NO REGRETS – ISSUES PAPER ON CONTRACT REVIEW AND NEGOTIATION
“My only regret in life is that I am not someone else”1
INTRODUCTION
The purposes of this paper and the workshop session are to:
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allow participants to understand the “big picture” in their contract negotiations;
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consider where they as lawyers “fit” in any contract negotiations;
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consider how they can be most effective in achieving their legal “positions”;
and
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highlight some legal issues that come up in legal contract negotiations.
NEGOTIATION ISSUES
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Preparation - Tactics and Strategy
“80% of success is showing up”
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Importance of preparation – Preparation for any negotiation is key – One
can only be “effectively spontaneous” if well-prepared.
Focus on key issues - Consider what key issues are (and what issues are
peripheral) – Usually there will be few vital issues - Understand your levers
and your bottom line on key issues.
Tactics - Think about tactics/behaviour – Be innovative, for example consider
hitting big points first instead of going in a chronological order (which can be
tedious) – Think of possible compromises – Don’t be ashamed to “barter” one
concession for another provided there is some reason in the exchange.
Authority to agree - It is essential you have the appropriate authority to
make decisions (nothing is more frustrating than not being able to make a
decision during negotiations) – Ensure the right people are involved – If you
need authority from management, get it before negotiations – If necessary,
have a decision maker available on the phone – Also check this is the case
for the other side and insist on it.
Behaviour During Negotiation
“I think being funny is not anyone’s first choice”
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Sense of humour - Keep it light and keep your sense of humour - Make it
enjoyable instead of ego-driven – Lawyers usually set the tone of negotiations.
End result focus – Focus on the end result and how you can best achieve that
result - Focus on the facts and issues rather than personalities – Lawyer’s role
may be to move your business toward an acceptable position (where experience
will assist) - Understand the limits of your bargaining position and circumstances.
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Quotes in this paper are from Woody Allen’s films and interviews – be inspired in your contract
negotiations but don't take it too seriously.
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Be professional – Be straightforward and honest - Dishonesty will destroy your
reputation and make any future negotiations all the harder - Trust between the
parties is crucial and allows efficient processes to be put in place - Understand
that the legal profession is small and you will probably work with the other side
again – Aggression and bullying should have no place in negotiations (but often
does).
Sensitivity - Listen and try to understand the other side and what drives them Be aware of (but not) controlled by the personality issues and manage these to
achieve your end result - Deal appropriately with the other side’s rudeness,
aggression, ego or bad behavior but keep your eyes on the result for your
business/client (that can be hard at times).
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Getting Contracts Across the Line
“If you want to make God laugh, tell him about your plans.”
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Set agreed timelines - Understand the negotiation processes and the time
that will be taken for each step by each party – The first item on any agenda
for discussions is a realistic timeline that both parties have input into - Keep
parties to this timeline and finish off each meeting with where you are on
timeline and what needs to be done by next meeting.
Keep moving forward – Put aside any issues that seem “intractable” – Keep
whittling down and moving forward on all disputed issues.
Be creative and flexible - Creatively deal with any issues that may cause
delay – Think outside the box - Understand the actual issues stopping
agreement and work to address both parties’ concerns.
Lawyers as facilitators – Lawyers need to find compromises that both
parties can live with – Don’t take other side’s initial response as set in
concrete – Delve into their concerns and try to work around them (there is
always a solution) – Lawyers can and should play a constructive and positive
role.
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Letters of Intent- Why they may not be a good idea?
“Confidence is what you have before you understand the problem”
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What are they? – Letters of intent (memoranda of understanding, heads of
agreement and the like) are used to record a preliminary agreement in
anticipation of a further (usually more detailed) agreement that will replace it –
Letters of intent are often unclear as to whether they are binding or not –
Tend to be drafted on the run and be incomplete and ambiguous.
Binding letters of intent – If binding, need to understand exactly what
parties are bound to do - Need to ensure terms are certain and complete –
Need to consider what will happen if further contract does not eventuate
(costs, IP etc).
Non-binding letters of intent – If non-binding, why do it at all? – If nonbinding, no point including heavy legal clauses such as indemnities etc (this
only confuses whether or not the letter of intent is intended to be binding).
What to do? - Avoid unnecessary letters of intent – Business people love
them, but lawyers should be wary of them – Question the reasons for a letter
of intent - If there is a good reason to have one, draft it properly as you would
draft a contract.
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Reviewing Contracts - Pragmatism v Perfectionism
“Most of the time I don’t have much fun. The rest of the time I don’t have any fun at
all”
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No perfection – People are not perfect so do not expect contracts to be –
Resist the urge for perfectionism (natural for lawyers) - Business is driven by
pragmatism and the bottom line, not perfectionism.
Get your priorities right - Focus on real issues instead of spelling,
formatting and grammar (this can be fixed if time permits later).
Business centered model – Have a business focus on what is important –
rather than a lawyer’s focus on getting everything right and being right.
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Working with Technical/Commercial Team
“I failed to make the chess team because of my height”
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Lawyers from Mars – Lawyers are often seated apart from the business Worse still, lawyers are sometimes (often?) seen as impediments to doing
business (If people avoid the legal department, you have a problem – fix it
now!)
Interpreters in the tower of Babel - One important lawyer task is to ensure
that the technical aspects from the technical team are “embedded” in the
contract and that these aspects work from a legal (or even linguistic) point of
view – Ask the right questions in regard to their area of expertise and then
ensure their answers are appropriately reflected in the contract terms.
Understanding the product - Technical/commercial people are lawyers’
connection to the product/service – to the very core thing the contract is about
- Miss that and you mess up.
Understanding the industry - Get to know your industry and products (terms,
processes and how it is delivered) – You will then understand the problems
and issues that must be dealt with in any contract.
Get down and dirty - Don’t underestimate what the technical or commercial
team do – Lawyers are just another member of this team and the legal
aspects are just a (small? ) part of the commercial deal – Visit the business
and see the product being made - Get down to the pub with the business on
Friday after work.
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Working with External Advisors
“There are worse things in life than death. Have you ever spent an evening with an
insurance salesman?”
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Scoping – If external advisors are involved, important to scope the task
precisely (for example, no point getting a ten page table of departures when
you know that the customer will only consider a couple of key points) – Use
the right people for the right tasks.
Insurance brokers – Often insurance brokers are used to comment on
issues outside insurance, such as indemnities and limitations of liability –
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They are not experts in these areas (you are) – Need to manage insurance
brokers to ensure that their input is practical and commercial.
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Compliance with Terms of Requests for Quotations
“I’d never join a club that would allow a person like me to become a member”
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Tenders – The idea is to create a level-playing field, but it is often used to
impose unreasonable or uncommercial terms – Need to read and understand
terms of tender.
Compliance with requests for tender - Risk that any departures to
conditions of contract may render a tender non-compliant - Sometimes may
be necessary to submit two tenders (a “compliant” one with a higher price and
a “non-compliant” one with a lower price) – Also may need to “quantify/price”
any departures to conditions of contract (this is inherently difficult – how do
you “price” unlimited liability or correcting ambiguities?)
Reliance on implied terms?
“What a world. It could be so wonderful if it wasn’t for certain people”
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Competition and Consumer Act 2010 – The Australian Consumer Law
(ACL) is a set of non-excludable consumer guarantees replacing implied
terms under the TPA – Be aware that whatever the intention, it has changed
the law and the definitions of “consumer” will extend to businesses.
Key guarantees – Implied guarantees that deal with “acceptable quality”,
“fitness for purpose” and services being rendered with “due care and skill” –
Generally terms excluding these rights are void – You must identify the
relevant “consumer” definition, the guarantee that is implied, determine
whether it has been breached and work out remedies.
Remedies - As ‘guarantees’ rather than ‘implied terms’ they no longer give
rise to common law contractual remedies - Remedies for contravention
depend on seriousness of the breach – whether a ‘major failure’ (definition is
vague) - Remedies may include refund or replacement at the consumer’s
option and damages (liability for which cannot be limited or excluded!).
State Sale of Goods Acts - The ACL was designed to replace a wide range
of existing Cth and State consumer laws (where some such sections have
now been repealed) – For a supply of goods falling outside the definition of
“consumer”, may still need to rely on the existing State Sale of Goods
legislation.
Implied terms under common law - “Courts are slow to imply a term”– For
a term to be implied it must i) be reasonable, ii) be necessary to give
business efficacy, iii) be so obvious that ‘it goes without saying’, iv) be
capable of clear expression and v) not contradict any expressed term – Many
hoops to jump – So do not rely on implied terms.
Ethical Contracting
“If you are not failing every now and again, it’s a sign you are not doing anything very
innovative”
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Current position – A race to use your own “paper” or terms, with the other
side having to “claw back” the unreasonable positions in lengthy and
expensive negotiation - Lawyers spend most of their commercial life playing
these games (no wonder lawyers have the highest incidence of depression of
all professions).
Alternative approach - Ethical contracting is about putting the parties’
commercial agreement into writing without the lawyers introducing additional
one-sided terms – It is about lawyers advising clients on what additional
terms are needed and working with the other side to draft them – It is based
on the principle that a good relationship works when both sides are protected,
feel secure and trust each other.
Furthering relationships - Ethical contracting is about not getting some
advantage from smart unprincipled lawyers – It is about furthering the
business relationship by lawyers working towards some commercial middle
ground.
Appropriate circumstances - Where parties want to create relationships
based on trust – Where the client wants to extend its ethical principles to its
legal contracts.
Short circuits legal games and costs – Potentially a big saving in time,
efficiency and legal costs and it is a lot more satisfying, than merely being a
“hired gun”!
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FIVE TAKE-AWAY POINTS
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Preparation is key.
Swap perfectionism for pragmatism.
Leave ego at home.
Be wary of letters of intent and the like.
Give a go to ethical contracting.
Leif Godwin/Stanislav Roth, June 2012
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