IVAN HOFFMAN, B.A., J.D.
Today, perhaps more than ever, private laws are essential. Contracts are private laws. Legislation and case law have always lagged behind most business developments but today, with the instant technological changes taking place even as you read this, it is impossible for the courts and legislative bodies to do anything but react with after the fact interpretations. Additionally, because today’s business environment is global in reach, it is never all that clear what law applies, even should some law exist. The Internet, the vertical and horizontal integration and cross boundary nature of businesses make this the day of the deal, the time of the private law.
It is thus essential for the contracting parties to make their own law governing their relationship so that vagaries can be made certain and holes in the cloth of the laws can be filled in. Courts will almost always honor the private laws that are made by the parties in agreements except where the contracts are for some illegal purpose or where, for either statutory or public policy reasons, the courts decide that either the contract as a whole or some particular provisions should not be given effect. But these exceptions are not the rule. Therefore, in most instances, the parties are free to structure their business arrangement in a way that suits the needs of the transaction and can feel reasonably assured that their expressed intention will be honored should it be necessary to litigate the agreement.
However, it has been my over quarter century of deal making experience that the more detailed an agreement is, the more clearly it reads, the less likely it is that in any dispute the parties will seek resort to expensive and time consuming litigation. If the contract directly speaks to the point, there is less chance that one or another party will seek some other interpretation by a trier of fact. Contracts are supposed to solve more problems than they create and by focusing on the specifics of the transaction and covering those specifics with great detail the parties actually prevent disputes. In complex transactions, such as those presented by the Internet and the convergence of media, “simple” and “short” are not necessarily qualities to be sought after. Taking a bit more space to explain the business and legal issues is often both essential and highly desirable. Help me is almost always cheaper than fix me. I have been at both the negotiating table and the litigation table and the former is almost always the least expensive way to go. Spending a few extra dollars to “get it right” in the agreement is likely to save significantly greater dollars down the road.
These contracts, these private laws to which I refer can be a myriad of agreements such as, as but a few examples:
The Entrepreneurial Mindset
And as a result of the need for private laws, there is the corresponding need for individual responsibility on the part of all entrepreneurs to take care of themselves in any transaction. This has always been so but today, because the underlying body of law may not be adequate to cover the entirety of the transaction, that need for personal responsibility is even greater.
And in the exercise of that personal responsibility, it is up to the entrepreneur to either be sufficiently knowledgeable and skillful in both law and deal making or to make certain that he or she is adequately represented in such areas. The mantra for the Y2K and beyond is “Own Everything.” Since no one can know how intellectual properties are going to be used and repurposed, since no one can know where the value may be in a copyright, trademark, patent or the like, owning everything is the key. The entrepreneur should be viewing each transaction in a way that is about gaining the maximum advantage without overreaching. That line is often fuzzy but given that most deals are essentially “zero sum games” in which when one side acquires a right the other side gives up that right, with each side tugging at the rope of deal points, this seems the best way to insure competition. And competition is the key to improvement, both business and personal improvement.
What then, are some of the issues that should be addressed by these contracts, these private laws? They essentially come down, in general terms, to the answer to the question: “What if?” What if this happens and the law is inadequate, then how shall we handle this within this private law? The following is a mere sampling of the issues. Each agreement has to be viewed within the 4 corners of itself and evaluated on a situation by situation basis.
This is, perhaps the most important issue to be addressed by the private law in the contract. Intellectual property rights are today’s means of production and those who control those rights are likely to be the powers well into the next century. And because the interplay of national and international laws, treaties and the like make the issue of who owns what somewhat unclear, the contract should deal in very express terms with these issues.
There should be provisions defining each parties’ contributions in the arrangement and what rights attend those contributions and who shall own those rights and what rights the non-owning party should have in those contributions. If one party owns the rights, does the other party participate in revenue derived from those rights?
And given the wired world in which we live, what exactly is covered by the term “electronic rights?” Read “Set To Fail”.
And along these same lines, what are the markets and territories of any rights of a party? How is this defined and is it defined precisely enough so that in today’s world of convergence, each party knows exactly what they own or do not own so as to avoid legal questions?
What rights attend owning rights? Are there restrictions placed even upon that ownership? Are there non-competition or confidentiality provisions that restrict these ownership rights?
Here too, the “what if” question is paramount. What if someone does not comply with the terms and conditions on their part to be performed in the agreement? What can the other party do? Jurisdictional issues are far from clear on an international basis and whether or not the parties can stipulate to jurisdiction is also unclear but better to have such provisions than not. The parties should provide for where disputes will be heard and by what form of panel, whether court, arbitration or some other panel. The parties can attempt to control their own destiny to a large degree by providing for how compliance is to be secured. Will one or both parties be entitled to injunctive relief to prevent the other party from breaching the agreement in such a way as to make monetary damages worthless? When dealing with intellectual property issues, this form of relief, in which a court issues an order preventing a party from breaching an agreement (or compelling some form of specific performance of the agreement) may be the most important remedy.
I am constantly amazed how these provisions seem to be given scant attention. Provisions should be included that deal with the specifics of when a payment obligation arises and how it is to be fulfilled. Those provisions should cover the rights of both the payer and the payee in such circumstances. What if there is a deliverable but it is not satisfactory and how is satisfaction to be determined? What are the obligations of the delivering party in the event of non-payment? Is payment secured by any instruments such as letters of credit, notes or otherwise? What is the leverage factor of the parties, both the party owing the money and the party doing the work, say in a web design/client relationship?
Every entrepreneur should be considering, even before entering into an agreement, about an exit strategy. This can be a voluntary one in which one party is to acquire the rights of the other party in the agreement or it can be a strategy that considers how the relationship might end should it not work out in the way that either or both parties intended. Thus, the agreement should deal with the specifics of how the parties may terminate, what specific instances trigger an event of termination, the rights of each party in such an event including the rights of each party to the results of proceeds of the business relationship while it was ongoing.
Clearly there are many, many other issues that should be covered by a thorough agreement, a set of private laws that protect both parties. For when the agreement is comprehensive, when both parties’ rights and obligations are set forth so that there are no surprises, no vagaries, no open issues that create enough of a window of unclarity, it seems far less likely that one or the other party would feel the need to litigate and resort to the courts.
But to avoid the courthouse, the entrepreneur must take care of his or her own house. The entrepreneur must understand complexity and seek a simple, private law solution. By spending a bit of time in the beginning, the entrepreneur may be able to make a problem not a problem.
This is the day of the deal. Out of a lack of vision, do not turn it into a nightmare.
Copyright © 1999 Ivan Hoffman. All Rights Reserved.
This article is not legal advice and is not intended as legal advice. This article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article is based on United States law. You should consult with an attorney familiar with the issues and the laws of your country. This article does not create any attorney client relationship and is not a solicitation.
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