Brevity in Arbitration Clauses

Every time I review the arbitration clauses in our template agreements, I wonder about the most succint, least ambiguous, way in which I can draft the arbitration clause.

The standard arbitration clause provided by the AAA is 50 words.

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

Ken Adams’s revision (from his blog at

As the exclusive means of resolving through adversarial dispute resolution any disputes arising out of this agreement or [describe the subject matter of the contract], a party may demand that any such dispute be resolved by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, and each party hereby consents to any such disputes being so resolved. Judgment on the award rendered in any such arbitration may be entered in any court having jurisdiction.

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Reader Query: USHA, Articles & Bylaws

AP writes, asking: What goes into the unanimous shareholders’ agreement and what goes into the articles and bylaws?

Dear AP,

First I’ll describe the way the different parties in a corporation/company interact:

1. The shareholders appoint directors.

2. The directors run the company.

3. To run the company, the directors appoint officers (i.e. administrators) like CEOs, CFOs, etc., etc.

The rules and documents that impact Shareholders’ interests in a company are in the following order:

  • The Law (the relevant act)
  • Constitutional Documents (Articles, Bylaws, Unanimous Shareholders Agreement)
  • Non-unanimous shareholders agreements, voting trust agreements, side letters, etc.

And now, a not-so-brief summary of the documents mentioned above:

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Compensating Team Members

FA writes: When a Canadian startup starts to make revenue, how do you pay yourself and your team without a) getting hit by lots of taxes and b) doing it wrong and making it an accounting nightmare.

Dear FA,
First of all, if your wish is that you could pay no taxes on this, join the club. We have a large membership. The only thing we all aim for is the best combination of techniques that reduce or defer payment of taxes. The important questions, as I see them, are:
a) can you defer the taxation of money received to a point in time when the person won’t be taxed too heavily when (s)he receives it?

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Patents for Early Stage Companies

V writes: Our startup is worried about IP, i.e., will we get sued? How do we protect ourselves? Do we need patents? Will the VCs love us if we do not have provisional applications for patents?

V, First, commit to having a plan, however bare-bones and however small, on what part IP is going to play in  supporting your business plan. Write it down (your thoughts will come useful in conversations with funders, partners, customers) You’ll look like you do your homework.

Second, if you want a nice summary of some concepts of patent law, check out:

A short succinct statement on the topic from that site is: “The five primary requirements for patentability are: (1) patentable subject matter, (2) utility, (3) novelty, (4) non-obviousness, and (5) enablement.”

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Should I Incorporate?

C writes asking what are the pros and cons of incorporation or should he just run his business now and deal with incorporation later?

Dear C,

This is the first big legal question in the life of your startup.  I always recommend incorporating as early as your cash-flow permits.

Some benefits to incorporation:

  • Risk reduction. If your business runs up mountains of debt, creditors can’t go after your personal assets (unless you are really careless as a director or very fraudulent – allowing the court to “pierce the veil” of the company to get to you.)
  • Tax deferral/reduction. You can accumulate value in your company by having it operate as a separate legal “person” without worrying about the short term impact on your yearly taxes. You can put in place a long-term tax efficient plan as to when you want to take cash out.
  • If you think you will grow and will want to raise funding, you will need a corporate entity to allow investors to invest into.

Some downsides:

  • Set up
  • Setting up the company will probably cost between anywhere between a few hundred dollars to 1500 dollars (done by a law firm that will do all the organising resolutions, give you the minute book and seal, etc.
  • You will need to file for a business number and depending on your revenue a GST number.
  • You have to do annual tax filings and annual resolutions. These may cost a few hundred a year.

  • If you are a director of your company you will have legal obligations you have to be aware of as your run your company (payroll, paying taxes, taking decisions in the best interest of the company)

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Setting up an international subsidiary

Consider this issue:You are an company looking to hit a major market on this or the other side of the world.
You’ve been attending trade shows in that market, pitching to customers, following up on referrals, and now … there on the horizon, a RFP beckons, or even better, a fully formed, real life customer.Should you be setting up a subsidiary in that country?Consider the following:Factors in favour of a local sub:
1. You need to station long standing employees in that company (especially to the extent you sell face to face services.)
2. You need to collect payments and remit taxes locally (don’t slip into the easy thought that if you don’t have a local presence a “Permanent Establishment” doesn’t exist and you are free from tax. That’s a detailed examination and not always conclusive, even if you don’t have a PE under that country’s rules- for example state and city taxes in the US.)
3. You’re worried about getting sued by customers, partners, employees, or  the local government for all the rules you don’t know about in a country where you have three employees working out of their bedrooms.Factors against:
c. You don’t know how much real business there actually is (for you) in that location.
d. You don’t have the money to set up a subsidiary.
d. You don’t have the money to pay for the expertise to maintain the subsidiary (annual corporate filings, bank account setup, payroll setup, understanding and preparing documents complying with local laws on employment, tax, etc.)
e. You don’t have the organisational bandwidth to set up local management.Doing business across multiple countries is an exercise that is high-risk, high-cost (especially if you want to manage liability risk.)

If you are small, you may want to consider a variety of models of international expansion.
You may want to decouple elements of your operation and contract them out to arm’s length third parties in your target countries (rather than your own entities) until you are large enough to absorb them back and deal with the complexity. These, depending on what you sell, will be functions like local sales, local distribution, and licensing.

Now, keep in mind, even if you don’t set up a subsidiary in a foreign country, to address point 3. you should consider channelling your overseas activities through local subs in your own country (that you can manage in a more cost-effective manner.)

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Hiring employees and consultants Internationally

The question inevitably arises:

What issues will I face when I have an employee based abroad?

I’ll share some of the concerns that light up my head whenever someone discusses such an activity:

You will have to consider what type of agreement (employment agreement, consulting agreement, business to business services agreement) you will want to enter into with the person X who is going to provide you service.

When you hire someone as an employee and he/she is sitting in some other country, you could be affected by:

a) local laws related to employment and taxation

b) foreign laws related to employment and taxation

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