Default Law: Arial 11 Isn’t Your Only Option

Many entrepreneurs avoid considering legal context because it’s both confusing and appears to limit choices instead of expanding them. The reality, however, is that making no choice of legal context is a choice – a choice to abide by the default law. Default laws are often counter-intuitive resulting in harsh unexpected consequences. Failure to choose is the worst choice you can make.

Default laws are laws (or rules) that apply when the parties haven’t made other choices. Like the default font settings in a word processor, the law also has default settings that apply in the absence of an affirmative choice. If you open a google doc and begin typing without selecting a font, you will use Arial 11pt. Arial 11pt is the default setting. If you don’t want to use Arial 11pt, you’re free to make a change but that requires action on your part. Similarly, the law has default settings – what I’ll call “Arial 11” laws. These default laws appear throughout statutory law and are based upon common law principles.

One example of an Arial 11 law is what happens if someone dies without a will. When this happens the court isn’t baffled or neutered, the court simply applies the default law, which in this case is called the law of intestacy. Every state in the U.S. has adopted some form of intestacy law, which automatically applies to your estate, forcing the judge to divide the estate according to the statute. If you had a valid will, however, the judge would divide your estate according to your will and the laws of intestacy would not generally[1] apply.

Another example of an Arial 11 law is what happens if there are terms missing from a contract. The Uniform Commercial Code (UCC) is one set of default rules that applies to contracts though there are many[2]. Courts will apply these default terms whether or not the parties actually know they exist or understand them. If, however, the terms were clearly specified in the contract, the court would abide by those instead of the default rules.

Similarly, most states in the U.S. have adopted some form of default business operation law. If you begin to do business and have not formally selected some other form of organization (e.g. corporation, limited liability company, limited partnership) then the default law applies. The default law is either sole proprietorship or general partnership depending on how many people are “owners” of the business. These defaults are extremely dangerous because both of them expose you to unlimited personal liability. Unlimited personal liability means that your risk isn’t limited to what you’ve invested in the business. Instead, anything and everything you own – your home, your vehicle, your retirement account, and arguably your bitcoin holdings if an identity is tied to them – is at risk. In the U.S., once a judgment is levied against you it will usually follow you either until death or bankruptcy. If, however, you had properly registered the organization as something other than a sole proprietorship or partnership, your risk would typically be limited to what you’ve invested in the business.

Default laws exist to allow courts to provide predictable outcomes in the absence of affirmative choices. Whether you are choosing the form of organization for your company or setting terms for a contract, making a well-informed choice is almost always better than leaving it to default. We’ll look at more examples of legal context and the power of informed decision making in the next article in this series, which deals with the choices of business organization, incorporation and registration.

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[1] There are always exceptions in the law and the applicability of the intestacy statute to a given case is decided on an individualized basis by an officer of the court. Examples of when the statute would apply despite a will include: if a will was not properly executed or failed to dispose of all residual property.[2] For one example of the complexity of interpreting contracts, see, The Law of Interpreting Contracts, Texas (2007).http://www.orsinger.com/PDFFiles/Advanced_Civil_Appellate_2007_Interpreting_Contracts.pdf