Access to legal document templates is becoming ever-easier and cheaper for online users due to the rapid expansion of the online legal services market. However, what many potential users of such services do not know are the potential dangers and complications that often arise from taking such an approach.
As legal advisers to many early stage businesses, we are often involved in the due diligence carried out prior to an investment or an exit, and sometimes the documents which have been used by a business up to that point are not fit for purpose. In the most severe cases, this has led to an investor or buyer walking away from the deal.
Extreme caution should be exercised when using online legal document templates, and this article by Louise Torr and trainee Gemma Sichi highlights some of the reasons why.
In the first instance, it is important to know that the document you are looking to use is actually the correct document for the intended purpose. In the absence of legal knowledge, you may for example, decide to use a non-disclosure agreement (NDA) instead of a consultancy agreement. Engaging with a legal adviser at an early stage will allow you to steer clear of using the wrong documents and having to get new documents signed at a later stage, sometimes when it is more challenging to get someone to sign it. We have seen many examples of this which have left a business open to risks.
Signing a document
Different countries have different laws when it comes to validly signing a document and even within Scotland certain documents need signed in different ways in order to be legally valid. It is important that you fully understand who needs to sign and in what capacity and whether or not a witness is required for the signature. Speaking to your legal adviser will ensure that all of your documents are executed properly.
This point is often overlooked but is hugely important. If you are using a document internationally you must take extra care. Often the jurisdiction of online templates will not be Scotland. Instead, it is likely to be England or even the US. Whilst a document works in one jurisdiction this does not necessarily mean it will work in another. For example, US templates will not be valid in Scotland in instances such as Wills and Estate Planning and English terminology is also often very different.
This issue is particularly relevant when it comes to warranties and indemnities. These are standard clauses used across most jurisidictions and different jurisdictions take different approaches to the law. In the US, for example, a breach of warranty allows the buyer to recover on a £ for £ basis, however in the UK a buyer must prove they have suffered a loss due to the breach and this is an onerous task where the bar is set high and is difficult to reach. If you have a document that is drafted under US law you may end up with a contract which is totally off the mark in a UK context, or, even worse, the document may refer to terms which have no meaning in the jurisdiction you are in. All of this leaves you with a document that doesn’t work as you intended and could reduce the creditability of the company.
The law which governs the contract will determine what court you must go to in order to enforce the contract, should the other party not perform their obligations or breach the contract in some other way. If the contract is governed by English law this will mean that you will need to go to the relevant court in England to enforce the terms of the contract. We have experience of dealing with businesses which are registered in Scotland that have executed shareholders' agreements governed by US law and where the US courts have exclusive jurisdiction for any disputes. This is not often practical.
With no personal and professional legal advice deriving from such websites to eradicate any doubt, what is spent now on professional legal services could be saved tenfold in the future (avoiding costly disputes or penalties).
They may also be governed by laws in different countries meaning that you may need to go abroad to enforce contracts.
Standards of drafting
Although the websites might draw you in with a cheap price tag and promises of little hassle, the old rule of thumb stands: if it sounds too good to be true, it probably is. It may not even be a jurisdictional issue as aforementioned; it may in fact be that the legal document template is simply error strewn in relation to incorrect legal terms and structure (which an untrained eye may not recognise). It might also be that the document that you need has certain requirements in order for it to work as intended. For example, a fully signed EMI must be sent to the option holder within seven days of signing and must be registered with HM Revenue and Customs. On a number of occasions we have seen this not carried out properly and it causes significant problems at an investment or an exit scenario.
Jack of all trades, master of none
Online templates tend to be all things to all people but actually end up achieving nothing. You may be looking for a specific document and when contracting with others it is imperative that you use the correct document for the intended purpose. However, you will often find that online templates are overly vague as they try to appeal to numerous needs. As these documents are so general they will most likely not include the vital ancillary documents that you need, for example, a share purchase agreement without a stock transfer form means that the share purchase never happened. You may also work in an industry that requires industry-specific issues to be covered and online templates cannot offer this service.
You will often find that in order to be all things to all people the vague wording can lead to misrepresentation, misunderstanding and miscommunication which could result in the company being taken to court - facing the very real possibility of a huge financial loss for the company and negative exposure.
You don’t know what you don’t know
Lawyer's fees, especially for businesses at an early stage, can seem hefty and the cheap price tag that comes with online templates may seem more appealing. But, how can you tell if the template is actually a good document? You need to ask yourself if you have the knowledge to tell what is good from bad. Online templates don't come with advice meaning that you are going in blind as to what you are signing up for and you don't know the short and long term consequences of using a template.
We have a team of specialists who know what to include in a certain type of agreement and what not to include so whilst legal fees may look steep in comparison to online documents, you are also paying for years of knowledge, advice and experience which will be invaluable to your company as it minimises potential consequences down the line.
Up to date?
As with the ever-changing nature of the law, documents need to be drafted in accordance with the current law. New regulations come into force and cases are also heard in court which can impact upon wording used in documents. In order to minimise risk it is recommended that clients seek specialist advice. Online legal document templates are not created to suit a particular client's needs; rather they are created with a one-size-fits-all approach. There may be key provisions which should be included in your specific document which the legal document template does not include let alone have a chance to consider.
Law firms in Scotland are regulated by the Law Society of Scotland and are expected to maintain the highest standard of service and conduct. A regulating body can provide welcome assurance to prospective clients in terms of credibility and accountability; however websites providing legal document templates are in many instances serviced by unlicensed advisers. It is therefore recommended that users leave nothing to chance and seek a regulated solicitor's advice.
There are certainly instances where using an online style document will be adequate for what you require and it will help minimise costs, however it is worth considering the associated risks.
Instead of isolating yourself, why not speak to a team of legal professionals to guide you not only with respect to current needs but also to provide a personal and proven service in the future and who will actively engage in assessing your risks and opportunities?
Sometimes the added value they can provide is also invaluable, whether it is putting you in touch with manufacturers, potential investors or marketing gurus, or even just featuring your business in their next newsletter.
Get in touch
At Harper Macleod, we work with businesses to ensure they have the right legal documents in place to meet their needs. If you want to have a discussion about how we can help, please get in touch with a member of our team.