Teamwork and Communication Versus Too Many Cooks in the Kitchen – Part 1 of 2

Team approaches in contract negotiations can be very effective. In fact, for some contracts, a team approach is essential – particularly when the contract will impact various divisions or facets of a company’s overall existing and future operations.

Consider hypothetical ABC Manufacturing Company (ABC) that has multiple divisions (including Aeronautics and Renewable Energy) operating independently, but within the same general industry groups. Further assume that ABC’s Aeronautics Division wants to license certain technology to Third Party Company (3P), but only for use in wind turbines – not in aeronautics or aerospace – because ABC has plans for use of the technology in those fields, but not in turbines. In this circumstance, it’s likely critical that ABC involve numerous parties in the contract process (although not necessarily in the actual discussions with 3P – see Part 2 on this topic). Who might those parties include, and why?

• Obviously, the heads of the Aeronautics and Renewable Energy Divisions – so that the precise scope and nature of the license can be considered, along with its impact on those divisions (now and in the future). Also likely those who are not division heads, but who may have a deeper understanding of certain products, projects and relationships.
• Research and Development – so that those negotiating the contract terms know what the current state of the technology is, where it may be headed, what rights are licensable, and what rights should be excluded/retained.
• IP – so that there is a clear understanding of what protections exist currently, who will be responsible for maintaining those protections, who has rights to derivative technology, etc.
• Strategic Planning – so that something that seems unimportant now doesn’t “unexpectedly” become important in the future – especially if there are parties within ABC who already knew it’s important.
• Legal – so that rights granted in this contract don’t conflict with rights previously granted to other parties, and the current contract ultimately says what the business people intend.
• Others – there may be any number of others that should be consulted or at least kept informed as to the discussions with 3P – accounting (budgeting and cost), marketing (brand and image), etc.

The point is, many contracts have far reaching and (sometimes) difficult to foresee implications for a company. Involve as many people and divisions as necessary to make sure you are aware of and consider all of these implications.

In Part 2, I’ll discuss the importance of speaking with one voice, notwithstanding the involvement of multiple parties.

The Risks and Costs of Non-Compliance

Paying lawyers for important tasks such as drafting contracts, preparing employee handbooks, providing securities law advice, and adopting procedural safeguards for export compliance, is expensive. However, prudent companies understand this is simply a cost of doing business and avoiding the catastrophic consequences that can result when you “get it wrong.” So, here’s my question – why do so many companies pay to “get it right” and then fail to follow through – thus exposing themselves to the very risks they paid to avoid? Unfortunately, the answer is typically, carelessness.

Consider the following hypothetical:
• Seller (a U.S. based manufacturer of non-military heavy equipment) contracts to sell “customized” bulldozers equipped with bulletproof glass and gun turrets (no guns) to a new international Buyer. Unbeknownst to Seller, Buyer is a known terrorist.
• Seller’s lawyers have previously prepared (a) an intellectual property manual (that would require foreign patent protection before shipping to this country), (b) an export compliance manual (that would not allow shipment of these goods to any buyer, or any goods to this buyer), and a contract where Buyer is responsible for shipping, insurance, risk of loss, and posting a letter of credit to eliminate payment risk to Seller.
• Despite those procedural and contractual protections, Seller did not review or follow the contract or the IP or export manuals, paid for shipping, did not confirm that either insurance or the letter of credit was in place, and simply shipped the goods.
• Buyer received the goods, and Seller did not get paid.

So, what are the risks/costs to Seller? Likely, the following:
• Seller has certainly violated U.S. export laws and perhaps the laws of the country to which the goods were shipped, exposing Seller to civil fines and penalties and even potential criminal charges;
• Seller has paid shipping charges that were Buyer’s responsibility;
• Seller has not been paid and has no insurance or letter of credit coverage;
• Seller has lost the ability to protect its IP in the country to which the goods were shipped;
• Seller has paid for legal advice that it didn’t follow; and
• Seller has suffered a loss of reputation, opportunity costs, and a potential devastating blow to its business.

The point is simple – if you’ve paid for the advice and protections, follow them.

Approach Every Contract Like a Construction Project

It struck me recently as I worked on a multi-million dollar construction project that parties would be well served if they approached each contract (at least initially) like a construction contract. So, why do I say that, and what does it mean?

A construction contract is the beginning of a project and a process – one that requires (a) careful planning, (b) trust and cooperation by multiple parties, (c) segregation of duties, (d) faithful performance and execution, and (e) recognition that circumstances will arise that may be beyond the parties’ control and will require flexibility, problem-solving and often change. These factors are actually present in most projects and transactions – not just construction projects – which is why I think the construction approach makes sense.

Here are the most basic elements of a construction project/contract that I believe should be considered and addressed in most contracts.

• Scope/Nature of the Project – what are we doing here? This should be defined as clearly as possible (even where, as in the construction process, this will change and develop as the project progresses)?
• Responsibilities – what is each party required to do, how and when? Again, this should be defined as specifically as possible.
• Standard of Care/Performance – is there an objective or subjective standard which a party must meet (e.g., codes, industry standards, the best or accepted practices in the relevant geography, the other party’s discretion)?
• Legal Compliance – who’s responsible?
• Subcontractors – who will actually perform the work, and can it be subcontracted?
• Communication/Authority – who has authority to bind each party, and how do we ensure constant communication to avoid misunderstandings?
• Foreseeable Risks – if they’re foreseeable, define them, how they will be addressed, and who bears the risk.
• Unforeseen Risks – since they’re unforeseen, they likely can’t be defined, but you can still do your best to allocate responsibility.
• Changes/Change Orders – how will we handle changes? The best answer – see Communication/Authority above. If your deal has to be changed, communicate and make the change in writing as promptly as possible.
• Disputes – how will we (hopefully) avoid, and in any case deal with disputes?
• Insurance/Bonds, Indemnification and Guarantees – how do we protect against the downside?
• Completion – how do we know, and who determines, when a party has completed its task satisfactorily?

There are other elements of a construction contract, but hopefully you see my point – think construction.

Don’t Forget the Laws of Human Nature

It strikes me that both lawyers and clients get so wrapped up in the business, legal and technical issues of a deal or situation that they often forget what I will refer to as “the laws of human nature.” True, these are not the laws I studied in law school, but I can tell you this – failure to understand these laws can often result in the failure of a deal. And what’s so sad about that is it’s completely avoidable in most circumstances.

So what do I mean when I talk about the laws of human nature? Obviously, I’m not talking about statutes or regulations. Simply put, I mean those aspects of the deal-making process that have more to do with human behavior, values, interaction and communication than with the specific parameters of the deal. Failure to understand these “laws” and acknowledge the fact that they fundamentally affect business transactions is just as often the cause of a failed deal as the laws on the books.

So, here are 10 lessons I’ve learned as to these laws:

1. It’s important to know what you AND the other party to the negotiations need, what you want, and what you’ll accept – and how these may change during the course of negotiations.
2. Nobody needs to “win” a negotiation – the best deals are win-win.
3. It’s ok (and in fact, it’s often productive) for the other side to like you.
4. It is imperative that the other side respect and trust you.
5. Emotion is rarely productive in a business discussion.
6. Professionalism enhances the likelihood of success.
7. There’s no value in frustrating or embarrassing the other party or wasting their time.
8. It’s important to know when you’ve pushed far enough.
9. Miscommunication leads to failure just as often as disagreement.
10. The deal is never final until it’s signed.

Consider the laws of human nature the next time you negotiate a business deal, and I’m confident you will enhance your prospects for success.

Get it Right the First Time

Ever hear the expression – “you never get a second chance to make a first impression”? It’s true in business transactions, and particularly in contract negotiations.

So, what’s my point? After all, many contract negotiations go on for weeks, or even months, and countless drafts are exchanged. So, don’t you really get many opportunities to “get it right”? The answer is, generally, no. Let me explain.

Twice in the past week, I’ve had clients send me a contract for “final review,” only to find out that the contract had actually originated with my client and had already been provided to the other side for review and comment. The problem was, in each case, the contract provided to the other side had substantial problems for my client. By problems, I don’t mean language that I preferred had been worded differently or minor clerical errors. I mean material issues that were overlooked or improperly drafted in such a way that it put my client at substantial risk – business and legal.

This scenario causes problems for a number of reasons. First, it limits your options. Do you (or really, can you even) go back to the other side and ask that substantial changes be made to the contract? If so, do you now have a lack of trust or credibility? Do you give the impression that you are disorganized, or worse yet, unprofessional?

Second, assuming you do go back with changes, do you highlight issues that may have been perfectly acceptable if they had been in the original draft, but that now are subject to strong objection? After all, the initial proposed contract was all about mutual give and take and compromise, whereas these changes are now almost certainly entirely in your favor. Will you have to give something back in return?

Third, by going back, do you delay the process, and perhaps threaten the deal entirely?

And finally, have you placed yourself in a position where you really can’t go back to the other side, and instead simply have to accept the contract as-is?

The moral of the story is, carefully consider the deal (hopefully in cooperation with legal counsel) before you present the first draft of the contract. If you don’t, you may find that you never get the deal that you wanted – or at all.

How to Handle Partners Who Are Bullies

Bullying and bullies are in the news a lot these days. Usually these are kids who physically or mentally torment and intimidate their classmates. In business partnerships, we frequently see a different kind of bully – the partner (who never should have been a partner in the first place) who refuses to listen to other points of view, puts his own interests ahead of those of the partnership, and generally wreaks havoc on the business. So, how do you deal with these bullies?

The first and most effective way is not going into business with them in the first place. There are plenty of articles warning you to choose your partners carefully, so I won’t belabor that point, but it’s worth noting once more – there is virtually no business decision that will affect you more than the decision of who you go into business with – choose well.

Second, have clear, detailed and well thought out organizational and governing documents that all partners understand and agree to at the outset. These documents should cover such basic issues as: (i) who gets to be an owner; (ii) who participates in management and how management decisions are made; (iii) what your general business objectives are; (iv) what happens if the company needs more capital; (v) how you avoid or address disagreements; and (vi) how and when you will make the decision to sell, merge, dissolve or otherwise exit the business or the owners’ partnership.

The third strategy follows logically from the second – having those governing documents in place is not enough – follow them. The easiest way to handle a difficult partnership disagreement is to simply follow the rules that you’ve laid out for the business.

The final strategy is more of an admonition – do NOT allow your difficult partner to bully you into making bad decisions or otherwise treat you or the business unfairly or act unwisely and then claim to be a victim! I see this frequently, and it is NOT an excuse to simply say your partner is a bad person and made you do these things that were bad for you or the company. You’re the caretaker of your business, and no one said it would be easy. Stand up to the bully!

Some Burns Never Heal

I’ve said it many times – Iowa is an easy state in which to network and connect with people. I think this is due to the general nature of Iowans. They’re open, trusting, mentoring and supportive – in business and in life. They understand that supporting another businessperson striving to succeed benefits everyone – which is why it’s so easy to network and establish meaningful and mutually beneficial business relationships in this great state. And once you start establishing these relationships and a reputation for honesty, integrity, hard work and excellence, it snowballs and becomes easier.

This article is not about the ease of networking and connecting with people, however. It’s more of a discussion of the flip-side reality. That is the permanent damage caused to a businessperson’s reputation and ultimate prospects for success when you “burn” someone.

I know – a ridiculously obvious topic for a blog post. But, I also think it’s important. Simply put, you need to avoid “burning” people in business and in life – not just because it’s morally wrong (I’ll let you be the judge of that), but because it will come back to harm you in the end.

Let me be clear, I’m not suggesting that you should be a patsy or that you shouldn’t be a shrewd negotiator or take hard stances in your business transactions. Those tactics lead to business successes and often the respect of your adversaries. Nor am I advocating for some sort of socialism where everyone shares equally in all opportunities. No, I’m a true capitalist. What I am saying is, do it the right way. Fulfill your promises. Meet your commitments. Be honest. Treat people fairly. And always act with integrity. Failure to do so and “burning” someone in the process will have permanent consequences and will not soon (if ever) be forgotten. And just like it’s easy to build a positive reputation in this state, it’s just as easy to build a negative one.

Is Your Lawyer Disruptive? Shouldn’t He/She Be?

When people think of the qualities they want in a lawyer, disruptive doesn’t always come to mind – in fact, it rarely does. However, this is one of the most important qualities in growth stage and entrepreneurial/start-up companies wanting to revolutionize their market segment and change the world. So why don’t clients (especially the kind mentioned in the preceding sentence) insist that their lawyers – in addition to being outstanding technical lawyers – be disruptive? After all, doesn’t it make sense that the most innovative and forward-thinking lawyers would relate best to the most progressive companies and clients? Sadly, I think the reason people don’t generally seek out these qualities in their lawyers is because they don’t know they exist. And, why is that? Because lawyers and the legal community have set the bar so low when it comes to innovation, creativity and client-centric business practices – choosing to require clients to conform to the traditional attorney-client model, rather than the attorneys focusing on what the clients want and need. In my opinion, clients should insist on more – and lawyers should deliver more.

So, I ask, is your lawyer disruptive, and if not, why not? The answer, of course, depends on what it means to be disruptive as a lawyer and whether/how that disruptiveness can benefit you and your company as a client and consumer of legal services. When I think of disruption in the legal world, I don’t mean reckless, hasty, rude or destructive. Rather, what I mean is not just the ability, but the desire, and in fact the affirmative goal, to think outside the box and provide creative client-driven solutions to your business and legal challenges – not canned or pre-scripted “one size fits all” responses from a dusty legal treatise.

With the foregoing definition in mind, you may say, “thank you but no, I don’t want my lawyers to be disruptive – I want them to provide the same “buttoned-down” black letter responses that their forefathers provided to my predecessors and leave creativity to me. If so, then this article probably hasn’t resonated with you. If, however, you like the idea of a creative, disruptive thinking lawyer and law firm, find one – they’re out there!

Understand What No Lawyer or Document Can Do For You

I was recently helping a client with a stock purchase in a deal that just felt wrong to me. Each time we asked a question or reviewed a document, it seemed additional issues, questions and concerns arose. Notwithstanding this fact, the investment bankers, company officers and selling stockholders assured us in each instance that there was no problem – usually with the excuse that it was simply bad record-keeping, a lack of attention to detail or a favorable related party transaction that would not adversely affect the company or my client going forward. In fact, they said, it was precisely because of these circumstances that my client had been presented with this amazing investment opportunity. I did not find these explanations to be persuasive or reassuring, even when the sellers agreed to provide a litany of warranties and representations, broad indemnification rights, and other contractual protections.

In this circumstance, I was compelled to explain to my client a very simple fact – while a lawyer can draft an all-encompassing contract in which virtually every possible risk is anticipated and addressed with detailed indemnifications, aggressive remedial provisions, escrows, etc., that does not turn a bad deal into a good one or provide the same level of protection as walking away from a bad deal.

The simple truth is, if your due diligence yields more questions than answers more uncertainty than certainty, and more risks than opportunities – and if you find yourself spending an inordinate amount of time and effort trying to protect yourself from known and unknown legal risks and possible bad behavior or misrepresentations by the other party (versus ordinary course business risks) – no amount of lawyering and no legal document can adequately protect you. In that case, you really only have 2 choices – (1) walk away from the deal, or (2) draft that over-the-top contract with all of the bells, whistles and protections and “hang on for the ride.” And if you opt for alternative 2, understand that a good lawyer and a good contract do not make a good deal.

Does Your Business Need a Little “Spring Cleaning?”

Spring is an exciting time. It signals the end of a long, dark and sometimes dreary winter and the beginning of a new season of growth, opportunity, color and activity. It’s also the time when many of us make a long “to do” list filled with tasks that we tackle with energy, enthusiasm and excitement – knowing that truly the seeds we plant today will yield a bountiful harvest some time down the road.

Unfortunately, very few of us have a similar seasonal signal that it’s time to clean up, get organized and plan(t) for the future. Instead, we’re so wrapped up in the day-to-day activities of running our businesses that we never get to the “spring cleaning.” Since spring is literally upon us, I want to make a pitch for a seasonal sprucing up from a business and legal standpoint.

As business owners, you know far better than I what sorts of projects will most benefit your businesses – but I’ll take a shot at identifying some that might yield value (while sticking with my spring cleaning analogy):

• Reset the Clocks – businesses and their owners need to reset priorities and revise strategies from time to time, or you simply run out of time in the day.

• Clean Out the Garage – businesses develop “clutter” just like households. Take the time to clean up and eliminate it so that it doesn’t distract you from your mission.

• Plant the Annuals – annuals are like near term goals for a business. With a limited amount of effort they can blossom and yield immediate benefit, but only if you do the groundwork at the right time and in the right way.

• Plant the Perennials – perennials are more like long term business objectives. They require more planning and nurturing than annuals, but yield long term rewards.

• Do It Yourself and/or Hire the (right) Lawn Service – this is a big one. As the owner, you need to decide where your time is best spent and who the right people are to handle the rest. Do what you’re best at and enjoy most and hire the rest. BUT, don’t hire the first service that sends you an attractive brochure. Make sure your advisers understand you and your business.

Spring is a time of great energy and promise. Make sure you harness both for the benefit of your business.