Business Articles

Business Articles

Stay informed about what matters when it comes to running a profitable business.

Lessons from Lawyers – Risk Management & Negotiating Agreements

Published in Advice, Entrepreneurs, Legal, Management, Protection Be the first to comment on this article ►

Author: Arif A. Mahmood, B.Sc., LL.B., JD. 
Arif A. Mahmood is an internationally qualified attorney who works on complex high-risk litigation including technical pharmaceutical and intellectual property matters. He is licensed in Ontario, Illinois and Washington D.C. and is quoted in both US and Canadian media publications on topics including technology, privacy and advertising law. Arif uses his unique professional background to bridge the gap between the business decisions of his clients and the risk management function of the law. He can be reached at arif.mahmood@inreip.com.

 

Small businesses almost always face the day-to-day challenges of commercial negotiations without lawyers. Obviously, it is rarely practical to spend resources on legal advice for routine transactions that are too small to be worth challenging in court. However, it is possible that a disputed contract may lead to threats of legal action or an angry party launching a short-lived court action in frustration. Even though few legal disputes actually make it to trial the possibility alone is certain to cause distraction and uncertainty, and prolonged disputes often undermine otherwise profitable business relationships.

 While is it necessary to retain a skilled attorney to obtain legal advice, the approach litigation lawyers use to analyze complex contract disputes can help small businesses deal with simple business negotiations, and help decide when legal advice is necessary. The following 5 basic principles cover initial issues that should be addressed when negotiating simple business agreements.

 1. Define Terms That Can Drag You Into Court

Nouns that refer to key persons, places or things should be defined separately in a contract. This ensures the parties both turn their minds to the details of key subject matter and understand that this single definition operates within each clause of the contract. For example, the precise nature of a material can be defined by referencing industrial specifications, custom certifications or end-use suitability. Similarly, when requiring a vendor to “deliver” material, an end of business day deadline can be set that specifies the goods must be unloaded to the warehouse dock with undamaged packing and all freight and unloading costs paid. Also, if there are unexpected delays in delivery and the purchaser can cancel the order with proper notice, the contract can specify the method and contact person for notice.

 2. Inconsistency Means You Missed Something

Parties are often happy to describe a good in one way in a certain circumstance, but emphasize additional details when considering other situations. For example, a clause may state “The Merchandise, polished and packaged to reduce vibration, are to be shipped by registered mail”. A good lawyer will ask, when the term “Merchandise” is used elsewhere in the agreement is it “polished and packaged”? Or, does the introduction of these terms in this clause mean that only in this circumstance must the Merchandise be polished and packaged? If a contract needs to refer to Merchandise in both states then two definitions may be appropriate, for example Unfinished Merchandise and Finished Merchandise. Whenever additional language is necessary in a contract to fully explain a definition the parties should revisit the definition and determine whether such details should form part of the definition.

3. Temporary Remedies Maintain Relationships During Conflict

Often contracts call for certain actions to occur but fail to address reasonable remedies parties can take to fix problems short of legal action. When negotiating contracts the parties are likely both optimistic about their performance and sure that the other party understands the absolute requirement to deliver on its promises. However, real world situations occasionally require compromise and having a pre-agreed process to solve disputes may preempt threats of legal action and help maintain relationships when frustration arises.

 “Liquidated damages” is a complex legal concept where an agreement requires a defaulting party to pay a pre-estimated loss without proof of actual damages. Although a proper, legally enforceable liquidated damages agreement will require the assistance of a lawyer, small businesses can use the idea of promising to offset loss as a tool to encourage the parties to act in good faith. For example, an agreement can acknowledge that there is damage to a party who is waiting for a supplier to complete a delivery, and in a good faith effort to maintain the business relationship and pay for some of the obvious costs of delay the supplier will make a small damage fee each additional day the delivery is outstanding up to a certain amount. The parties must settle on proportional, fact-specific pre-estimated damages that is not a penalty or undue burden in the circumstance.

 A great side benefit is that these pre-agreements appeal to the basic nature of human psychology and may help remind the parties that these damages are part of the delay process and are aimed at motivating the supplier to complete the transaction rather than have the relationship dissolve among threats. It may be best to write the language to remind the parties far into the future why this behavior was added in the first place. A buyer can feel somewhat vindicated that the inconvenience of a delay is partly compensated. A seller is reminded of their acknowledgment that a buyer suffers damages from a delay.  In any event, using such an agreement for profiting or penalizing a party is likely to undermine its enforceability and benefit.

 4. Make Problems When Everyone is Happy

The contract drafting process is often referred to by corporate lawyers as the “honeymoon phase” of a business deal. The business owners both anticipate a profitable transaction and the lawyers are told to finalize the agreement as fast as possible.

 Overly optimistic views produce overly simplistic agreements. The best defence against failing to plan for a problem is to ask each party the 3 problems that are most likely to be encountered. By addressing these predicted problems in the agreement practical, alternative responses can be mandated. These could include identifying other industries that can be looked to for guidance if novel problems arise, selecting a neutral third-party to act as a last resort arbitrator or mandating how the supplier can help the purchaser make up lost time should a delay occur.

5. Revisit Before You Repeat

Contracts are generally lists of rights and responsibilities based on an anticipated transaction. If you are entering into a series of similar transactions it is wise to adapt and update the agreement in light of what the parties learn from the experience. Simply ask the other party “does this agreement still work for you or are there issues you have considered that we should confirm in writing?” Asking for a clarification or addition may even help strengthen the business relationship.

 

Recommend This Story

Leave your comments

You must be logged in to comment.

Please sign up for a FREE account to gain access to this feature and lots more!

Sign up now!