Internet Destruction of Fair Business Practice & Legal Remedies

by Donald W. Hudspeth, Esq. 

            The Internet is destroying the enforceability of small business contracts.[1]

Here are a few examples: 

Case 1: Painting Company and the BBB.

A house painting company (“PaintCo”) bid on and signed a contract with a home owner to paint his house. The contract had a three day cancelation clause which was not invoked. Instead, the home owner was unable to allow the painting company to perform under the contract because the homeowners association (“HOA”) had to approve the paint type and color. To that end PaintCo provided three different samples of paint over a three month period. Finally, the HOA approved the paint and the homeowner called the painting company to paint the house. PaintCo responded that it would have its scheduler contact the homeowner early the next week to arrange a time and date. PaintCo did call the customer the next Monday to arrange the job to begin that Friday or the following Monday, to which the homeowner replied that he, had found another paint company and wanted his money (the deposit) back.  PaintCo objected, saying, among other things, that that was not fair or legal because the company had a written contract and had performed under the contract in presenting the paint samples, called to schedule the job, was ready and willing to perform, etc. The homeowner filed a Better Business Bureau (“BBB”) complaint (the paint company was a member) saying basically that the customer wanted his money back because he had found a better price.

  

            PaintCo dutifully responded, explaining that it had a signed contract and was ready to perform. The homeowner responded with a diatribe stating, basically, “Don’t do business with X painting company.” Under the BBB rules the customer’s version of the story, including the admonition not to do business with X would go live in one week. PaintCo could not afford the negative press, particularly as a major home show was pending. 

            Basically, there were and are no workable legal remedies for this kind of situation, which is now repeated everyday in small and medium size (“SMB”) business commerce. The painting company theoretically could sue the homeowner for breach of contract, and perhaps defamation and tortious interference with contract. But, as a practical matter could not do so because (1) the lawsuit would cost many times the lost contract price of about $5,000 (2) the harm would be done Online regardless of the outcome of the suit, (3) the lawsuit would take a year while the harm would occur the next week, (4) if the painting company sued the BBB it would probably lose because it accepted BBB’s rules when it became a BBB member, and in any case (5) the BBB would “bury” the small business painting company in legal fees and costs. 

            So, PaintCo returned the deposit rather than have the customer’s BBB diatribe go live on the Internet. SMB’s face this kind of Internet facilitated extortion everyday, which destroy their right to due process, i.e. the right to be heard in a fair proceeding leading to a with a fair outcome based on reason not power.[2]  

Case 2. Remodeling Company and Angie’s List.

Workers for a home remodeling company (“RemodelCo”) arrived early one Friday to remodel a second floor condo. They used a ladder to the second floor balcony to unload equipment and tools. The homeowner, who arrived late, objected to the invasion of privacy (the patio entry door was locked) and kicked the workers off the job. The workers returned to the job the following Monday, but the homeowner objected, stating he expected them there on Sunday. Homeowner then terminated the contract and kept about $800 worth of drywall and supplies, which were used on the job by the next contracting company. 

            RemodelCo was now out the benefit of its bargain under the contract. Moreover, it was out of pocket for the cost of labor, materials and supplies booked for the job. RemodelCo requested payment for same. In response, the condo owner filed a complaint with Angie’s List and left the wrong number for RemodelCo which prevented Angie’s List from advising RemodelCo about the complaint and providing RemodelCo an opportunity to respond. 

RemodelCo did not learn of the complaint until a potential customer asked about the post. RemodelCo then contacted Angie’s List and asked for the complaint to be removed because it was untrue -- the Registrar of Contractor’s which has jurisdiction in such cases had dismissed the condo owner’s complaint as defamatory and vicious. According to RemodelCo, Angie’s List said, basically, the complaints do not have to be true, we have no legal responsibility re same and we are not going to take down the false report in spite of the legal ruling. Thus, RemodelCo has a false report on its public record with no way to cure.[3]  In this case even an official legal determination of falsity was not sufficient to prevent the extortion. 

Case 3. The Engineer and the Internet.

An engineer worked long hours – about 60 hours a week – away from home on site at various nuclear power plants.  The engineer was an exempt employee (i.e. exempt from over-time) except that certain company actions, e.g. not paying the salary for weeks not worked, created issues whether the engineer would be entitled to overtime pay. The company said that the engineer did not show up for work and was terminated under company policy; therefore, was not entitled to be paid. And, the company said that the engineer had entered post-termination hours which were billed to the employer and its client which were false and arguably fraudulent.[4]

 

The case appears to be a typical, genuine dispute requiring legal resolution. But, regardless of the merits, Plaintiff dismissed the lawsuit before the employer filed its Answer. The reason: A nuclear plant employee must have security clearance. A finding and perhaps even just the allegation of dishonesty could destroy that security clearance and thus, make just the engineer unemployable in such well-paying jobs, affectingly ruining a career.  

Worse, the engineer’s suit when filed in federal court immediately showed as the third item on the first page of a Google search under the plaintiff engineer’s name. This public ranking might have been acceptable when only the engineer’s wage claim was posted, but had the employer responded with a defense and possible compulsory counter-claim (i.e. “use it or lose it”) alleging false and fraudulent conduct, that allegation of dishonesty would have been public, internationally, and virtually forever. This result was a function of Google’s search algorithm, not any action within the control of the parties. 

Plaintiff had the right to bring suit and Defendant had a right to bring its defense and claims as well. Public policy favors the employee and in such cases double damages may be recovered under federal law and triple damages under state law. Thus, a risk adverse defendant might have settled the case with a $100,000+ payment to plaintiff, but here the engineer faced not a choice between winning or losing the case, but of losing a career, his reputation and way of life no matter the case outcomes. Because the downside risk was so great, the engineer decided to dismiss the case. 

In an earlier time the counterclaim of false time entries – without the virtually infinite magnification by Google and the Internet – might not have been enough to cause the engineer to dismiss the claim. But the public posting for all to see was more risk than the Plaintiff could bear. In this case the Internet allowed interference with the individual’s right to due process.   

  

Case 4.  A Federal Court Complaint as the Weapon of Choice.

A few years ago a firm client, which was a business among the leaders of new court reporting software, hired a manager who later sued my client in federal court alleging my client had stolen her intellectual property (the reverse appeared to be true) and never served the complaint. My client’s reputation in the industry was seriously affected and, again the existing remedies were slow, not effectual and expensive. Most likely, the only way to demonstrate the falsity of the complaint would have been to litigate the matter in federal court the cost of which could have well exceeded $100,000.[5] (And, again, the client had not even been served with process with the Complaint so had no right or duty of filing an Answer without taking special and expensive steps to do so.)     

In this case, one business was allowed to seriously and unfairly impact an apparently blameless competitor, which being a small business and having suffered the loss of business caused by the illicit action, could not afford the substantial costs of attempting to remove the complaint. So, the complaint, being in federal court, sat at the top of the Google search rankings under the client’s name.

Another example of unfair Internet use is Website marketing models   which destroy local business by “owning” an area, say, hypothetically, “Alabama  locksmiths.” Overreaching models such as the one described are illegal in some states, e.g. under the false address statutes or local licensing statutes (the companies may not be “real”, local businesses thus have no local address or license). But the suits can be piecemeal while the offender’s profits can be substantial. And, even then, law firms like this one which practice Internet law (prepare Internet contracts and advise clients on Internet transactions and represent them in Internet litigation) can tweak the Internet business model to be legal within the boundaries of current law, and still be extremely effective.          

Conclusion. 

These few brief examples show the unforeseen use and unintended consequences of the Internet as an instrument of extra judicial process, with actions and outcomes contrary to the rule of law and fair business practice.  There are many, many more examples of unfair and/or fraudulent schemes than those listed here. Such schemes based on “bad press” might not seriously harm a major corporation, which can afford the counter-response, but they can ruin a small business, e.g. restaurants which are now routinely scammed for free meals by parties threatening bad press. 

            Right now the Internet is like the Wild West.  We need the rule of law and a Sheriff in town to stop the abuse.         

 

The Law Offices of Donald W. Hudspeth, P.C.
Business Law, Commercial Litigation & International Business Law

www.AZBUSLAW.com – TheFirm@azbuslaw.com
“The Business of Our Firm is Business”

---

[1] More accurately, the lack of developed law allows parties to use the broadcast feature of the Internet for their own purposes. A purist might argue that the Internet does not cause the harm but a partial legal response would be that “but for” the Internet the harm explained here would not occur. Thus, the Internet is a causal factor. In any case the purpose of this article is not to attack the Internet but to start or contribute to a dialogue as to how the problem can be remedied.   

[2] While I have problems with the immunity companies like BBB have in this situation and think the law should be modified to allow claims against them in extreme circumstances, my purpose is not to fault the BBB, but to show how the advantage of prompt and neutral, private dispute resolution has been corrupted by the existence of the Internet as a tool for extra-judicial remedies.    

[3] Of course there are also literally thousands of cases where a customer just FLAMES the business online and the damage is done without the business having the right of a fair hearing.

[4] Whether and when the engineer was terminated and knew he was terminated were live issues in the case. 

[5] Ultimately, the client, having no money to hire the firm, waited out the time to serve and the case was dismissed for lack of service of process on the client.  But in the meantime the client suffered great and lasting harm to its reputation and sales as a result of the false complaint. 

Entrepreneurs & Business Development Around the World

Entrepreneurs & Business Development Around the World

by Donald W. Hudspeth Esq. 

Introduction, Small Business and Southern Europe’s Economic problems. 

            Because my Arizona business law firm represents businesses and start ups, both locally and from around the world, I was curious about the role   entrepreneurs, start ups, and small and medium size businesses play in their national economies around the world. Surprisingly, one of the first articles that I found attributed the financial problems of Greece, Italy and Spain, in part, to the predominant role that small businesses play in their economic systems.[1] In this article Mr. Yglesias, writing for Slate.com, states that too many workers work for too many small firms. 58% work for firms with fewer than 10 employees and 75% work for firms with fewer than 50 employees. In contrast in the United States only 11% of workers are employed by companies with fewer than 10 workers and only one-third work for firms with fewer than 50 workers.  

Although not expressly stated, one problem seems to be that local regulations do more than foster small businesses, they protect and coddle them through restrictive licenses. Ironically, protecting local firms from globalization seems to have destroyed the national economy. Like it or not the economies of scale provided by larger global organizations appear to serve not only the public but also the country as a whole. This is not exactly what I wanted to hear when I set out to write this article. But, as small business – or starting one’s own business – is often spoken of reverentially, like motherhood, it is good to get the perspective. Still, as the Slate article makes clear, business smallness is not the only, or necessarily the major, cause of southern Europe’s economic problems; poorly functioning institutions which favor personal connections over finely drawn regulations, policies and procedures, contribute to the problem. 

Europe.    

            The joke is that America is finally discovering Europe.[2] The question is what we will find when we get there. European countries have not been particularly entrepreneurial. While Germans excel at business development, they do so at the managerial (and perhaps engineering) level, not as entrepreneurs. Germany has fewer than one-half the entrepreneurs of the US. And, according to the Global Entrepreneurship Monitor, fewer European start ups become big businesses. As quoted in The Economist, according to Janez Potocnik, the EU commissioner for science and research, only 5% of European companies created from scratch since 1980 have made it to the list of the 1,000 biggest EU companies. 22% of US firms have made that transition. This being said a program and article Online by National Public Radio states that “Europe is starting to make its mark on the start up scene. Paris and Berlin are starting to hold their own as more and more European startups look to compete on the global stage and attract investors. ” [3] 

         

Europe has the strength of cultural diversity. The French are good at social interface. Russia, if it is considered part of Europe, is known for its technology colleges and software development.  Skype was a Swedish company using Estonian computer programmers. 

            But, Europe has a mind set against business failure. In the US prior business failure is accepted, and is almost a precondition to venture capital financing for technology start ups. In Europe business failure cannot only hurt you with the banks, but can keep you from ever having a CEO position. In an environment where failure is not accepted, risk taking is discouraged, and entrepreneurial activity cannot flourish. There are likely to be fewer risk takers in a risk adverse society.

European law still makes it difficult to hire employees due to the cost of social benefits. It is also difficult to fire employees, and where employees cannot be fired fewer will be hired. So, rigidities in the legal system discourage innovation. And, speaking of law, start ups in Europe have the laws and social mores of 18 countries to deal with. This would be like doing business in America when we still had the confederate states. A major reason for the American Constitution was to form a national government so that we could have uniform and non-discriminatory laws among the states. Before the Constitution, economic activity was chaotic.     

  

England and the United Kingdom.  

            England, in creating its international empire, created much of the global trade as we know it today.  Because London has been a banking and financial center for many years, we may think of England and the United Kingdom as being highly entrepreneurial. In truth, not so much. According to Scott Scheper of Gaebler Ventures,[4] Total Entrepreneurial Activity (“TEA”) in England is about 6%, of which 8% is male and 4% is female. And, in the UK entrepreneurship is primarily a youth phenomenon with 18-24 year olds comprising the largest age group.   Still, in the United Kingdom the entrepreneurial trend is up which is not true of other European countries.

France.  

While France may have invented the word “entrepreneur,” it does not seem to have many of them. Entrepreneurs in France are a scarce commodity. The French seem to lack the entrepreneurial spirit and instead want the stability of a salary from the government or a large company.[5]  Apparently, France’s egalitarianism mitigates entrepreneurism.  And the French economy has strict regulations and high taxes, typically anathema to start ups and small business growth. The government seems to be trying to provide statutory exemptions and lower tax rates for start ups, but apparently without much success. Still, in spite of itself, France was third, behind the UK and Germany in venture capital firms in 2001.  And, in 2010, the French company, vente-privee.com pioneered “private flash sales” which sparked interest around the globe.[6]

Germany.

            What about Germany? It is an economic powerhouse. What role do entrepreneurs play in that economy? According to international entrepreneurship .com, a source of much of the basic information for this article, Germany has a relatively low TEA rate of 5.1 % -- 24^th in the world - even though it is first in spending on entrepreneurs, and has government programs for entrepreneurial women.  Reasons for the lack of stellar performance by German entrepreneurs include social disapproval of individual enterprise as well as high corporate and social security taxes.  

Portugal. 

  

            Portugal has a low TEA rate of 3.95% and entrepreneurship seems to be a relatively new concept there. Still, during better times Portugal had a growth rate higher than the European Union average. And, as one reviewer remarked, it is a beautiful country with ocean views and cheap beer. Life has its compensations.

Croatia. 

  

            In addition to Portugal, Croatia is another one of my favorite countries to visit. And, while teaching business law at Arizona State University, I had students from there who I much admired.  There is an entire doctoral dissertation by Nikoline Fuduric online about entrepreneurial conditions of Croatia, if you really want to study the subject, but otherwise the available information on Croatia is that entrepreneurial activity is expected to rise.

Russia.   

             According to internationalentrepreneurship.com Russia has a TEA of only 2.5%. Barriers to entry include high taxes, regulation, registration, and corruption, not to mention Mafiosi and protection payments. What entrepreneurship and individual business ownership exists in Russia seems to come from the takeover of government enterprise, not from starting and building a business from scratch.  Still, individual entrepreneurship was up 25% from 1998 to 2001. Women seem to be a little more entrepreneurial in Russia due to discrimination in pay and job opportunity.   

Israel.       

    

According to the prominent Kaufman Foundation Policy Forum Blog, Israel is one of the most innovative countries in the world. As stated in a recent article in the New York Times, if the name ends in “man,” then the person is Jewish and that includes Superman.[7]  Many workers in Israel are employed by smaller firms, many of which are in the forefront of technology.   

Australia.    

            Australia’s TEA is up from its 2002 score of 8.7. According to Internationalentrepreneurship.com, in 1996, 97% of the business in Australia was conducted by small businesses! The Swinburne University of Technology has its Graduate School of Entrepreneurship. The country recognizes top women entrepreneurs and has programs to foster them. In short, Australia seems to be a paradise for entrepreneurs and collectively an economic powerhouse comprised on entrepreneurs. 

Japan.

            According to The Economist,[8] “Something must give” in Japan. “Japanese entrepreneurs are pressing for change. The old guard resists.” Japan has one of the lower TEA rates in the world – not even mentioned. Japanese culture has been built on lifetime employment and seniority. Young bucks who challenge the system are viewed with strict scrutiny and may find themselves under legal as well as social pressure. 

Canada. 

            According to a presentation by BDC, prepared by the Fondation de l’entrepreneurship in July 2010 about 10.1% of the businesses in Canada are individually owned. Its TEA rate is 8.9 with 11.2 % of the population saying they want to start a new business and 4.6 actively engaged in doing so. Overall, Canada has had a decline in new ventures. 

China.    

            Entrepreneurship in China is an interesting case study of “flying under the radar” in order to succeed.  90% of the businesses in China have fewer than eight people and small business ownership increased by 30% per year between 2000 and 2009.[9]  Business owners work without bank financing and do not want to be known and identified. While they may buy luxury goods, not only the workers in the plant, but the owners and office workers may work without heat to save money.  The Chinese – and Asians in general - seem to be experts at deferred gratification, which studies show is one of the major factors indicative of future success.

The United States.   

      

            According to The Economist[10] between 1996 and 2005 the United States added 550,000 small businesses a month.  The TEA for the United States is 11.3%. America is the first country to ditch managerial capitalism – of the sort found in Germany, or Japan and France – for entrepreneurial enterprise. After all, the country was founded by innovators and risk takers.[11] Here, one way to be a “rock star” is to own a start up. 

            America has several advantages contributing to its entrepreneurial success: 

1. mature venture capital industry

2. the symbiotic relationship between the university and industry,

3. open immigration policy (many successful US companies, e.g. in Silicon Valley, are owned by immigrants)

4. “venturesome consumers,” as defined by Amar Bhide of Columbia University. We are willing to try new products. In fact it seems that the “new thing” is in our cultural DNA.[12]     

Conclusion.

            So, what have we learned? Well, as the song goes. “God bless the USA.” We have a common culture which is accepting of the entrepreneurial spirit, individual business ownership, risk-taking and failure. We have mostly uniform and non- oppressive laws that make national business success possible. The United States is still the place to be for start ups, and immigrants -- if we let them -- will bring their money here to invest it in business enterprise. 

            But, before we get too proud of ourselves: I thought of my client from Uganda. According to internationalentrepreneurship.com Uganda in 2004, Uganda had the highest TEA index in the world: 31.6. And, according to FastCompany.com 29.3% of the business activity in Uganda was conducted by entrepreneurs or managers of a new enterprise. Many of the entrepreneurs in Uganda are women, including my client, who owns and manages a company which makes composite blocks for construction.

---

[1] Yglesias, Mathew “Southern Europe’s Small-Business Problem,” Slate.com. 2012/07.  Web. 09 July 2012. 

[2] The Economist, Europe’s Tech Entrepreneurs, June 10, 2010.  Web July 7, 2012

[3] NPR, “The Next Silicon Valley? Berlin Startups Catching Up with the Hype,” July 09, 2012. Web July 10, 2012. 

[4] Gaebler.com/Entrepreneurship-in-England.htm

[5] Internationalentrepreneurship.com (a great source for information of virtually every country. Much of the information for this article came from this site, supplemented by The Economist, Gaebler.com.  and the other sources cited.

[6] The Economist, Europe’s tech entrepreneurs, Blooming, June 10, 2010 from the print edition. Web. July 09, 2012

[7] Parker, James. “Man of Action.”  New York Times Book Review, July 8, 2012 writing about the book Superman by Larry Tye. (the creators of Superman,  Jerry Siegel, writer, and Joe Shuster, drawings, were geeky before geeky was cool.)  

[8] Entrepreneurs in Japan, Something must give, The Economist June 23^rd 2001 from the print edition. Web. .July 9, 2012. 

[9] The Economist, Let a million flowers grow, March 10, 2001.

[10] The United States of Entrepreneurs, America still leads the world, The Economist, March 12 2009 from the print edition. Web. July 07, 2012. 

[11] Id.

[12] Id.

Arizona Business & International Law

By Donald W. Hudspeth, Esq.

       A decade or more ago a client of our business law firm needed some advice on an international transaction. We called several local firms that we thought might do that kind of work, but they didn’t. So, I concluded, “What the heck. If they are not going to develop a practice in that area, I will.” Thus, we invested in multiple volume sets on the international law of contracts and the law of various foreign nations. Since that time we have done a number of transactions all over the world. 

        Fortuitously, a friend of mine who has done business all over the world did a short presentation to my business law class at Arizona State University, explaining some of the “Do’s and Don’ts” of doing business in  various countries. 

        Now, my firm, perhaps like yours, finds itself with clients or potential clients from all over the world – in my case seeking representation to bring their business to the U.S. in general and Arizona in particular. Conversely, some Arizona clients now do business around the world and need contracts tailored to the particular country. For example, our latest transaction is for the sale of environmentally safe paint in the Middle East through a Jordanian distribution company. Because of the Internet such deals are common. 

I. Payments and Collections.    

Doing business internationally can be complicated. For example, due to problems of financing, payment and collection, large international contracts are typically funded by letters of credit. This means that the businesses on both sides of the transaction must have a bank familiar with international commerce and willing and able to enter into letter of credit transactions. Fortunately, while the banker that you deal with at your local branch may not have expertise in that area, the “downtown” office usually does. So, it may be simply a matter of arranging the appointment. 

        Alternatively, transactions may be funded by wire transfer – that is typically how this firm is paid. And, recently we were paid on a small matter by a client in China through PayPal.  This is rare for us and we do not yet have sufficient experience with PayPal on international transactions to recommend it. But, it appears to be a possibility.   

II. Currency Transfers, Exchange Rates, and Risk of Change.

          When a foreign company, say from Japan, pays money to a U.S. company, or vice versa, the currency must be converted according to the exchange rate. International banks, and perhaps even PayPal, can do the conversion, but they charge for this and the cost can be significant. So, the contract must allocate the costs of conversion. 

        There is also the question of exchange rates. Exchange rates vary virtually on a daily basis, which change can benefit one of the parties and hurt the other by making the goods more or less expensive. The risk of loss from this variation must be dealt with – perhaps by stipulating to a given rate of exchange, e.g. Euros per Dollar.     

III. Choice of Forum and Governing Law. 

        Among the most important considerations – at least to a lawyer – are the forum and choice of law. Provisions for the state of litigation and governing law are common fixtures of contracts in the U.S.[1] But in the absence of these governing law, venue and jurisdictional clauses for parties and subject matter within the United States we still have applicable law and a forum for resolution. The parties may argue where the suit belongs, e.g. whether in Arizona or California, but there is no question the case can be heard and that some state and or federal law will apply. 

        In contrast, speaking figuratively, “There is no courthouse to run to in the middle of the Ocean.” Specifying applicable law, like the CISG, discussed below, and the forum for resolution -- often through international arbitration in London or Geneva – is absolutely essential. Without such designation and agreement as to what law will apply and where the dispute will be heard, the parties can literally be “nowhere” in terms of dispute resolution and contract enforcement. 

 

According to Wikipedia among the most significant forums are the International Chamber of Commerce (ICC), the International Centre for Dispute Resolution (ICDR), the international branch of the American Arbitration Association), the London Court of International Arbitration (LCIA), the Hong Kong International Arbitration Centre, and the Singapore International Arbitration Centre (SIAC). Specialist alternative dispute resolution(ADR) bodies also exist, such as the World Intellectual Property Organization (WIPO), which has an arbitration and mediation center and, according to Wikipedia a panel of international neutrals specializing in intellectual property and technology related disputes. We typically designate London or Geneva under the U.N. Convention, but that practice may change as our international business practice expands.

  

         So, to repeat – because it is so important – the contract which you use must specify the governing law and the forum of dispute resolution. By the way, if the other contract party will agree, you may designate a court in the United States, say the federal District Court of Arizona. Typically, however, the common practice has been to choose a more “neutral” site like London or Geneva as the forum for international disputes.

A. Some Types of Law in the U.S.

          In contracts between parties located and/or doing business in the United States, the bodies of law most commonly applied by this business law firm in Arizona are:

(i)  the Uniform Commercial Code (commonly referred to as the UCC), which applies to transactions in goods. The legal definition of “goods” is things moveable at the time of the transaction, a paradigm example of which would be furniture and equipment, but which also applies software, data and digital transactions.[2]  

(ii)  the law of real property, which governs transactions in buildings and lots, and

(iii) the common law, developed in case decisions over time, which most typically applies to transactions in services.[3]

        Some transactions can include both the law of goods, like carpet, and services, like carpet installation. In that case the law of the predominant factor applies. For example, if the sales price of the carpet is $2000 and its installation cost is $1000 (I apologize if these figures are way off) then the UCC would govern because the cost of goods predominate over the services in the transaction.

  

        B. The Contract for the International Sale of Goods (CISG).

        Many international transactions involve the sale of goods (think Chinese products to Walmart). Unless otherwise specified, e.g. an insistence that the Law of China would apply, the parties to such international transactions in goods would typically stipulate and agree that the CISG would apply. 

        Generally, the CISG is compared to and said to be similar to the UCC. But, as Article 2, the chapter on Sales, of the UCC (out of nine Articles) is an entire law school course by itself, we cannot cover the UCC and CISG here in these few paragraphs.  Generally speaking, both the UCC and CISG are liberal in their writing requirements for a contract. The UCC requires at least some writing, e.g. a check or receipt -- some indication that a transaction actually occurred (kind of a credibility “speed bump” on the way to court) -- while the CISG, in Article 11, does not require a writing. 

Although more liberal as to what is called the “Statute of Frauds,” i.e. the writing requirement, the CISG is much more particular in the formation of contracts than the UCC. Under the UCC only the parties, subject matter and quantity are required to create a contract. Other terms, like price, and payment terms, can be filled in by the court as to what is standard or reasonable in the industry.  In contrast, the CISG follows the  “mirror image rule” of the common law, which requires that acceptance match the offer on a number of factors, including price, payment terms, delivery, etc. 

For our purposes here the point is that international contracts should be carefully drawn to specify parties, subject matter, price, payment terms, delivery, etc. to avoid the defense of lack of contract. U.S. parties, particularly those engaged in the sale of goods under the UCC, may be not be accustomed to negotiating and completing contact terms and conditions with the completeness and particularity required under international law.

        

        C. Warranties and Disclaimers.   

          Whatever general law may apply, important contract provisions in the sale of goods, domestically or internationally, include warranties, disclaimers and the limitation of remedies. In the U.S. we are used to and commonly accept contract provisions stating that the product is sold without warranty of “merchantability,” AS-IS, and without any other warranty including the warranty of fitness for particular purpose. Also, U.S. contracts commonly exclude “consequential damages,” e.g. monies paid to a third party to fix the situation, and state that, in any case, such damages will be limited to the cost of repair or replacement, which could be a remedy of $139.95 versus $1.5 million in consequential damages for defective software. 

        While hotly litigated in the US, especially where death or serious bodily injury is alleged to have been caused by a defect, European countries may not accept such disclaimers of warranties and remedies at all. In any case the lawyer for the party from the other country may argue for the law of that country to apply, or at least that the contract to provision reflect local custom, and not the case law of the U.S. The U.S. business party and its attorney should be prepared to negotiate these issues and not assume that the European or other nation’s business will just accept the U.S. way of doing things.

        Foreign “temperament” is also a factor. While not legally required, French businesses and their attorneys prefer the contract to be in French or translated into French. This adds a whole level of time and complexity to the transaction as each side hires its translator to review and confirm the accuracy of the translations. 

German businesses tend to be quite specific, which means that contract negotiations can be more arduous and take longer than such negotiations might be in the United States. For example, in the US a contract may refer to a material breach as an event of default, without defining “material,” but rather looking to case law to define the term as necessary. But, a German lawyer may want the term defined in the contract, which may force the parties to consider and anticipate the possible types of breach and list in the contract those types of breach events which they agree to be “material.” Terms like “reasonable,” “significant” or “substantial” may require a similar process of examination and definition. 

IV. Conclusion.

          Obviously, this article is but an introduction to some of the issues that arise in international transactions. My primary purpose here is not to educate you about such transactions, but to inform you of their possible complexity and to encourage you to get legal representation in doing the deal. As briefly shown above, contract requirements and acceptable terms in international transactions may be completely different from what the client is used to in transactions within the United States.  

As I have said elsewhere “Good legal contracts are like shoes: One size does not fit all and one pair is not suitable for every occasion.” A good contract is informed by the knowledge and experience of the business client together with its business law attorney, and is tailored to the client’s typical transaction.[4] This admonition and advice applies to international contracts as well – perhaps more so, given the probable larger size of the transaction and the downside risk of “being nowhere” if the contract is not properly drawn.  

For more information about business law topics and our firm, please see our website or call our representative at:  www.AZBUSLAW.com - 602-265-7997 - Phoenix law offices

---

---

[1] Such a provision might read as follows: “Disputes arising out of this agreement and its formation shall be governed by the law of the State of Arizona with venue an jurisdiction in Maricopa County, Arizona.

[2] Interesting story about that, the short version of which is that the creation of technology outpaces the creation of law; thus, the law is left scrambling to adapt to the new world constantly under creation.  While the pace now is greater this problem has always been through. For example, the corporation as we know it was a legal response to the social-economic phenomenon of the Industrial Evolution.    

[3] There are of course other bodies of law, like patent law, maritime law and the International Law of the Sea, etc. but this firm does not practice in those areas. 

[4] For example, one of my first clients, which sold office phone systems, had a long, three-part form contract on NCR paper which was in general excellently drawn, but did not allow a remedy for non-payment. Based on this experience the firm added a provision for repossession and the right of peaceful entry (i.e. showing up with a security guard) to repossess same. The dollar amount of the client’s uncollected receivables and write-offs declined precipitously where the remedy was not just to sue but to repossess.   

What Business Owners Should Look for in a Business Law Firm and Business Legal Representation

by Donald W. Hudspeth, Esq.

            In selecting a law firm for an owner-operated small or medium sized business (aka “SMB’s”), we can start with some basic positions: 

1. The law firm client is well advised to choose a lawyer, not a firm. Lawyers vary in aptitude, knowledge and experience in various practice areas, just as other businesses do. So, obviously, you need an attorney who actually practices business law. Unfortunately, due to the number of businesses in Arizona, many lawyers are hanging out their shingle in “business law” who do not have a business or business law background – especially prior experience as, or for, business owners.   

  

2. Many smaller boutique law firms were started by successful larger firm attorneys who grew tired of sharing their profits and carrying the large firm overhead. 

3. Substantial fees are required to carry large firm salaries, overhead (and egos). 

4. Many large law firm attorneys may have no clue what it is like to own and operate a small business nor do they have a strong incentive to really care to, because such firms can’t “pay their freight.”[1]

 

Given these premises no reason exists for a small or medium size business owner to use a big box firm. Rather, the business owner may well do better to pick a law firm that understands, appreciates and values them the way the owner-operated business in turn values its clients.         

            I decided to start my own business law firm when I left a larger law firm after the last great recession known as the “RTC crisis.”[2] At that time targeting small or very small business was not in fashion mainly because the thinking was that such law firms could not support the fees and overhead required to operate. This may have been true at the time, as I started in very humble surroundings and charged fees about one step above “volunteer lawyering.”  My goal at the time was to earn $100 a day; the goal was dollars to live on, not dollars per hour. 

            What I thought I knew and confirmed was that there were many business owners who were like I had been, i.e. a small business looking for a lawyer who understood us. Before I went to law school at age 36 I had owned and operated a bar and bar real estate chain in my 20’s and a three store chain of major mall retail stores in the 1980’s. But as the “big box” stores grew in prominence I found my mall store business slipping away. So, I took what I had left and went to law school – an earlier goal before I got sidetracked by life. 

            When I started my own firm, targeting owner-operated businesses, I focused on what I thought was my unique selling proposition (aka “USP”); that is, that I had “been there” as an SMB business owner myself. I knew the long hours, about the manager who quits the day before my first vacation of five years, of lying awake thinking about payroll, and about the problems with banks and other professionals including lawyers, accountants and marketing experts, who seemed to be looking past me to see if there were somebody better in the room. 

            Even today I wear both the “lawyer hat” and the “business owner hat” and analyze every problem in terms of both. Frankly, while I am ethically compelled to give the proper legal advice, sometimes the client cannot do, or has already not done, what the law would recommend or require; so, we look to remedy the situation and minimize risks and consequences. And, clients will tell attorneys “I am not paying you to tell me I can’t or should not have done this, but to advise me on what we are going to do now.”  Again, this can be the difference between a purely legal and a global, practical, real-world, business like problem-solving approach.   

            Thinking about these things and my early years of practice led to my book “Inside the Firm,” The Inside Story on Choosing and Using a Lawyer, in which I explained why and when to call a lawyer and identified some criteria for picking a law firm for your small business. Things to look for in selecting an attorney include: 

1.  Understanding the nature of an entrepreneurial, owner-operated, driven business and how it differs from corporate America. If one identifies with “Corporate America” and Wall Street then one may not identify with Main Street. Most SMB’s probably have more in common with Main Street than Wall Street. (In my opinion small business owners often mistakenly identify with big business and Wall Street which may not identify or give a damn about them). Because big law firms need the large corporations to survive, it is unlikely an SMB will get the level of empathy and understanding from a big box law firm than a smaller one. It is highly likely that the large corporate law firm may have no attorneys on staff who have ever owned or operated their own business. 

  

2. The ability to listen, know what things mean and what to ask. Again, this comes from knowing the area.

3. Connection and communication:  I remember a saying: “It is hard to see eye-to-eye when you are looking down on people.” I am not saying that larger firms and their attorneys actually do this, but, generally, the higher the level of identification, connection and effective communication between attorney and client, the better the outcome.  A background of common experience facilitates this process.  To me it is like raising a child: You can read the books about child rearing, but you really learn what it is all about – especially the overall, big picture – by raising the child. The same is true with business representation: One really learns the area by having been “on the other side of the desk,” by having run one’s own owner-operated business.  

4. Compassion, empathy, the ability to care:  Customers want to be served by businesses that care about them. Because I have “been there” in terms of operating my own businesses, I have great concern for, and empathy with, my clients. I understand their financial limitations and the need for cost-effective representation.  The firm does its best to make the bills fair and reasonable and the representation cost-effective. In our firm we talk a lot about client options, pros and cons and what those options will cost. We balance possible outcomes with cost to determine value.  And, because we care about our clients – and act like it – we find the clients care about us. This is one facet of good teamwork.   

5. Responsiveness:  Often, the clients who call the firm are in trouble and “need something done yesterday.” Responsiveness is the small firm advantage. While elephants are powerful, cougars are more responsive. It takes about two miles to turn around a 747; much less for a Cessna or Lear Jet. Small businesses and their law firms need to be able to “turn on a dime.” When I worked for a larger law firm it might take a week or more for a file to get open, hit my desk and/or for me to get to it. Generally, today, even with our firm’s busy and successful practice, most of the time we turn projects around (not litigation of course) in about a week. That is always our goal. One reason for this is that we tend to face similar business and legal problems and do similar projects again and again so we bring a high level of knowledge and experience to the process. Most of the time we do not have to “reinvent the wheel.” While the matter may be new – a once in a lifetime event for the client – it is probably something the firm has dealt with many times. [3]  And, if we do have to create something new – which happens because many of the business areas we work in did not exist a few years ago -- we can analogize from the past. Often our firm is in the forefront of what’s new in business concepts, business models and business methodology because our clients are. We are the pioneering entrepreneur’s law firm. 

6. Team work:  that is, client participation and involvement. Many if not most of this firm’s clients are brilliant and/or outstanding in a least one way. Capitalizing on their unique talents has allowed them to succeed. While the client may not be versed in the law and the way of doing things in the legal profession –  anymore than I am well-versed in, say, engineering and an engineer’s approach – that intelligence can be used and it would be a shame to waste it. Thus, following my Mom’s idea that “two heads are better than one,” we seek the clients’ input and involvement every step of the way in their representation. In particular the client sees a draft of any letter or document before it goes out and we meet and discuss (often by phone or email) with the client where we are and where we are going in every matter. In this day and age of cloud sourcing, video conferencing, texts, emails, and even faxes, there really is no excuse for not having the client’s review and approval of significant work before it goes out. And we find, often, that “last look,” can trigger a whole new set of recollections and ideas from the client, which takes the level of representation up a notch.  All of this may seem like a “no-brainer,” but you would be surprised at the independent and top down approach taken by many law firms and their attorneys. 

            While legal work cannot be purely democratic in that attorneys are subject to procedural, ethical and competency standards, an attorney-client relationship which includes client input, feedback, participation and involvement optimizes results – not only in terms of improved outcome of the transactional or litigation matter but also in improved acceptance by the client of the outcome. While results are usually not perfect for either side in a legal matter, where the clients know what we did, and why, and how we got here, they are more likely to accept and appreciate the outcome. It’s like democracy, i.e. participation improves results, acceptance of the outcome and, perhaps, educates the client against false expectations. 

7. Pick a lawyer, not a firm. This advice did not originate with me. Given the leveling effects of technology and rule changes, large law firms no longer have a practice advantage. In fact, they may be trapped with overhead in library and staff no longer required in this internet age. In fact, most attorneys now use online search tools like Westlaw or Lexis-Nexis. So, typically, the smaller boutique firm which practices mainly in your area of need will provide the best representation: In knowledge and experience of your kinds of business and legal problems, empathy and understanding, response-time and cost-effectiveness. Leave the big box law firm to the big box corporate client. If you are a business owner or entrepreneur, work with your SMB law firm to take your business to the next level, or even to create the next and new business reality.[4]                       

---

[1] I am not impugning ill motives. Some of the finest people and lawyers I know work for larger firms. I am talking about the large firm need to bill larger dollars to cover the large firm salaries and overhead. For example, clients tell me that we charge a fee of $950 to $1250 for documents for which they paid $4-5,000 or more – in part because they were billed by the hour.  

[2] The banks went broke (sound familiar?), consolidated and we lost their business. 

[3] This reason alone is why every business should have an attorney “on retainer.” The business lawyer may have 20 years of experience in dealing with your “unique” (for you) legal or business matter.   

[4] Again, this is something I have done personally and do as a lawyer for my clients. I use the saying: “We don’t just connect the dots, we create the dots.