By Stephen Taylor - Of Counsel
[Ed. Note] This is written primarily for businesses without an internal legal department, from the perspective of a lawyer who has run multiple businesses and practiced as a litigator and contract attorney. My objective is to share tips that could save you money, improve the accuracy of business decisions, and reduce the stresses caused by disputes and uncertainty.
Business owners and managers know that much of our contractual language has often gradually evolved over time through additions by lawyers and employees trying to adapt to changes in circumstance cheaply and quickly. This isn’t new. Businesses routinely cobble together agreements based on old documents that previously worked. Typically, this means that no problems arose far more often than that the language was legally tested. Reuse involves a number of assumptions as to the efficacy of the document in general and its applicability to the current circumstances. Reuse can come back to bite one.
Occasionally, it is wise to review the obligations that you have entered with others during business. That is not necessarily a suggestion to rewrite everything; rather a suggestion to have a commercially experienced third-party lawyer with “fresh eyes” review them for currency and effectiveness. This enables a conversation about what legal questions are posed and a discussion of the commercial implications and frequently promotes a useful learning process as well as narrowing the focus to key issues where risk can be reduced or better managed. It is no secret that uncertainty and change in marketplaces, such as we are currently witnessing, increase the chances of disputes arising and needing to invoke contractual rights. The argument for looking at your contractual language and usage is therefore stronger now than it has been for many years.
Let’s face it, often the reality is that, particularly if the customer or vendor is important or time is pressing, we can’t afford to rock the boat when an agreement is proposed, or a similar one can be repurposed. Such sentiments may seem persuasive, but if decision-makers don’t know the validity of the hull they are about to set sail in, doing so may lead to an unnecessary dunking or worse. In this cynical age businesspeople frequently assume they cannot negotiate terms with important, established partners. So, why bother? This relaxed attitude is not without danger. You may overlook vital contractual terms in non-commercial clauses or when clauses have been dropped from a prior agreement used as a template. I have frequently encountered leaders who blithely accept clauses that control their contractual duties while avidly disputing ones that don’t truly define risk or do so in an ineffective way. The result can be a deal or customer needlessly delayed or lost. Other results include incorrect pricing assertions and false confidence in your exposure to risk.
A time-worn military adage holds that any successful general will master the terrain before committing to fight. This also applies to major agreements. Knowing what the language means is essential to knowing if something justifies leadership focus, or simply reflects how the contract is costed or fulfilled. If, for example, a company is, or can conveniently get, insured against a liability, this may factor into pricing, not contract negotiations. One common justification is that the other party “won’t listen to us anyway and we need the agreement.” That is a good reason not to wait until the last minute to review proposed contracts or other agreements, but also to point out that if one does not ask these urgent questions and provide a cogent reason why it’s in both parties benefit to amend the terms, it is a certainty nothing will be improved. Many business partners will accept that a clause that they want to protect them is counter-productive once they understand that it could undermine your ability to fulfil the contract in future.
What if a major customer or vendor seeks to have you sign a long and complex document? A line-by-line review followed by negotiation and modification can easily cost $20,000 to $30,000 in legal fees. Obviously, business is a tradeoff of cost and risk. If the agreement is a “bet your company (or own financial health) deal” it may be a risky decision, but that is ultimately yours to make. If the prospective deal is material to the business’s health or to fulfilling existing obligations, it is important to understand potential pitfalls in advance of deciding how to proceed.
A contract lawyer with first-hand experience of such decisions and their consequences is well placed to identify and prioritize areas of potential legal concern and then, critically, to work with you to determine a pragmatic commercial response that accounts for priorities, cost, and the reality of negotiating position. They can then sit down with your leadership team and discuss whether attempts to remove, replace, renegotiate or alterations in terms of price, fulfilment or other commercial aspects are justified. The objective is to allow your leaders to determine what, if anything, should be invested in securing confidence that the level of risk is acceptable. Informed decision-making is the key to a workable and profitable relationship.
Some companies use retained, outside, counsel to perform this function. This has the advantage of an attorney who knows your business, may in fact entail no extra cost for simpler arrangements, and benefit from repeated review reducing the need to revisit previously addressed issues. Commercial context is as vital as legal knowledge, so experience on both sides helps the attorney, as does familiarity with the company’s leaders. The thought processes and perspective of lawyers and businesspeople often leaves a gap that needs bridging to achieve an effective balance.
A lot of the power (good and bad) in an agreement is contained in non-commercial clauses and in phrases that govern how an agreement should be read and interpreted in the event of a dispute and at what cost. Some of the more frequent examples include questions of choice of law, how the documents are to be interpreted, including what governs, what is excluded and what may amend and what alternative dispute mechanisms and rules apply, if any, as well as issues of notice, venue, and forum. Frequently, language may reside elsewhere that supplements or governs the agreement at hand or past actual business practice may appear to alter the way a court or tribunal would interpret the agreement. Addition or amendment of certain phrases can dramatically limit or shift liability. Sometimes directly. Other times, by altering how the document is read and whether other documentation and actions are relevant to interpreting it. These and other considerations can significantly affect the true meaning and enforceability of the agreement and thus the potential for disputes and resulting expenditures and outcomes.
Agreement review can defray corporate and personal risk and doesn't need to be expensive or time consuming. If it informs decision-making, including when not to seek further assistance based on an informed business decision, then you can effectively manage cost and avoid being blindsided. As with most things, review shouldn’t be just giving clients a workable document, but explaining to them the reasons and available options in a way that first develops their knowledge and understanding. The same rationale applies to more mundane agreements. These are more common and represent an aggregate risk concept. Fortunately, they are often better understood or at least easier to comprehend in terms of purpose, language, and exposure. Unfortunately, more of these agreements are in force. If you have a retention arrangement with your counsel, some may fall within that. If not, most standard type agreements can be reviewed, and suggestions made for those with guidelines for variations cheaply. Couple that with periodic reviews of standard terms to reflect changes in your practice by law or regulation as well as business partners and you should be able to have more effective protections, be able to better manage and understand risk internally and be better positioned to secure commercial advantage through improved protections, clarity, or faster turnaround.
Finally, having emphasized why it’s important to ensure that liability and commercial imperatives are protected in “business critical” agreements, it would be remiss of me not to stress the point that that is only half of the battle. In practice, it is just as important to transfer knowledge to key personnel to enable them to understand what to use and when and, critically, to appreciate when to seek additional guidance and a process for doing so that is cost and risk effective. Effective legal advice should inform and transfer knowledge and do so with an understanding that business is the art of the practical, albeit one that demands informed risk assessments. Legal advice should help not only reduce legal risk but increase efficiencies and expand commercial advantage. Contract review is one mechanism which. if done right by both leaders and lawyers, can directly address each of those objectives materially and in a cost-effective manner considering the objective at hand.
