A short story (taken from some real life episodes) may help to illustrate the point.

A client, let’s call her Mary, walks into my office.

Mary has a problem. Potentially I have a new job.

Mary’s got a sub-contractor who she would like to get rid of (Lance). Lance has been a valued member of Mary’s team for many years, but Mary’s discovered recently that Lance has been over-billing her, and customers have been complaining about the quality of Lance’s work.

Mary owns the tools and equipment that Lance uses and so she needs to be a bit careful about how she deals with Lance. That equipment is in Lance’s possession and it’s worth a lot of money.

Mary has confronted Lance about his performance and has put him on notice that she’s going to terminate his contract. Lance’s response is that, if she wants her equipment back in one piece and for him to go quietly, she must pay him $10,000.

So, how can I help?

For the sake of the story let’s say that the law that applies here is pretty straightforward. Mary may even have done the research and summarised her own legal position before she called me. Mary’s contract with Lance allows her to terminate it. Mary has the right to recover damages and overpayments from Lance. Mary has registered her security interest over the equipment that is in Lance’s possession on the PPSR. On the face of it everything is in order. Mary seems to have done everything right and she has the law on her side.

Assuming that the law is on her side (although even in the clearest cases, there’s likely to be an element of doubt), I need to explain to Mary that she has a business decision to make. At one end of the spectrum she can agree to Lance’s proposed deal – pay the $10,000 and get on with her life. I can draft up a settlement deed and Mary can put this behind her. The deal will mean that she won’t be able to recover the money that Lance has overcharged her, and she’ll have to fix the problems with Lance’s work herself. But she’ll get her equipment back and she’ll be able to focus on her own business (and chalk the whole episode with Lance up to experience).

On the other hand she can spend some money on lawyers to enforce her contractual rights, recover the equipment and the overpayments from Lance. This will also take time and will be a distraction for Mary when she’s got a business to run. Of course there’s no guarantee that she’ll win or, even if she does, Lance will have the money to pay her.

This decision involves weighing other considerations. If she settles with Lance, will Mary get a reputation as a soft touch? What message does it send to other sub-contractors, Mary’s employees and customers?

If you are in Mary’s position, it can be a difficult decision. Emotions run high when you find out someone you have trusted has betrayed that trust. Revenge may not be on your mind, but righteous indignation almost certainly will be.

There isn’t a right or wrong answer to Mary’s problem. Both options will cost her money. I’ll explain the process, the costs, the timing, the risks and whether Mary can change her mind in future. I’ll tell her about the decisions that other clients have made in similar situations. She’ll probably ask me what I would do if I was in her position. And then Mary needs to use all of that information and advice to make a call that she, and her business, can live with.

A carrot is generally a more powerful incentive than a stick – I’ll follow through on a resolution to call my customers more often because there will be an immediate pay off in the form of higher sales. In contrast the “reward” for following through on my resolution to get my company’s contracts reviewed and tidied up by my lawyer is that I may avoid a legal dispute or a bad debt at some undetermined date in the future.

Psychologists tell us that humans aren’t very good at prioritising actions that will only have a long term pay-off. And we are even worse at prioritising risk avoidance actions where the risk is small. The Royal Commissions looking at the Pike River disaster and the Canterbury Earthquake building collapses showed us that it’s not just individuals and companies that ignore risks – governments and regulators are also guilty of inaction to prevent low probability/high consequence outcomes.

As lawyers, we deal with the “low probability/high consequence” situations every day. That gives us a unique perspective to help all of our clients to learn from each other’s mistakes. For example, anyone who has been through the stress, cost and frustration of court proceedings can tell you how horrific it is. $100,000 legal fees for a High Court case where the disputed amount is less than $300,000? You’d better believe it.

Ask anyone who has been a litigant how much money they would pay to avoid being in that situation again and the amounts would surprise you.

The good news is that most disputes can be avoided if you have done your legal housekeeping. And it costs surprisingly little to get a review done of your main contracts (assuming that you ask someone who knows what they are doing – like us). If you’ve got the right tools, of course you need to make sure that you use them (and that your record keeping is full and accurate).

The same can be said of the importance of due diligence. If you woke up on 1 January convinced that you needed to be your own boss and buy a business, have you thought about how much you should spend to check out that company before you sign over your life savings?

A recent experience with a client is typical – he spent $10,000 on preliminary due diligence on a proposed $400,000 acquisition. The result was that he didn’t go ahead with the purchase. A $10,000 loss or a $400,000 saving? He’d definitely say the latter. I’d bet that the clients of Ross Asset Management wish they’d done a bit more checking up where their money was going before they signed over their savings too.

Maybe 2013 is the year of learning from others’ mistakes – and putting those resolutions into practice?

NZ consumer law reform

The Commerce Select Committee has been knee-deep in the Consumer Law Reform Bill which heralds the most significant changes to our consumer law since the Consumer Guarantees Act came into force in April 1994.  Although the Bill is a while away from becoming law, you should be aware of the thrust of the proposed changes – and there are some things you can be thinking about doing right now to prepare for it.

Fair Trading Act – “unfair contract terms”

The Bill prohibits “unfair contract terms” in standard form consumer contracts (effectively a contract that is not, or is unlikely to be, negotiated – a lot of online terms will qualify here).  What’s an “unfair term”?  Well, it’s one that:

• would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
• is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.

Got that?  No, me neither…  And there’s precious little case law around from other jurisdictions (e.g., Australia) which is likely to shed light.  To help us out, the Bill suggests some examples of what may be unfair.  For example,  a term that:

• permits one party (but not another party) to vary, renew (or not renew) or terminate the contract
• permits one party to vary the upfront price payable under the contract without the right of another party to terminate the contract
• permits one party unilaterally to vary the characteristics of the goods or services to be supplied under the contract
• permits one party unilaterally to determine whether a contract has been breached or to interpret its meaning.

The idea, of course, is reciprocity.  So, if your customer base is consumer oriented, and you have terms of trade that give you all the rights, and the customer all the obligations, it’s time to review them.  Similarly, if you exclude all your liability for breach, and ask your customer to indemnify you for everything they do, you’re likely to fall foul of the new law.  We often advise our clients that it’s in their commercial interests to focus on key risk areas in their terms, rather than taking a blanket approach and skewing terms their way – this new law will make that approach compulsory.

Contracting out of the Fair Trading Act and Consumer Guarantees Act

The Bill allows parties “in trade” i.e., business-to-business, to negotiate out of their Fair Trading Act obligations where to do so is “fair and reasonable” (taking into account the subject matter of the agreement, the value of the goods or services, the respective bargaining power of the parties and whether they received legal advice).  This will be a welcome addition for most businesses.

What won’t be so welcome is a similar regime for the Consumer Guarantees Act.  Currently, goods and services acquired for the purpose of a business are exempt from the Act.  The Bill proposes scrapping that, and inserting a similar “fair and reasonable” requirement for contracting out of the CGA.  For a Bill that was initiated to simplify the law and simplify business, this will undoubtedly produce uncertainty.  A better approach may have been to apply the existing Consumer Guarantees Act exclusion rules to the FTA.

Force majeure clauses in ICT contracts

“Force majeure” is a relatively well known phrase for business people, but it’s not one that’s well understood.  For a start, it has no legal meaning per se.  So you can’t just say “Neither party shall be liable for breaches due to force majeure” – that will not protect either party.  “Force majeure” must be explicitly defined.  Usually, it means acts of God, war, flood, pestilence, and any other reasons beyond the (often, reasonable) control of the breaching party, which may include examples such as strike, riot, lack of supply, government action, etc., etc.

It is the “reasons beyond the (reasonable) control” bit that causes problems, particularly in ICT contracts.  In contracts for the supply of services such as hosting, equipment colocation, and more recently cloud computing, maintaining a constant service is critical.  It’s really important to review “force majeure” clauses carefully in these contracts, and not to gloss over them as mere “boilerplate” provisions.

Power failure is often an important consideration for suppliers and customers alike and suppliers often try to hide behind force majeure clauses when the lights go out.  At the end of the day, it’s all about risk and who bears the loss when the unexpected (or unwanted) occurs.  Things to think about:

• unless the supplier generates their own power (unlikely) an outage not physically caused by the supplier is invariably going to be, to an extent, “beyond its control”.  Should the supplier have an obligation to have back up power arrangements?
• even if the power outage is a force majeure event, what about consequent loss of data or damage to equipment.  Again, a separate obligation requiring proper data back up and surge protection will, if correctly drafted, override any argument that the supplier is not liable for this type of loss, even after force majeure
• from a customer’s perspective, strikes by the supplier’s own workforce should never be a force majeure event
• make sure you have reviewed the supplier’s disaster recovery and business continuity plans (these may cross over with issues discussed above)
• where financial damage is likely, consider requiring the supplier to hold insurance that will cover the customer’s loss, or to pay for the cost of the customer holding its own insurance.

New lawyer: We are going to be sharing our new offices with Rachel Colley’s new firm – AXIS IP. Rachel is a trade marks and intellectual property specialist with tons of experience advising owners of local and global brands about how to get the most out of their IP. Rachel’s on assignment in Sydney this month, but we look forward to her return in November.

New funding and awards recognition for Konnect: We’ve been delighted to be advising Konnect in its latest fund raising round – a $3.5 million investment from Rangatira. Konnect has also been named as one of the finalists in the University of Auckland Business School’s  Entrepreneurs Challenge for 2012 – following in the footsteps of another client, Enlight Photo, who was one of the winners in 2011. Watch these guys – they are only just getting started.

New book: Congratulations to Kirsten Hodgson on the publication of her debut book “LinkedIn for Lawyers”. It’s a great guide for anyone who uses LinkedIn (not just lawyers) and is getting some well-deserved positive reviews.

One other business we’d like to spread the word about is yourschool.co.nz. They aren’t a client but they’ve got a great business that we think combines online advertising, philanthropy and support for local communities really well. Half of the sign-up fee goes straight to your school. Check them out (and get your school registered).

And finally, warmest congratulations to Jeremy and Jackie (of Jackie Jones Interior Design) on their recent engagement. We wish you both (and your extensive whanau) all the best for a long and happy life together.

For creditors it seems like a relatively cheap option – get your lawyer to prepare a short statutory demand, serve it on the company, wait for 21 days and if no payment is forthcoming, head off to court to get the debtor wound up.

The following recent examples illustrate some of the problems with statutory demands for creditors.

Scenario 1 – Our client agreed to buy out his 50% shareholder in a company they own together. The purchase price was to be paid in instalments over 12 months. After buying the shares our client discovered that the vendor had been defrauding the company. So he stopped making payments. The vendor issued a statutory demand for payment. We pointed out to the vendor’s lawyer that there was a genuine dispute and that the demand should be withdrawn. The statutory demand was withdrawn and district court proceedings were commenced by the vendor. Over 18 months later our client has still not paid a dollar to the vendor.

Scenario 2 – our client was owed money for services provided to two related companies in Australia. One was registered in New South Wales and the other in Victoria. Issue # 1 was that our client had to instruct separate law firms in each state. Both firms prepared statutory demands and served them on the debtors. Issue #2 was that the debtor companies failed to respond to the demands (or raise any issues) except by issuing their own proceedings to have the statutory demands set aside on the basis that the bills where disputed. Our client then had the problem of defending these claims (and spending significantly more money chasing the debts than it was owed). Our client settled the claim for 10 cents in the dollar rather than continue the fight. The amount recovered only just covered its costs.

Scenario 3 – Our client issued a statutory demand to a slow-paying customer. On day 21 the debtor paid the debt in full.  So far, so good. 14 months later our client received a letter from the debtor’s liquidator demanding repayment of the money in full. Under the Companies Act any amount paid by a company within 6 months of the appointment of a liquidator is presumed to be a voidable payment (and has to be repaid for the benefit of all creditors). As you can imagine, our client was not happy.

What’s the lesson from all of these stories? In all three cases the debtor companies could have avoided the whole issue of non-payment. In scenario 1, the vendor could have protected its position by holding onto the shares (or taking security) until it got paid in full. In scenario 2 our client should have stopped supplying services when the debt went overdue. In scenario 3, our client was a subcontractor who should have dealt directly with the principal instead of the head contractor. All three companies have learnt expensive lessons. We hope that you can learn from their experiences too.

Law graduates in 2012 face a similarly difficult challenge. After a real boom for lawyers over the past 15 years, the market for law graduates is again going through a tough time. In the 90’s and noughties every young lawyer I knew headed overseas for their OE after a couple of years working here. As an employer, it was a nightmare to attract and keep the best graduates. As the boom intensified, overseas firms were even employing graduates with no experience. Starting salaries with six figures in $US or $AU were possible for the brightest.

So why is it so hard for new law graduates to get a job now? I think that there has been a perfect storm of factors:

• Large scale M&A activity has dried up (partly driven by the lack of capital and the diminished appetite for risk during the GFC and also by the fact that big companies in NZ are subsidiaries of multi-nationals headquartered off-shore – so the work gets done there). This means that the large firms need to employ fewer graduates.
• There are too many law schools and law graduates for NZ to absorb (demand for law degrees is driven by students attracted to the rewards that a legal career can offer and supply of those degrees is easy to meet because lawyers are relatively cheap to train compared to doctors or engineers).
• The leakage of lawyers into other careers, particularly in business and banking, which created gaps for new lawyers to fill has also been slowed by the GFC.
• Law firms also have their own problems employing new lawyers.  Clients are increasingly unwilling to pay $200-$300/hour for a junior associate to learn on the job, partners are unwilling to forego their high incomes to train new lawyers and graduates just aren’t profitable in their first couple of years of practice as they get to grips with the practice of law.

So what’s my advice to new graduates? First – get a job – any job – and work your way up from there. I found my first job in a small law firm in Hastings and I loved it. I know lawyers who have started their own companies, got jobs as contract managers, gone into policy jobs in government, worked for an MP, a union and the IRD. Except for the graduate mentioned in the first paragraph (who started as a law clerk and is now a partner at Bell Gully), for most of us the first job was just that. Get some experience and see where it leads.

Completing a law degree doesn’t necessarily mean that you have to be, or are suited for a career as, a lawyer. But after 20 years of practice, I am still learning new things every day. And that’s what will keep me excited about being a lawyer for many years to come.

It makes the news when sport and business collide – one of my favourite examples is the (now jailed) Ponzi scheme conman Allan Stanford who tried to buy world cricket, starting with the England team.

Despite these episodes of disharmony and disaster (and there are plenty more) most of the time sport and business work together collaboratively and for mutual benefit. Sport depends on the support it gets from business and businesses can get tangible benefits from being associated with sport.

A recent example that we worked on was the NZ PGA Pro-Am Championship at the Hills golf club in Arrowtown. The NZPGA (which looks after NZ’s club and touring professional golfers) teamed up with Sir Michael Hill’s business empire to create a unique event that included celebrity and fee-paying amateurs playing alongside touring professionals. The tournament is run by a joint venture company and has attracted a solid list of sponsors and corporate support in its first year. It also has government backing as the premier event on the local golf calendar. The Hills have high hopes that this tournament could become the “Masters” of the South Pacific.

Apart from collaborating on funding and organisation of events and teams, is there more that sport can learn from business? We think that there is. For instance – why is it that New Zealand golf administration is split between the NZPGA (who look after pro golfers) and New Zealand Golf (who look after everything else)?

Businesses in the same situation (and unencumbered by the Commerce Act) would try and “consolidate” by merging these two organisations. The larger NZ Golf would take over NZPGA. Members of both would reap the benefits of the economies of scale and efficiencies from having professional and amateur golf under the same umbrella – allowing the game to speak with one voice to SPARC, funding agencies, sponsors, broadcasters and the public.

Much of NZ golf’s success has been at an amateur level (the men’s Eisenhower Trophy team in 1992, Danny Lee as the youngest winner of the US Amateur and Lydia Ko and Cecelia Cho as world #1 women’s amateurs). It would be great to see this success replicated by our touring professionals. Local club members would feel a stronger connection to Kiwis on the pro tours if they were flying the NZ Golf flag internationally. Pro players would benefit from having access to the resources of the whole golf community. As golf fans, we’d love to see that.

I’m not the first person to notice it, but there are some very obscure business niches dominated by New Zealand companies. If you can be the world’s biggest anything, chances are that it can be big business – Vista Entertainment’s 83 staff generated $24.1m revenue in 2010.

But this is a lawyer’s blog, so what’s my angle? Your position in a market correlates to your ability to control your own future and deal with risk. So if you look at a company like Apple, it has achieved market dominance as much by having a brilliant business model as it has by designing cool gadgets. In my view, the iTunes Store and the Apps Store are the truly genius parts of the business – getting other people to create content and write applications so Apple can make more money is one of the most effective commercial models ever devised. Apple doesn’t have to buy stock for its e-stores and there is really no limit on how much content these stores contain. Developers even give Apple’s customers software apps for free. This creates the virtuous circle of making Apple’s hardware even more desirable at no cost to Apple.

Because Apple dominates the smartphone and tablet markets, it has been able to write its own rules. That’s a great position to be in. While you may eventually be the subject of attention from competition regulators (like our Commerce Commission) most companies that dominate their markets make a lot of money.

Who are the NZ companies dominating their niches? One example is Konnect. It collects the medical information for life insurance policy applicants on behalf of insurers. In just under 3 years of operation it has signed contracts with all but one of the life insurers operating in NZ. It invented its own market and promptly signed up 90%+ of the potential customers. It is executing its plans to extend the range of services it offers to those insurers. Because most NZ life insurers operate on both sides of the Tasman, its customers are insisting that its services are also available in Australia.  Konnect controls its own destiny. Although it is currently a tiny company compared to the insurers it deals with, it offers a service that all of its customers believe they have to buy just to compete with other insurers on an even playing field. That means Konnect has real bargaining power in contract negotiations and can control its risk.

There seems to be no industry that doesn’t have an undiscovered niche that a NZ business could dominate. Maybe that’s what small countries and small countries can be best at – identifying an opportunity that others have missed (or is too small for big companies to bother about), devising the solution and selling it to a global market.

Judging by the results at last night’s awards, NZTE and the government has started to recognise the importance of these niche companies to our future economic prosperity.

The generation of lawyers before ours did not recognise that distinction – if you were a lawyer you would have a crack at everything from drafting wills and doing conveyancing, to handling child custody disputes and defending criminals.

By the 1980’s a clear split had emerged between the court lawyers and non-litigators.
These days the profession has become much more specialised – family law, criminal, commercial property, construction, banking, competition, tax and environmental law are all distinct. In larger countries and firms the specialist areas are even narrower – when I worked at Clifford Chance in London there was a department that was dedicated to financing aircraft leases, and another that solely dealt with mergers and acquisitions for private equity funds. The Australian law firm I worked in had lawyers solely dedicated to advising on stamp duty (and how to avoid paying it).

What does this mean for businesses? Chances are you are going to need more than one lawyer to meet all of your legal needs. One of the skills of a good lawyer is knowing when, how and who to engage for that specialist advice. The other value that your lawyer can add is to make the process as efficient as possible (saving you time and money). The same way that a good builder will manage a renovation project to make sure that the subcontractor plumber/electrician/painter only turns up at the right point in the job (and when the preparatory work has been completed by other trades).

So, don’t be alarmed when your lawyer recommends that you consult another lawyer for advice – you wouldn’t expect an orthopaedic surgeon to deliver your baby – neither would you ask an employment lawyer to give you tax advice.

We have had a brisk start to 2012 – helping new and returning clients with some exciting transactions.

We are often asked how our clients find us. It’s pretty simple – all of our clients are referred to us by existing clients and people we’ve met. It’s a great thrill when an existing client recommends us to someone new. It means that we’ve done a good job when someone endorses our work with a referral.  Believe us, we know the challenges every business faces to grow a client base.

So we like to reciprocate – by highlighting clients’ work in our blogs and steering clients to people we know will do a good job. On that note, in this blog, we’d like to put a plug in for:

• our favourite golf pro, Susan Farron
• a recruitment agency you can’t go past — Dale, Paul and the team at Talent Magnet
• NZ-designed and manufactured low cost central heating  – talk to Massimo at HEATBOX
• great business mobile rates at 2degrees Mobile
• NZ’s market leading GPS vehicle tracking and fleet management solutions, at Navman Wireless
• Roger and the team at Scenario Communications, providing strategic and creative communications, branding and advertising solutions
• Minnie and the team at Be.Accessible, inspiring and enabling greater accessibility for all.

Finally – this is a New Year’s blog, so we are sharing our three resolutions. Firstly, we’ll be sharing legal updates and client news regularly on this blog; secondly we’ll be getting your feedback on how we are doing at the end of each job; and thirdly, we are going to make sure that whatever happens, we contribute to our clients’ success and have fun in 2012.

Nick and Jeremy