Bad Agreements with Bad Actors: A Few Words on Contracts

deal-devil-dude-e1383095467983Contracts are a necessary element of business. They form the relationships and set the expectations on which we all rely as businesspeople. But, at the end of the day, a contract is nothing more than a promise. And a promise, as we all know, is only as good as the person who makes it.

When you enter into a contract, therefore, you have to consider two important things:

First, what is the quality of the actual contract? For example, does it clearly and unambiguously set forth what each party is supposed to do, and what happens if they don’t? Does it provide reasonable grounds for termination of the agreement is not working out, but still ensure that each side gets the benefit of their bargain.

Second, what is the quality of the person on the other side of the contract? Is this a person who will keep his promises? After all, if he doesn’t, all the contract allows for is me to seek a remedy, usually by going to court. All too often, that is not really a remedy at all, given the expense involved and the likelihood that the court can even provide the relief you need.

In my practice, I am often called upon to review a business contract (or, as the case may be, a commercial lease, which is nothing more than a specific type of contract) after the relationship has soured, a dispute has arisen, and a business owner comes into my office asking what he or she can do. In many of these instances, the contract involved either contains ambiguous or unfavorable terms, or is missing important terms altogether.  The counterparty to the contract is either using terms that were put into the contract to bludgeon my client, or taking advantage of the absence of terms to run roughshod over him.

More frequently than I care to mention, when that business owner is sitting in my office, it is the first time a lawyer has even looked at the contract. The opportunity to prepare a solid, comprehensive, clearly worded contract is long past – and now the only thing we can do is try to reach a negotiated resolution to the dispute (if that’s even possible), or litigate it. In either instance, the expense involved is far greater than it would have been to do it right in the first instance.

Humans are fallible, imperfect beings. And business, as is life, is unpredictable. Try as you might, you will never be able to predict with 100% accuracy who will keep their promises and who won’t, and what relationships will work out and which ones won’t. What you can do, however, is take control of those things you can. And one thing you can do is prepare rock solid contracts, and do so right from the beginning.

Hooters Waves White Flag: Will Voluntarily Close Rather than Face Revocation

There are some battles that are just not worth fighting, apparently.  For the Rockville, Maryland Hooters restaurant that was charged with overserving the drunk driver who killed Montgomery County police officer Noah Leotta late last year, that would include the battle to save their liquor license.  The restaurant faced a show cause hearing before the Montgomery County Liquor Board this week over whether their license should be revoked, or some lesser penalty (a suspension and/or fines) should be levied.  Apparently seeing the handwriting on the wall, the restaurant opted to forego battle and accept terms of surrender — namely, the surrender of their license.  They will voluntary turn over their license and close their doors permanently in November.

Many may wonder why the restaurant wouldn’t at least try to defend themselves — after all, there is no stronger penalty the liquor board can levy than revocation, and this result is tantamount to that very outcome.  Moreover, in our experience, it is notoriously difficult to make the case that an individual became intoxicated at a particular establishment, and as a result of drinks served to him at that establishment.  This was, however, a very high profile case and Hooters — a nationally recognized brand — may have had strong business reasons to not engage in what seem like an exercise of shirking responsibility.  The individuals who held the license for this establishment may have also had a strong interest to avoid a hearing and not tinker with the possibility of revocation — had their license been revoked they would have been permanently banned from ever holding a license again.  By voluntarily surrendering their license, they avoided that fate.

Considering the business and legal implications, and the fact that the liquor board is not a court of law but an administrative body that has broad discretion to make decisions that it thinks are in the best interests of the community, this voluntary surrender and closure appears to be the proper result for all concerned.  Finally, considering that the establishment cannot face any civil liability under state law (because Maryland is one of only a handful of states that does not permit so-called “dram shop liability”), this should close the matter (and a sad chapter) for the restaurant and its licensees.

 

 

The Four Relationships that Can Make or Break Your Restaurant Business

restaurant kitchenThe restaurant business, like almost all businesses, is about relationships. And, of course, the most important one you will have is with your customers. If you don’t preserve that relationship, you won’t have a business for very long. But there are other relationships that must be protected just as jealously, because if any of them sour, they can bring down your business just as quickly as if customers stop coming in the door.

In our experience, these are those four relationships:

1.      With Your Partners (and Investors).

If you go into business with anyone else, that person has control over the success or failure of your business – regardless of whether they have any involvement in its day-to-day operations. If your restaurant is struggling, will your partners and investors have the patience to allow the plan to work, or will they want to bail out at the first sign of trouble? And, if they do bail out, can they pull their money out and leave you with all the responsibilities and liabilities? Alternatively, if the business is doing well, will they insist that the profits be paid out in distributions to the partners, or will you have the ability to put that money back into the business to enable it to grow and thrive? And, regardless of whether you are succeeding or failing, how will decisions be made about how the restaurant is managed? What if there is a deadlock – can a decision be made at all?

These are all questions that must be answered well before you open your doors – and well before the first sign of discord. That is why we advocate that preparing a written operating agreement should be among the very first things you do when you embark on your restaurant business. If you are in agreement on all these things – great, finalizing the agreement should be easy. But if you’re not, it’s better to find out sooner rather than later.

2.      With Your Landlord.

Perhaps no single person (or entity) has more control over the future of your restaurant business than your landlord. A tough-nosed landlord can stick you in default over the slightest deviation from the strict terms of your lease, whereas a more lenient and accommodating landlord can work with you through rough patches and allow your restaurant the time it needs to get up and running and the room it needs to prosper. So while you need to understand the terms of your lease, you also need to understand who your landlord is – and how they operate – before you sign your lease.

But even a lease with a well-meaning landlord needs to be reviewed thoroughly and completely – every word – because landlords can change, and what today is a small local landlord with a reputation for working with their tenants can tomorrow be an out-of-state investment trust that does not care that you’ve had a few tough months and it always picks up in the Spring. In those cases, your only protection will be your lease. Indeed, the lease you enter into with your landlord is probably the document that will have the greatest impact on the success of your restaurant. For all too many restaurants, whether they succeed or fail is predetermined at the moment the lease is signed. Make sure you not only sign a lease with a good landlord, but that that lease itself is top notch too.

3.      With Your Employees.

As with any service business, a restaurant’s employees are its lifeblood. They are its face to the world and, without them, the food doesn’t get prepped, cooked, plated, or served. Without good employees, even a perfectly formulated restaurant concept will assuredly fail. But taking care of your employees means more than just showing them gratitude, paying them well, and giving them appropriate time off. It also means complying with the letter of the law when it comes to wage and hour and other employment laws.

Federal and state lawmakers, for good reason, have made it a priority to ensure that unscrupulous employers do not take advantage of low wage workers, and the restaurant industry’s heavy reliance on tipped employees makes them a target for government regulation as well as lawsuits from disgruntled employees who may not have been properly paid. To protect themselves, restaurants must keep impeccable employment records and strictly adhere to all employment and wage laws. Take a lesson from those who haven’t, and have paid dearly.

4.      With the Government.

As businesses that prepare food for public consumption, and often serve alcoholic beverages to go along with that food, restaurants are among the most highly regulated small businesses in the country. From food safety permits to liquor licenses, there is almost nothing that restaurants do that does not require government approval or subject it to government oversight. The IRS is also notorious for making restaurants among its favorite audit targets. As with the employment issues highlighted above (which is another area of government oversight and regulation) strong compliance programs are essential. No one is ever going to be perfect, but if you are found to have violated a law, it is better to be able to show it was in spite of your best efforts at compliance, not because of a lack of such efforts.