Common Myths that Doom Business Relationships

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Credit: Thinkstock

Credit: Thinkstock

Myth: A widely held but false notion 

Unless you operate a stable on the dark side of the moon, out of contact with everyone else, interactions with others will be an essential part of your business. The success of your equine venture is a direct reflection of how well you manage the relationships you have with three important groups of people: your clients, your workers and third-party vendors and service providers. Conventional wisdom about these relationships often is wrong, and dispelling these myths is essential for keeping your stable running successfully.

So, with apologies to the Discovery Channel’s popular “Myth Busters” Adam Savage and Jamie Hyneman, let’s dive into common myths about business relationships.

Myth #1: I don’t need a written contract. I trust my clients; my clients trust me.

While mutual trust is an essential starting point for any successful relationship, a well-written contract is the mortar that holds things together when disputes arise. And disputes will arise. Not with every client, certainly, and not in every situation, but a business that sails along without issues is a pipe dream. The inevitability of disagreements makes the use of written contracts essential.

Think of a written contract as a time machine, a way to predict the future no matter what happens. Most of the time, business deals work out as expected. The stable provides the agreed-upon services—board, care, training, lessons, horses for trail rides and so on; no one gets hurt; and the clients pay the bills on time. When the expectations of the parties are satisfied, and no arguments arise, the existence of a contract is irrelevant. Everyone is happy and life goes on. When things go wrong, and no one is happy, a court can enforce a well-written contract and create the expected result.

Disputes arise when the expectations of one party, or sometimes of both parties, are not met. The possibilities for disagreement in the horse industry are nearly endless: A client or a client’s horse is injured and the client says it is the stable owner’s fault; a client claims that promised services were not provided; board, training, lesson bills go unpaid; problems with a sale or lease develop. The list goes on.

A contract, no matter how well written, cannot guarantee that a disgruntled client will not file a lawsuit over a real or imagined problem. While it might save time and grief, there is no gatekeeper in a courthouse to toss out even frivolous lawsuits before they are filed. A contract may provide a viable defense to a lawsuit, however, and the process of negotiating a contract with a client may help ward off lawsuits because the process requires the stable owner and the client to discuss the terms of the agreement. It should go without saying that everyone who signs a contract should read and understand everything in the document before signing it.

Generic contracts downloaded from the Internet or copied from a book can be satisfactory starting points when drafting a contract for your business, but working with an attorney is essential for an agreement that satisfies all the legal requirements of your state. A one-size-fits-all contract never fits any individual business very well.

The emphasis here is on a written contract, but not because of the popular belief that oral contracts are impossible to enforce in court. Although there are a few important exceptions, such as transactions for the sale of land, some sales of consumer goods and contracts that cannot be completed within a year, many oral agreements can be enforced in court. The problem is that successful litigation is more difficult when nothing is in writing.

Before a court will decide the merits of a breach-of-contract claim based on an oral agreement, the individual who filed the lawsuit must prove two things: first, that there actually was an agreement; and second, the terms of that agreement. If nothing is in writing and there were no witnesses to the alleged negotiations, those preliminary hurdles may be insurmountable.

Avoid “he said, she said” arguments. Get it in writing!

Myth #2: I can sell your horse if you don’t pay your board bill.

This one probably should be called a “quasi-myth,” because selling a horse to satisfy a delinquent board bill can be a viable remedy, but only if the stable owner jumps through the required legal hoops. A horse owner, even one who does not pay his bills, has rights that must be respected. You may be guilty of theft or conversion (the civil version of theft) if you sell a boarder’s horse without the legal authority to do so.

If you utilize a written boarding contract—and you should (see Myth #1)—it should include a provision giving the stable owner a security interest in the horse being boarded. This provision gives the stable owner all the rights of a “secured party” under the Uniform Commercial Code, a comprehensive body of law that governs commercial transactions. Some version of the UCC has been adopted in every state, and an attorney familiar with your state’s laws can draft language that satisfies the specific statutes.

In general, a properly secured party (the stable owner) can take possession of collateral (a boarder’s horse, considered personal property in all states) and sell it in a commercially reasonable manner to cover the outstanding board bill. Relying on a contractual security interest to satisfy a delinquent bill does not require court action, but there are important legal procedures that must be followed. If the sale price exceeds the outstanding bill, the excess goes to the horse owner. If the price falls short, the horse owner still is on the hook for the balance.

Potential problems include defining what “commercially reasonable” means in the context of selling a horse and whether a breed registry will transfer ownership of a horse without a court-ordered sale.

If there is not a written boarding contract, or if the contract does not grant a security interest in the horse, a stable owner’s only option for dealing with an overdue bill may be a statutory lien. Often called “agister’s” liens, these security interests are based on state statutes rather than provisions in a written contract. Agister’s liens are cumbersome, require court intervention and take time to resolve. These liens arise through the act of boarding a horse, do not require a written contract and provide some protection for stable owners who do not use written boarding contracts. These liens are creatures of state law. They are similar in purpose, but vary in detail from state to state, and the assistance of an attorney is recommended to help navigate the legal waters. Self-help may save attorney fees, in the short run at least, but may create more problems than it solves.

The best solution to unpaid bills is to avoid them. Screen your boarders; ask for references (and check them); keep your billing up to date; identify overdue bills as soon as possible; and take corrective action by contacting the client before the problem becomes unmanageable.

Myth #3: One of my clients gets hurt? No problem. My state has an equineliability statute, so I can’t be sued.

Forty-six states have equine activity liability statutes on their books (if you live in California, Maryland, New York or Nevada, feel free to skip this section). In a relatively new twist on a long-standing defense to personal injury lawsuits called “assumption of the risk,” these laws typically require boarding farm owners, trainers, event sponsors and other equine professionals to warn participants of the inherent risks of the equine activity, but not to make the activity safe. The idea behind the laws is simple and attractive: A participant in an equine activity assumes the risk of getting hurt if he or she is made aware of the inherent risks of working with horses and decides to participate in the activity anyway. Without these laws, the high cost of commercial liability insurance would bankrupt many equine businesses.

One of the important misconceptions about equine activity liability laws is that they prevent lawsuits from being filed against a stable owner. That is not how the laws work. Instead, they may provide an effective defense—assumption of the risk by the injured person—that a stable owner can raise in a personal injury lawsuit.

There are important requirements and exceptions, however. For example, stable owners typically are required to post conspicuous signs warning participants of the inherent risks of equine activities. Exact language for the warning signs generally is specified, along with the size of the signs and the size of letters that must be used. Failure to post the required signs may mean that the stable owner cannot use the assumption-of-risk defense. Courts are divided on this question, and an attorney can help interpret the laws in your state. The specified warning language also should be used in contracts and liability waivers.

Exceptions include negligence of the stable owner and his employees, use of faulty or defective tack, failure to determine the ability of participants and failure to provide a suitable horse for participants. Injuries to spectators may be excluded, along with some activities such as racing. Employees, often covered by workers’ compensation insurance, also typically are excluded from state equine liability laws.

Myth #4: Representing both parties in the sale of a horse is good for my clients and good for me.

Serving as bloodstock agent for both the buyer and seller in the sale of a horse might sound harmless, especially if both parties are clients of your stable, but the practice of “dual agency” is fraught with hazards. Dual agency also may be illegal.

Potential problems arise because of the special nature of an agency relationship. In legalese, agency involves two separate parties. The relationship arises when one person (called the “principal”) grants legal authority to negotiate on his behalf in business transactions to another person (the “agent”). One of the most important components of an agency relationship is the agent’s duty of loyalty to the principal (called a “fiduciary duty”). This fiduciary duty means that the agent must act in the best interest of the principal.

So far, so good—at least when the agent owes a duty of loyalty to only one principal.

Dual agency, when a single agent has two principals in the same business deal, is problematic because an agent must try and reconcile the competing interests of two parties.

In the sale of a horse, there are two principals: the seller and the buyer. Their interests in the transaction are understandably different; the seller wants the highest price for his or her horse, while the buyer wants to spend as little money as possible.

Consider the plight of a single bloodstock agent trying to fulfill his fiduciary duty by representing the best interests of two competing parties. Negotiating in good faith to get the highest price for the seller and the lowest price for the buyer—for the same horse—is extremely difficult. It may be impossible without breaching the fiduciary duty owed to one of the parties.

The conflict of interest inherent in dual agency, along with the potential for hidden commissions, under-the-table deals and kickbacks, has led at least three states to enact legislation to regulate the practice in horse sales. (Dual agency may be addressed in a general fashion by laws in other states, but Kentucky, California and Florida currently have dual agency statutes aimed specifically at horse sales.)

These equine-specific statutes do not prohibit dual agency. Instead, they require transparency in horse sales to protect both the buyer and seller. Horse sales must be accompanied by a written bill of sale that includes the purchase price and is signed by both parties; dual agency is permissible if both the seller and buyer are informed that one agent is representing them both and if they agree in writing. Hidden commissions and other incentives to the agent must be disclosed. Penalties for violations of these statutes can be severe.

Stable owners and managers should think long and hard before deciding to represent both parties in a horse sale.

Myth #5: I live on the farm, so my homeowner’s insurance covers everything that might go wrong with my business.

Buying insurance sounds easy—you select a policy, pay the premiums and hope you never have to make a claim. Not all insurance policies are the same, however. Liability policies written for homeowners (or renters) nearly always have specific exclusions for businesses conducted on the property. It is a safe bet that the insurance carrier will adopt a very broad definition of “business” to include even a modest horse operation in the event of a claim. Reliance on a homeowner’s policy likely will leave you without any coverage if one of your clients is injured, and paying the damages from a successful personal injury lawsuit can drain your personal assets and bankrupt your business.

A general farm owner’s liability policy might include coverage for personal injuries caused by “livestock,” while excluding horses from that provision. Also, most general farm policies do not cover harm to animals or other property owned by someone else while those animals are in your care. This exclusion can create serious liability problems for stable owners in the boarding business. For situations in which you assume responsibility for someone else’s horse, “care, custody and control” coverage is appropriate. Other insurance options include mortality (full or limited risk); theft and loss-of-use coverage for your own horses; various kinds of fertility insurance; and major medical.

A general discussion of insurance typically raises more questions than answers. One of the most important relationships for any business owner is with a reputable and knowledgeable insurance agent who can answer those questions as they relate to your unique circumstances.

Myth #6: Everyone who does work for me is an independent contractor because I say so.

Workers are classified by the Internal Revenue Service as either employees or independent contractors. The differences between the two, and the implications for a stable owner who misclassifies workers, are significant.

For a stable’s employees, the owner is required to: 1) pay the employer’s share of employment taxes (including Social Security, Medicare, and federal and state unemployment taxes); 2) withhold income tax and the employee’s share of employment taxes from the employee’s gross pay; 3) report gross and net wages to the government; and 4) provide a W-2 form to each employee. That is a substantial amount of bookkeeping and red tape for a stable owner who probably is overworked already.

Things are far less complicated if a worker is an independent contractor rather than an employee. There are no withholding requirements and the only necessary reporting is annual filing of a Form 1099-MISC if certain conditions (including payments of $600 or more during the year) are met. The solution sounds simple: Classify all workers as independent contractors and avoid the red tape associated with having employees.

Unfortunately, “simple” and “IRS” seldom go hand in hand.

Even if both the employee and the worker agree on independent contractor status, the final determination of a worker’s classification will be made by the IRS in the event of an audit. Although the IRS employs a 20-part test to differentiate between employees and independent contractors, the main factor is the level of control exercised by the employer over the worker. The odds are good that the IRS will consider the worker to be an employee if you direct how, when and where a worker does his job; provide equipment and training; set the work schedule; and pay on a regular basis. Improperly characterizing employees as independent contractors, either intentionally or by mistake, may require the employer to pay his share of employment taxes, along with the taxes that should have been withheld from the employee’s wages, and possibly interest and penalties. Getting it wrong can be expensive.

Courts have wrestled with the question of whether certain classes of workers are employees or independent contractors. Veterinarians and farriers generally are considered independent contractors unless they work exclusively for a single farm, while grooms and other regular stable workers more likely are employees. A trainer who conditions horses for multiple owners is more likely to be classified as an independent contractor than a trainer who works exclusively for a single individual. Courts are split about the status of jockeys and exercise riders at the racetrack and on the farm.

Take-Home Message

Myths in business tend to persist until they are proven false, often at the expense of a stable owner who has relied on them. The most important relationships you can cultivate may be those with members of your management team—your attorney, accountant, banker and insurance agent. Their advice can put your stable on solid ground and help you avoid a myth-based business model.