Tuesday, February 12, 2013

How to Start a Brewery in Nebraska (Part II) - Contracts

(The views and opinions expressed in this article are solely those of the original author. These views and opinions do not necessarily represent those of the Nebraska Beer Blog.)

By Aaron Funk

“So let it be written, so let it be done…” Not just Metallica lyrics (or Yul Brynner’s Pharaoh from ‘The Ten Commandments’), but actually some of the best and cheapest legal advice I can offer to the people I consult on brewery projects.

One of the great things about the professional craft brewer is their open and honest character. They are hardworking professionals who display remarkable passion for their product and for their industry. Without turning this into a paean about craft brewers analogous to a pickup commercial about farmers, I will nevertheless say that craft brewers are a decent lot, many of whom hearken from a bygone era where a handshake sealed the deal and your word was your bond.

I love the sentiment, I truly do. But sentiment doesn’t buy the $50,000 pickup for that honest, hardworking farmer. Seven dollar/bushel corn did and you can be damn sure the farmer had a written contract for the corn and the pickup.

Much of the legal consulting I perform for craft brewers has nothing to do with licensing and regulatory work and everything to do with contracts. I am, first and foremost, a contracts attorney. Nearly everything I do is contractual paperwork – your TTB license and liquor commission applications are for all intents and purposes contracts. “I’ll give you the right to produce and sell beer, you promise to pay me excise taxes.”

The items that creep away from the licensing side of the business are innumerable, but typically stem from putting together the apparatus to house the brewing side of the business. Few craft brewers walk into a turnkey operation with the building, equipment, and materials all set up and ready to go. And even if they do, they had to have signed some sort of purchase agreement. Rather, most fledgling brewers are piecing together the various parts of the business from a variety of sources, many of whom will insist on a written instrument guaranteeing payment for their performance. And while a deluge of paperwork and signed agreements is far from the fun and entertainment of brewing beer, it is no excuse to avoid it.

Case in point: a new brewer is contracting with a plumber to install his brewing equipment. And let’s say that this plumber is legit – licensed and bonded and came recommended from a trusted colleague. You like the guy, he seems to know what he’s doing, and he says he’ll do the job for time and materials. You haven’t signed anything, he hasn’t given you a written quote, and the only number you have is a vague assurance that the job shouldn’t cost more than $20,000. Are you then surprised when the bill comes back for $60,000? You shouldn’t be. You turned this guy loose on your property and told him to bill you for time and materials. His time, his subcontractor’s time, his secretary’s time, to say nothing of the best and finest materials your money can buy – you agreed to that. And before the 1st year law students out there start shooting their hands in the air to point out that oral contracts are not generally enforceable – do you really think that any judge or mediator will allow you to get out of paying this bill just because you didn’t pay enough attention to this detail? You will get sued, the plumber will present his time cards and his invoices and pictures of the work he completed, and you are now $40,000 over budget. Oh, and while this drama is playing out, the plumber will have filed a lien against your property. It’s a little hard financing your project when your collateral is already spoken for. You can beat your breast and cry out to the world at large that you have been wronged – maybe you have been – but this mess is now yours to clean up.

A written agreement does not have to be written in legalese and take up 35 pages and require a notary’s stamp and your thumbprint in blood. Sometimes these are good precautions to take, but the above case could be avoided with a page or two of clearly written language encompassing the intent of the parties. COULD be avoided, I say, because the more complicated a project gets, the more precautions, warranties, and contingencies you may want to build into the agreement. If you hire a guy to paint the interior of the brew house for $1000, you will very likely pay a guy $1000 for a painted brew house, and another guy $500 to clean up the mess the painter left behind since your contract didn’t cover drop cloths or cleanup. And since you didn’t specify a mold-resistant paint, you may be paying another guy $3000 in two months to repaint your brew house. Do you have any legal recourse against the first painter? Perhaps, but how are you going to go about getting your money back?

At the same time, many of the service providers and suppliers you will deal with are honest, decent people and they may have a standard contract they use. You are not doing yourself any favors by simply signing your name at the bottom and handing it back, though. Did you read it? Did you understand it? Did you know that you just indemnified this contractor from any damages that occur on your property and that you agreed that your insurance company will cover his negligence? He’s still an honest, decent person, but he just got you to cover his insurance liability. How do you think your insurance company is going to feel about that when his employee drives a forklift through your new fermenter? What do you think is going to happen to your insurance rates after that? And maybe your insurance policy doesn’t allow you to indemnify third parties for their negligence. It all gets pushed back on to you.

Putting together a contract is certainly within the average person’s capabilities. As I mentioned previously, a clearly written statement of the intentions of the parties will offer a basic level of protection. And for the people who want to do the right thing in producing a contract but want to do it themselves, there are DIY contracts for sale – heck, the internet is littered with them. The DIY kits and web contracts, though, are the equivalent of the DIY beer kits sold in Wal-Mart – you will technically be making beer, but just barely. And if you start playing attorney – borrowing language from other agreements and using terms you don’t understand – you’re setting yourself up to make bad beer. I trust my local brewer to produce good beer; it’s a better part of prudence to let your attorney produce a good contract for you.

It may seem self-serving to make the case for written contracts, when I myself am in the business of writing contracts. It’s a fair point – however, you’ll never hear me complain about a craft brewer charging a fair price for good beer. I am after all a craft beer enthusiast as well as an advocate. I’ve experienced many situations where otherwise sophisticated businessmen get dinged by circumstances that could have been controlled by a modest investment in some risk management up front. I believe that it’s my job as a consultant to help you make the best decisions. Therefore, I’d prefer that you pay a little money at the beginning for a decent contract, rather than a lot of money later for crappy work from a disreputable contractor who charged you too much and then sued you. And, while I won’t hold up the written agreement as a cure-all to defective work and unscrupulous characters, I have found that the mere fact that you push for a contract can take care of the issue. It’s much harder to take advantage of a well-informed customer who asserts their rights from the start and builds remedies into their contract. And I’ll tell you, I never lost a wink of sleep worrying about hurting anybody’s feelings by being assertive while negotiating the terms of a contract – being assertive is not being a jerk, it’s good business. In any case, craft brewing is the business of making assertive beer – why should you expect any less of your business dealings?

“Get it in writing!” thus remains some of the best and cheapest legal advice I can offer (besides “Take a cab!”). Insist on a contract, don’t let anybody go to work without one, and seek the advice of a professional prior to putting your signature on something you aren’t comfortable with.

~ I must stress that the above article was written for informational purposes only. It is not intended to replace the advice of an attorney familiar with the specifics of your business or of your needs.

Aaron Funk is a craft beer enthusiast who finances his passion by working most days as an attorney. He got his start in the industry working for Empyrean Brewing Company, where he bottled beer, taught beer appreciation seminars, and judged homebrew competitions - at the same time as he represented the company as its general counsel. While earning his MBA at the University of Colorado - Boulder, Aaron worked with the American Homebrewers Association and the Brewers Association, first as an intern and later as a web editor. Aaron consults both start-ups and established breweries in and around Nebraska. -Contact the author: afunk2 (at) msn.com.

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