Atty. Rami Hourani
The prevailing view of lawyers in the business/start-up space falls into one of two categories. The first is a vague sense of expense and unnecessary complication. The second is a general attitude of indifference. This is not a strange or unexpected thing. It is very possible to live your life without needing or even encountering a lawyer. However, there must be something there for our society to create the atmosphere that it does around lawyers. By the end of this article, I hope to give you a framework with which to approach the law and lawyers in your endeavors.
This is perhaps the most basic thing that a lawyer can do for a business in its day-to-day. Lawyers know the law. They can give you a working understanding of it too. This is a simple enough concept but difficult to truly convey. If you’ve seen a legal drama than you know on a certain level that dates, forms, rules, and choices can have extreme consequences on the trajectory of people’s lives. In those dramas, this is illustrated by the threat of jail which the lawyers must work against. However a businessman, entrepreneur, freelancer, or other enterprising individual are not contending with jail. They contend with their day-to-day and 95-98% of the time the law has very little to do with whats in front of them.
For your purposes though, you need to know when that 2-5% of the time has arisen and what a lawyer can do to help you. The biggest determinant of how a lawyer can help you really depends on the kind of enterprise you are dealing with. It can be either simple or complex.
A simple enterprise does not require a lot of elaboration. These are your small store fronts, cafes, low volume buy-and-sell, small scale manufacturing, individual freelancing, etc. Basically, if everything that could be the business can fit into a humble location and the transactions you make can be described accurately by “they give me their money, I give him/her my product/service” then you have yourself a simple enterprise.
In the case of a simple enterprise, what a lawyer can do for you is sit down with you and explain what you need to do to be compliant with government regulations. This is something that can be done by googling, yes. However, a favorite trick of professors in law school was asking a question requiring you to enumerate a list. At the end of the list, they would then ask the question “… and?”. The hapless law student trusting the sincerity of his professor’s tone would not know when to stop enumerating. (Coincidentally, this is where a lawyer’s general distrust of the kindness of strangers starts.) In the same way, when you google you will not know if you got everything or if you’re beginning to imagine requirements that do not in fact exist.
A complex enterprise is best understood in one of two ways. First, complex due to its purpose. Second, complex as a consequence of growth. On the first kind of complexity, do your transactions involve a lot of trust? Is there a lot of work that goes into a project before profit is realized? Are you required to submit a lot of compliance documents to a regulatory authority? Does your product or service require you to adapt to the needs of each individual customer? Then you probably have yourself a complex enterprise.
The second kind of complexity occurs due to growth. The second kind of complexity is best illustrated by an example. Let’s say Pedro has a laundry shop. (For the sake of the example, Mr. Laba-laba) All he starts with are a cashier and a helper who loads the laundry. Over time, the the number of customers he has steadily increases, he even adds a few branches. Pedro might see that his electricity bill is quite large because each of his branches is equipped only with smaller washing machines. He decides to take another location and outfit it with large industrial washing machines that he will operate at a higher volume. This means he will hire drivers who will ferry the laundry from their locations to his central washing headquarters. He will hire supervisors to ensure the work is being done within the amount of time he requires. He will operate these washing machines in shifts throughout the day and night. He will hire auditors to check the collections of each of his satellite locations and ensure that money is promptly and properly collected. A laundry shop is a simple business but given just a little bit of time and growth, it can become a complex one.
In either kind of complexity, an ongoing relationship with a lawyer is a near requirement. There are going to be disagreements with your employees. There are going to be major conflicts with customers. There are going to be unfortunate incidents of theft or swindling. There are going to be government requirements to contend with. These are all par for the course in the life of a businessman, but to be handled correctly they require the intervention of a lawyer. The process of getting a lawyer up to speed on your business takes time. If the same lawyer who advised you on your internal controls is the one you go to when you find out an employee has stolen money from you, you will not need to dwell on what evidence to furnish him. If a disagreement occurs between you and your employees as to compensation, if your lawyer is familiar with the organizational structure of your company, he/she can tailor his advice to the specific employee or incident concerned. If a building you constructed is supposedly not up to specification and you believe it is in fact compliant, the lawyer you hired to draft the contract is in the best position to point to the portion of the contract that most supports your point. (He will also be the one to tell you when you are in the wrong and should probably send some contractors over to fix the problem.) This is why having someone in your corner who is familiar with your business and its various idiosyncrasies is invaluable.
Businessmen/Entrepreneurs are a generally capable class of people. They need to be in order to be able to take on the task of reshaping a small slice of the world to suit their vision. If you are a businessman or entrepreneur you may think to yourself “What does a lawyer have that I do not?” This is precisely the kind of thinking that makes you successful at business. Let me answer your question, what we have is an intimate understanding of the ways people fail to understand the law. Every lawyer’s training comes with hundreds upon hundreds of hours of studying how people have fallen short of or misunderstood the requirements of the law. On top of that, lawyers know which laws can be bent exactly how far and what to do to ensure that nothing be broken. If you remain unconvinced, try and recall instances of businesses running afoul of the law and paying dearly. I don’t think you have to think for very long to call into mind a few good examples.
Lawyer’s are not known for their creativity. However, what we do have is a knowledge of how the Philippines works behind the scenes. This is the entry on the list that will probably require the a relatively strong relationship with your lawyer before you feel comfortable enough to have these kinds of conversations. I think the only way to talk about this topic is to use examples.
I have a friend who is active in the startup space and was very adamant to get online payments set up for a large LGU. They sent out their feelers and were able to get in front of representatives of the mayor to make their pitch. After a tense 30 minutes presentation, they were thanked for their time and left the premises. That’s where the story ends. There was no follow-up, there was no callback, and there was definitely no business to be had. I told my friend that he should have been more targeted in his pitch. I heard about the event after the fact. I explained to him that he should have not settled for the staff of the mayor and should have tried to speak to the Chief Executive of the LGU directly and in default of that a Councilor. I got a long look from my friend, the failure was fresh in mind and not wanting to dwell on the topic, I held my explanation in abeyance.
The reason why the plan was never going to work, something that was obvious to me, but not to my friend, was because he was not speaking to the decision maker. A contract entered into with the LGU will require a resolution authorizing the Chief Executive to sign the contract. If money is required to be spent then an ordinance will need to be passed authorizing that the money be spent. There are also bidding requirements that need to be thoroughly sifted through and understood. In the above example, none of this was incorporated into my friends plan and thus there was really no plan, just an idea. In the start up space there is a saying “ideas are worthless without execution behind them.” In this case, the missing component of execution was actually expending the effort to understand what needed to happen to be able to give the government an offer it could act on. All the artistry and eloquent presentation in the world cannot defeat… dun, dun, dun… legal requirements.
Another example of this is when I was talking to a different friend. He wanted to set up a company that would disburse salaries for employers. Even in casual conversation, I could see the small mannerisms that were being restrained to lend clarity to the presentation. If I squinted hard enough, I could almost see the pitch deck in the background. I saw the amount of effort that he had expended and wanted to offer a bit of insight. I asked him a few simple questions about if he’d looked into the tax treatment of income and the various ways portions of income could be exempted from tax. He gave me a blank stare. I explained, if he just changed the composition of the services he offered he could actually save his customers money. He asked me how he would do it, I told him I had a rough idea but did not know exactly how. This would have entailed expenses on his part that he was not in the position to be able to assume at that time. However, I just want to impress on you that there was an aspect the marketability of the venture that was unknown, even to the person starting it, that would have remained unknown without the candid intervention of a lawyer.
A question that is bandied about in Startup Forums or Facebook groups is how to organize a company. I do not mean business registration or compliance. I mean questions crafted like this: “I am entering into a business with friends. What kind of corporation should I make?”, “I have am about to shift to one big supplier for most of my needs in X, how can I be protected?” or “I’m going to partner with X for a big project, does anyone have any templates for a JV Agreement I can borrow?”
These are the kinds of posts that make me cringe the most as a lawyer in the Philippines. This betrays our desire for stability as merely an afterthought in our pursuit of profits. I cannot begin to elaborate the number of assumptions that each of those questions makes. Even in the realm of the purely hypothetical I could come up with several dozens of questions to ask the person who came to me with these queries. To name a few: “How did you meet this person?” “How long have you known them?” “Do you trust them?” “Who holds the money?” These are all questions I would need the answer to before even beginning to take notes.
There is a whole spectrum of legal arrangements that can be placed between people to protect them from the public and from each other. Deciding which one to employ is not as simple as the common refrain “Corporation so that you are protected.” There are many situations where that will be the case, but the precise flavor of corporation may differ given the circumstances. Maybe multiple corporations should be created with contracts tying them all neatly together. The thought process of deciding which arrangement is fair will require an intimate understanding of contract, partnership, administrative, corporation and tax law. Aside from issues of law, your lawyer will also take into consideration the human tendency to acquire the upper hand in business dealings and tweak the arrangement to minimize that possibility. A good lawyer would even consider the demeanor that you and your business partners exhibited in your consultations with him when drafting and proposing terms.
The added utility of procuring a lawyer for these arrangements is that you can go back to him/her in the event of a disagreement. The impartiality and authority he/she brings to your agreement can split the difference between parties who have otherwise acquired fixed stances and simply dug in their heels. Contrary to popular belief, lawyers do not like conflict and if given the opportunity will seek to settle differences. If your lawyer has the delicate human touch that escapes many members of my profession, he/she may even be able to soothe the feelings of hurt or betrayal and set you and your business partners back on the track towards being friends.
A statistic that is thrown around a lot in the Startup space is that 9 out of 10 businesses will cease to exist in 5 years. This is often used as an excuse to play fast and loose with contracts and covenants. However, this is all the more reason to make sure that the contracts, corporations, or commitments that you make today become chains tomorrow. When contrasted against the millions of pesos that an enterprise can spend every month when business really starts to pick up, the amount you could pay to a lawyer is minuscule by every conceivable metric. How I wish that my disagreement was purely an academic one but I have seen these quickly drawn up and seldom remembered agreements become the basis of bitter and protracted civil and criminal litigation. You would not believe the number of criminal cases for syndicated estafa (punishable by decades in jail) that are pending review before the Department of Justice between business partners who once considered each other fast friends.
Every businessman with any respectable amount of time conducting business on any respectable scale for a good amount of time will have a s***-hits-the-fan story. A requirement not being submitted. An employee walking away with over 1 Million pesos worth of inventory. A payment being missed. These are all the beginnings of a series of unfortunate events for the person recounting the story. On the whole, the most common reactions I see to these situations is, First, the business owner instructs an employee to “take care of it” and, Second, the business owner takes it upon himself to rectify the situation.
In the first scenario, this is the reaction that comes most naturally to business people. They leverage their time by hiring people who do things for them so that they can devote themselves to directing the operations of their business. Naturally, a good number of them will think that this approach works in a legal controversy. However, for whatever reason: the employee being too busy, the employee not understanding what to do, the failure of the business person to devote enough resources to the problem, the failure of the business person to realize/convey the gravity of the scenario, the problem may go unsolved. Often, the lapse of time from when the instructions are given until the business person becomes aware that his problem has not gone away has only given his problems time to grow and become more difficult (and more expensive) to solve.
In the second scenario, this is perhaps the most laudable response that I see. The business person takes it upon himself to try and settle the dispute. A good number of problems can be solved this way because when you are doing something for yourself you are not reliant on other people to tell you that the work is done. There are however some problems with this that I encourage you to consider. Breaking away from a routine that has brought about a successful business comes with a cost which you pay with every hour you step out from under your business person hat and into the problem solver hat. Additionally, the solution of most businessmen is to enter into a transaction, but not all problems can be solved with a transaction. Lastly, let’s not forget about the mental toll that additional uncertainty and stress can take upon someone whose life is probably already full of uncertainty and stress.
Now, it may seem like I’m asking you to let your guard down around your lawyer and pay him whatever he asks you. I am a lawyer today in large part due to the dependency of my family upon lawyers previously and the considerable sums we paid them. But, if you find a lawyer you can trust, that is worth the lawyer’s weight in gold. (As lawyers tend to be a bit doughy, this is saying a lot.)
People often ask “What do I get for paying you to solve this problem?” I think this is the wrong attitude to take with a lawyer. In the same way that buying inventory is actually buying future profits, SHTF moments are previous lapses that incur future losses. What going to a lawyer accomplishes is it lets you know roughly how much those losses cost you.
Lawyers are broken into pieces and reassembled in law school. This is done so that we can exist in the space created when someone breaks the law.This is why the saying “Even lawyers were children once” exists, because in the space that would bring about crippling anxiety in a lay person, a lawyer stand on his behalf and thrive. We are remade in this way that you may go on living your life without the sword of Damocles hanging over you.
People have impressions of lawyers and I am not here to disabuse you of any deeply held impressions. In writing this article, I simply sought for you to reconsider how lawyers might be of service to you. However, as I do not wish to leave you with just vague concepts, I will leave you a little advice for talking with lawyers:
1. Do not be afraid to talk prices.
Most lawyers are perfectly fine haggling their fees so do not feel that when a lawyer quotes you a price that you are not allowed to discuss it with him. I only ask that you refer to the Minimum Attorney’s Fees Schedule that can be obtained by the Integrated Bar of the Philippines Chapter. I do not say this for the benefit of your lawyer, I say this is so you don’t embarrass yourself asking for prices that are lower than what your lawyer could legally give you.
2. Communicate your expectations.
Lawyers are used to encountering people who are already “neck deep in it.” You will have to forgive us if our general demeanor is seemingly aloof or guarded. This is so we do not get overwhelmed by the scope of the problems that we may be approached with. I am sure though that any lawyer would be very happy to take a consultation before any problems have occurred with a view to preventing them. Just let him know in advance what you would like to know and I can near guarantee that your lawyer will have satisfactory answers for you.
3. Remember, your lawyer did not bring you before him, your problem did that.
The unique role of lawyers causes them to be treated with the contempt that was previously reserved for the problems they are handling. I often receive verbal retorts from my client that I know were emotionally directed at the opposing parties or the cause of their pain. It is part of the job to take these on the chin, but if you can catch yourself in a quieter moment and communicate an apology to your lawyer, this goes a long way from preventing you from being “that client.” It may even net you that extra bit of attention for your case.
If you made it this far, I invite you to check out some of the other articles on my website here. I sincerely hope you never need any of the advice I gave you!