fraction of the expense spent as compared fighting battles in court.

When you factor in the benefit of reduced time and legal expense, prudent business people--especially the owners of small businesses whose customers may have deeper pockets that their own--should seriously consider adding mandatory arbitration clauses to all their contracts.

If arbitrating potential disputes is right for your business, I have set up a way for you to get a copy of an Arbitration Clause that you can easily add to your agreements. Go to http://www.ArbitrateClause.com.

Quicktip: What to Do with Your “Corporate Book”?

Back when you formed your corporation or LLC, you probably received a black, three-ring binder with official looking papers and stock certificates. The binder often has a fancy cover and may even have your company’s name embossed on its edge. This binder is your Corporate Book.

It’s been our experience that many entrepreneurs, especially those who bootstrap and organize their business using a low cost legal service, simply put the book as is on a shelf where it collects dust and (frequently) gets misplaced.

Regardless of whether your corporation has one shareholder or hundreds, it is your responsibility to keep a meticulous record of the activities of your corporation. This is part of the process maintaining the “corporate formalities” required to demonstrate that your business is the real deal and not just a sham. These records become very important if your business ever ends up in court and your adversaries try to hold you personally responsible for business activities and debts by questioning the legitimacy of your corporate entity.

We recommend that our clients—even one man armies--have their board of directors approve in writing all material action that is outside the ordinary course of their businesses (like leasing new office space or issuing equity ownership). The written record of the board’s decision is then filed in the company’s Corporate Book.

If your corporate existence is ever called into question, a well maintained Corporate Book will serve as significant evidence that your business is legit.

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QuickTip. Staying out of hot water as a creditor in bankruptcy

PRE-FILING

• Require COD or advance payment or retainers for client projects. • Keep open communications with your customers about their ability to pay. Terminate service as far in advance of filing as possible if they get too far behind on payments.

POST-FILING

• Call a lawyer immediately. Set up a consult, which is usually free, and assess your options.

• Cease all collection activity.

• Consider setting aside any of the debtor's "past due" payments received within 90 days of their filing.

• If you are a party to an executory contract, continue to perform until advised otherwise by counsel.

• File your "Proof of Claim", the document that proves that the debtor owes you money. If you don't file timely, you will be barred from collecting what's owed to you.

• Legal representation can cost $10,000+ for creditors. To save on legal fees, consider teaming up with one or more other creditors to retain counsel jointly.
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QuickTip: Beware of the Small Print in Vendor Contracts

When a business hires a vendor, most times the relationship goes well. However, it is important to know that many vendor agreements have language that could be harmful to your business in the event of a dispute. Allow yourself enough time to review the terms of your vendor's agreement before signing to avoid unforeseen problems in the future.

For example, we hired an interior designer whose form contract would have prevented us from using a paint treatment concept he suggested in any expansion of our office--something that seemed unreasonable to us.

A "form" or "standard" contract that is presented to you by a vendor will be prepared with the vendor's best interests in mind--not yours. You should never feel that you have to accept a vendor's contract as is; you can (and often must) request changes to it.

In our case, we asked if this restrictive language could be removed. Turns out the designer's attorney drafted the agreement and, until we pointed this restrictive clause out to him, the designer never considered the extent to which it would negatively affect a corporate client. He happily agreed to strike the clause.

Remember - more often than not the vendor wants your business just as much as you need the vendor. It is in everyone's best interests to bargain in good faith.

Be skeptical when you review a contract that you or your attorney didn't draft. Let the vendor know you wish to take the time to carefully read the contract, and that you won't be shy about requesting changes to the contract if need be.

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