GETTING THE DEAL
THAT HURTS YOU:
BETWEEN THE LAWYER AND THE SALES DEPARTMENT IN COMMERCIAL CONTRACTS.
The scenario is repeated so often that
almost every owner of a business knows it. A salesman or woman comes in
with a “great contract” that will make a good profit, excited not only
about the instant transaction but the other follow up business down the
road. A contract and business relationship so long sought is now on the
verge of being culminated.
Then the legal department or outside
counsel are brought in and to the initial annoyance and then anger of
the sales department, begins to pick apart the deal and, perhaps, become
engaged in a heated exchange with counsel for the other party which
threatens the deal…and at times kills the deal.
Furious and frustrated, the sales
people mutter that lawyers kill deals and have no idea about how
business really works. Indignant and defensive, the lawyer insists that
the transaction was more of a set up than a good business decision and
would have resulted in disaster.
And next time around the sales
department seeks to evade attorney review or, more dangerously, actually
commit the company in some handwritten letter hoping that legal review
cannot hinder the process.
Meanwhile the owner of the business,
seeing the sales lost and an angry workforce, but fearing a bad
contract, feels caught in the middle. But the salespeople have one
powerful argument to advance: the deal is gone. The “troubles’ mentioned
by the lawyer are not certain, only possibilities: that the deal gone is
Our office makes a lot of money from
the result of the above scenario: it usually means that sooner or later
contracts will be signed that will result in confusion and dispute and
we end up making good money from the inevitable litigation that ensues.
But what is an owner or salesperson to
do? How do you know when the lawyer is being too cautious, when the
chance must be taken? And how do you really know how much of a chance is
This article shall seek to give some
guidance on this issue.
THE USE OF “TEAMS” TO
1. There Are Legal Terms
that Matter More Than Money: FORM A TEAM.
Many disputes involving commercial
contracts result from, and their resolution ultimately turns on,
decisions made by the corporate lawyer
at the drafting table. Even provisions considered boilerplate—e.g. those
involving governing law, forum designation, arbitration requirements,
merger clauses, survival of representations and notice
requirements—frequently can be determinative in litigation. Indeed, many
commercial disputes could be avoided altogether if only they had been
anticipated, and dealt with properly, at the drafting stage.
The problem stems
from the realities of the commercial negotiation process: many corporate
lawyers, driven by intense time pressures and clients; business
dictates, concentrate on the immediate transaction at hand without
focusing adequately on potential future disputes and their manner of
resolution, leaving such issues to the litigators. As a result, by the
time disputes arise, the litigators' options are restricted by the
language of the governing contract.
More often than not, the litigation
reduces to a battle of contract interpretation—a battle that most likely
could have been avoided if only the contractual provisions had been
drafted with greater care.
By planning ahead, or
consulting attorneys who do not only draft contracts but litigate or
arbitrate them, many owners or commercial lawyers can avoid contractual
disputes or, if they do ripen into litigations, greatly enhance the
likelihood of a more favorable (and more expeditious) resolution.
Contracts are power. No
more or less than that. It is via the contract that a party will have
rights and obligations and signing on the dotted line can obligate a
company to do things that will kill it. United Airlines and General
Motors were both brought to the brink of bankruptcy because of contracts
with workers. More businesses than this writer can list have been
brought to bankruptcy because they agreed in a contract to build a
project, sell a product, perform a service that turned out to be more
complex, require more resources or take too short a time and realized to
their horror upon reading the contract that they were truly obligated to
accomplish that feat.
Each word, every word is viewed by the
judge or jury closely. In most states and in most arbitrations, verbal
testimony is looked upon with disfavor, or at least suspicion, as a
party seeks to “interpret” a written obligation away. To state that one
did not understand the meaning of a term or was in a hurry or was ill
that day will bear little weight.
In one prolonged arbitration, our
client commented sadly one night that he never realized that a five
minute chat about a warranty over dinner before signing a contract could
result in five days of discussion of that term. But it does.
But NOT all terms matter that much and
the good lawyer will educate him or herself not only to the legal
requirements of a transaction (this any lawyer should know) but the
practical business side to determine in the negotiations what can be
“given away” and what must be held to at all costs.
It is up to the owner/client to educate
the attorney as to what matters and to integrate legal advice with
business practicalities BEFORE the negotiation, including what
provisions do not matter much to the owner and what terms the owner and
lawyer agree must be inserted.
Equally important, the sales staff must
be educated not only as to the process, but why it is being imposed and
their views invited as to how particularly dangerous clauses might be
For example, one lawyer was extremely
worried that a delivery to China would never be paid for since the
Courts in that nation are notoriously fickle. The salesman was besides
himself that a large deal would be lost because cash up front was
required by the lawyer and the customer would only have sufficient cash
to pay all when he had sold the first third of the order, but timing of
delivery required the full inventory available within a hundred miles
from first delivery. The customer could not put up a
Letter of Credit for the full amount and the deal seemed
But during discussions the actual
issue-security for payment-was considered by the owner, salesman and
lawyer together as a team-and a solution was found by delivering the
product to a bonded warehouse in Singapore (with a good court system)
and releasing parts into China as payments were made.
It need not be a fight if the ISSUES at
hand rather than the roles (lawyer versus salesman) are made the focus
of the inquiry.
2. Realize that Risk
Taking is Part of Business –but EDUCATE YOURSELF AS TO RISK.
general rules should be kept in mind by the drafting parties at all
(1) ANTICIPATE THE
SOURCE OF LIKELY DISPUTES;
(2) DRAFT EACH
CONTRACTUAL PROVISION WITH THE EXPECTATION THAT ITS LANGUAGE WILL BE
DISPOSITIVE IN ANY FUTURE LITIGATION; AND
(3) CONSULT A LAWYER
WHO HAS BEEN IN CONTRACTUAL ARBITRATION AND LITIGATION BEFORE
FINALIZING THE CONTRACT.
3. The Representations
and Warranties: ALWAYS AN AREA OF IMPORTANCE.
Perhaps no aspect of a
commercial transaction, other than its economic terms, should be
negotiated more vigorously and with greater care than the
representations and warranties. All corporate negotiations are alike
in at least one regard: the buyer and seller each want to provide the
most limited representations and warranties possible, but demand the
broadest possible representations and warranties from the other party.
This struggle is not
without significance. Representations and warranties, together with
merger clauses, define the parties' agreements and understandings.
Virtually every litigation arising out of a commercial contract is
marked by allegations of breached representations and warranties.
Carefully (i.e., narrowly) drafted representations and warranties
(together with tight merger clauses) may prevent litigation; at the very
least, armed with such safeguards, a party dragged into a litigation
should find itself in position to resolve the dispute by dispositive
motion which can eliminate the matter before trial or
representations and warranties, the Team must make absolutely certain
that their terms, as written, are absolutely accurate. Keep in mind
that, in a deal gone bad, it is not uncommon for the economically
aggrieved party to hire a litigator to scour the other side's
representations and warranties for loose language or ambiguities, hoping
to find a basis for a lawsuit.
Forum; WHERE AND HOW YOU FIGHT CAN ALTER IF YOU FIGHT.
Beyond limiting the
scope of representations and warranties and ensuring that their terms
are airtight, a drafting Team should seek to employ procedural
safeguards to fend off possible litigation.
A local forum lessens the
cost and inconvenience of a possible fight. More than one fight did not
occur because it was simply too disruptive for an opposing party to
travel across the world.
Attorneys fees awarded to
the prevailing party makes the chances of small or vengeance dispute
less likely since nothing makes one hesitate before filing suit as much
as the danger of having to pay the other side’s attorney fees.
Limitations on liability
can restrict the risk factor and make a litigation less likely.
Alternatively, if your opposing party wants to limit liability far below
what your damages would be if they breached-consider why.
One can include in the
commercial agreement a provision that states, in substance, that all
representations and warranties are to be narrowly construed and limited
specifically to the terms set forth therein. (In addition, one can
insist that the representations and warranties are effective only for a
limited period of time after the closing of the transaction. The
so-called survival clause allows a party to bring suit only for those
breaches of contractual representations and warranties that arose during
the survival period. Southland Corp. v. Ashland Oil, Inc., 696 F. Supp.
994, 1004 (D. NJ 1988).
And good lawyer can
provide additional provisions that clarify disputes so that the chances
of ambiguity are minimized; that make the process to resolve disputes
less expensive; and to allow intelligent discussion before dispute, such
5. The Goal: MAXIMIZING
RETURN AND MINIMIZING RISK.
The balancing act between the
protection of the lawyer and the upside of the sales person is
inevitable in any business context and ultimately must be determined by
the boss who runs the business. At times risk that the lawyer considers
insane will be well justified. At times the boss will turn down
tremendous profit to avoid tremendous potential loss. (A wise business
man once told the author that the most money he ever made was the money
he did not lose by closing a deal.)
The key task is to form the right team
and to keep them working together so that over time they educate each
other as to their own concerns and needs. This can work over the years
and one saleswoman, known for her successes and hatred of lawyers,
eventually formed her own checklist of what she knew the boss and the
lawyer would insist upon and went through it with customers before
taking the contract possibility back to the office. It gave her
tremendous credibility with the home office to the point where the
lawyer often was not even called in for the standard deal.
And the winner of that effort was
everyone, of course.
Except for the lawyers who make a lot
of money from fights….