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 real.
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 being taken.
This article shall seek to give some guidance on this issue.
THE USE OF “TEAMS” TO AVOID DISPUTE
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 avoided.
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 doomed.
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.
Three general rules should be kept in mind by the drafting parties at all times:
(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 arbitration.
In drafting 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.
4. The 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. 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.
b. 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.
c. 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.
d. 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).
e. 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 as mediation.
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….