How Default Terms in the Law May Affect Your Business

Lawyers can find analogies to the law anywhere.  I recently found one during a fantasy football draft.

On Tuesday night, nine of my law school friends and I held our annual draft.[1] And for the first time we decided to conduct an auction draft. An auction draft is exactly what you think it would be: a NFL player is nominated and the highest bidder (using fake money) wins the player. The same spending limit is placed on each participant.

About halfway through the auction one of our friends put his draft on “auto-select.” The auto-select feature is fairly common. Wh      at happens is that the website has a predetermined set of rules by which it will draft players for you. Typically, this is not a problem  . . . unless you are playing with a group of lawyers who (by nature) read this set of rules.

What happened next? Thank you for asking, I’ll tell you. The rest of us agreed on the conference call to purposefully increase our bids for the next few players up to the maximum amount the computer would bid on behalf of our departed friend. The result was that the computer ran through the rest of his money very quickly while he “won” a handful of average players.  Was that the right thing to do? Absolutely not.[2] But was it effective? Yes. It is astounding what advantages you can have when you know the predetermined settings (aka the default settings).

Believe it or not, the same is true with the law. When two parties reach an agreement but fail to settle all of the terms, in effect, they put their agreement on auto-select. In response, the law will often input those forgotten terms for the parties based on a predetermined set of default rules it has created, whether the parties would have chose them or not.

An example might help. In a lawsuit in Virginia in 1986, a company went to court trying to enforce a promissory note for nearly $4,000.00. There was no argument that the defendants had signed the promissory note, and no argument that they failed to pay the money. And yet, the lower court entered judgment in favor of the defendants and the Supreme Court of Virginia agreed.[3] The plaintiffs could not collect the money owed to them.

Why? It turns out that the promissory note did not contain a due date. And so, the court found a Virginia “default rule” to input the due date. In the circumstances of this case, a promissory note with no due date under Virginia law was said to be due “on demand.” In other words, the due date of this promissory note with no due date was . . . the very day the note was issued.

For the defendants, that could have spelled trouble. The default rule meant that, in this case, the plaintiffs could have demanded payment on any day after the defendants signed the agreement. But they didn’t. They waited five years and one month to demand payment. And, unlucky as they were, the court also decided that a five-year statute of limitations was applicable. The plaintiffs missed the legal deadline by one month. Clearly if the plaintiffs had known about this Virginia default rule, they would have demanded payment much earlier.

Most business owners understand that handshake deals and hastily written (or downloaded) agreements may be risky, but few understand that it is not just the words written in the agreement – but the words NOT written in the agreement – that may affect their business. Contact a lawyer to draft and review your loans and agreements before you sign them. It might just save you time and money down the road.

NOTE: This post is for informational purposes only. It is not legal advice. If you need legal advice, please contact a lawyer.  (If you are still not convinced, please read our disclaimer.)

[1] Yes, we did it by conference call.  But that makes it cool, right?

[2] That is a joke.  It was absolutely the right thing to do.

[3] Harris & Harris v. Tabler, 232 Va. 75 (1986).

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