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.

Subtlety Has Its Place

As the title to this post indicates, subtlety has its place – just not in business negotiations or contracts.  This is not to say that people shouldn’t be tactful, courteous and professional in these contexts – of course, they should be.  I’m not talking about manners; I’m talking about clarity, precision, directness and transparency – i.e., the things that avoid uncertainty and minimize the risk of disagreement (and litigation).

Occasionally, clients will ask me to word a provision in a contract so that it isn’t as clear or explicit as it might be, so that it’s “less conspicuous,” or in a way so that “later, we can take the position that it meant X. . . .”  This is almost always a bad idea.  After all, a contract is meant to be a clear and complete expression of the parties’ mutual intent and agreement – trying to “finalize” the deal while simultaneously avoiding clarity and completeness in order to avoid points of disagreement is NOT a recipe for success; to the contrary, it is a recipe for future disputes.

So, what does this mean for your negotiations and contracts?  Quite simply, items of potential disagreement should be identified and discussed (and hopefully resolved) early on, just as items on which the parties agree should be discussed.  Dispute resolution at the point of negotiation/deal-making and as part of the contractual process is healthy and productive.  It generally leads to one of 2 outcomes – either the parties ultimately reach agreement through compromise, concessions, etc., and they move ahead with the deal; or they don’t, and the deal doesn’t get done.  Either result is far better than signing a contract or entering into a relationship only to end up in the other kind of dispute resolution – the kind that comes after the contract is signed and involves 2 teams of lawyers, a judge, jury or arbitrator, and words like injunction, breach of contract, damages, and legal fees.  Don’t be subtle . . .

Nice to Meet You – Let’s Get Married

Only fools rush in.  We’ve all heard that expression many times and probably think we’re far too wise and experienced to be such a fool.  However, you’d be amazed at how often businesses and individuals rush headlong into business relationships or contracts only to find out they should have used more discretion, patience and judgment.  Remember, before you date someone, you usually want to know at least a little bit about them; before you go steady, you want to know a little more; and before you get married, you really want to know them well.

Consider applying some of these dating lessons and clichés to your business and legal relationships and contracts, and you may find you have fewer emotional breakups or (more importantly) fewer bad marriages that end in messy divorces:

  • Ask around (a/k/a, do your due diligence) – learn all you can about a person or company before you engage them, become partners or enter into a long term binding contract.
  • Trust your instincts (a/k/a, if it doesn’t feel right, don’t do it) – unless there’s some compelling reason you have to work with a specific person or company or you have to jump into a deal with both feet, if you’re getting a bad vibe, don’t proceed.
  • Go slowly (a/k/a, – start small) – whenever possible, start with a smaller project or a short term relationship and see how it goes. There’s usually time and there will almost always be more opportunities to work together if the first one goes      well.
  • Build in an escape hatch (a/k/a, don’t put all of your eggs in one basket) – even if you’re ready to hire someone or enter into a contract, make sure you have the ability to terminate or get out of the relationship.
  • See other people (a/k/a, avoid exclusivity) – exclusive relationships are serious commitments and have high risk (and potentially, high reward); take your time.
  • There are more fish in the sea (a/k/a, know when to say when) – ending a bad relationship is always hard – whether personal or business – but when your gut tells you it’s not right, then it probably isn’t. Cut your losses and end the relationship (in the right way, of course).

The bottom line is, business and legal relationships resemble personal relationships – with the same types of risks and rewards.  Look before you leap.

Shared Values Matter in Attorney-Client Relationships

Everyone knows that shared values matter greatly in interpersonal relationships – in fact, they may be one of the few absolute requirements for a successful and rewarding long term personal relationship.  Most would also agree they matter within an organization, where individual values ultimately dictate company culture.  I’d like to make the case for the importance of shared values in attorney-client relationships.

Both attorneys and clients come in many “shapes and sizes” when it comes to personalities, preferences, communication styles, etc.  I’m not suggesting that these qualities need to be the same or even similar.  In fact, one can argue that it’s healthy to the overall team to have varying skills, experiences and styles.  However, I don’t believe that’s true when it comes to values.  I believe shared values and value systems are essential to a long term successful relationship.

When speaking of values in the attorney-client context, I’m talking about those principles – business, ethical, etc. – that dictate both what we’re willing to do and not willing to do and how we’re willing to do it.  For example, I’m not willing to lie or mislead, abuse or mistreat, or place unfair demands or blame on the other side to a negotiation.  My value system inherently tells me that these are the wrong actions and behaviors to bring about a positive outcome for my clients.  I am, however, willing to push myself and my team to the limits to zealously and aggressively represent my client’s interests.  When clients share these values with me, we make a great team and can accomplish great things.  If we don’t, it will ultimately lead to frustration and disappointment.

If you haven’t taken the time to explore whether you and your attorney (or you and your client) share the same essential values, you should.  It can go a long way toward establishing the right relationship and building it so that you – as an attorney-client team – reach your maximum potential for the benefit of your business.

Changing Relationships Call for New Agreements

Have you ever had wills drafted or met with your financial advisor or insurance agent, and at the end of the meeting, he or she said, “Now we need to revisit this every couple of year to make sure things haven’t changed.”?  That same approach should be followed in your other legal and business relationships.

Relationships and circumstances can change for a variety of reasons.  The law changes.  One party is faced with financial or other business hardships.  One party transforms from a start-up business that is just happy to have a contract to an industry powerhouse.  An employee right out of school becomes a partner in the business.  Territorial capabilities or needs change.  Etc.  When these changes happen, it is critically important that the parties’ contract(s) be reviewed, and where appropriate, revised.  Otherwise, that ever-important “meeting of the minds” that we attorneys talk about may no longer exist – and that’s a recipe for trouble.

As I’ve said before, in negotiating and drafting agreements, we should attempt to anticipate the various ways that the parties’ relationship may change over time, and where possible, include provisions that allow the contract to evolve as well.  However, it’s rarely possible to anticipate all of the changes that may occur.  For that reason, I recommend a periodic revisit of your contracts.  The old saying, “If it’s not broken, don’t fix it,” is absolutely true; but your contracts may be broken now simply because they don’t fit your evolving business relationship.  Don’t let that be the case – remember the other saying, “An ounce of prevention is worth a pound of cure.”  Review your contracts and relationships periodically as part of your preventive maintenance.

How to Begin a Project With Your Lawyer

I was working on an international dealership project with a long time client this week, and something caused me to ask – why is there mention in this email string of a third party that isn’t part of our deal?  Oh, my client responded, you remember that we work with them and they get a piece of each deal “like this” – meaning not like their standard deal.  In fact, it’s been 4 years since we worked on the contract with the third party, and we haven’t worked on a deal “like this” since then (although we’ve worked on many that were not like this) – so, no, I didn’t remember.  Thank goodness I asked about the third party’s involvement, because it was not evident from any other information my client had provided so far, and without knowing this, I could have missed some key issues.

What does this scenario tell me?  It tells me that even in longstanding attorney-client relationships (and maybe especially in those relationships – since sometimes clients forget that the lawyer has many other clients and is not immersed in the client’s business 24/7), we need to always focus on the basics of the deal.  This starts with a detailed description from the client of all relevant facts, circumstances, concerns, interests, etc., and a specific identification of the ultimate business objective.  Next, the attorney should restate his or her understanding of the deal, and ask any specific questions and gather any specific information necessary to fully understand the project and properly advise the client.  This exchange between client and lawyer may be verbal or in writing, but the point is, when it’s complete, the attorney should be clear on what’s happening and what’s most important to the client.

The above process may seem obvious or even tedious, but I can assure you that it will better protect the client’s interests than the “ready, fire, aim” approach that is often the case.  An added benefit is that it will reduce legal fees and the time it takes to consummate your deal – it’s a real win-win.

Sign Your Deal NOW!

I’ve seen it happen a thousand times – in fact, I’ve seen it happen twice this week.  Parties to a negotiation reach a “deal” but don’t have documents ready for signature.  So one party takes responsibility for drafting them, but by the time drafts are circulated, one or both parties change their position, back up, get cold feet, reconsider, or whatever else you want to call it – and the deal falls apart.  While that’s not always a bad thing, it often is, and it is also frequently avoidable.

Now, I’m not suggesting that parties hastily enter into deals or sign incomplete or inaccurate agreements.  But, I am saying that well thought out and carefully considered deals are often at their best – that is, closest to the actual “meeting of the minds” that we lawyers talk about – right after negotiations are complete.  This is why it’s important to move quickly from negotiations to definitive documents, to execution. 

Remember, the name of this blog is BizB4Law – when negotiations are complete (and assuming they were well thought out and comprehensive), the “biz” portion is in most cases complete – all that is left is the “law” portion.  While the documents should spell out the business terms agreed to and fill in gaps, it is generally not productive to reconsider or reopen the negotiations – and doing so often means the parties lose the “benefit of the bargain” they had just made.

So all of this means we should follow a few simple guidelines, as follows:

• Make sure your negotiations are as comprehensive as possible.  Discuss and agree on all material terms.
• Include your lawyers as early as possible in the discussions.  If that’s not possible or productive, include them just prior to preparing definitive documents – so that any specific open issues or questions they may have get answered before the parties conclude negotiations.
• Draft definitive documents as soon as possible after negotiations are complete, and stick as closely as possible to the terms agreed to in negotiations.  The document stage is not the time to surprise your prospective business partner.
• If you feel you have to change something from what was agreed to or address something important that wasn’t previously discussed, let the other party know before you send them proposed documents.
• And finally, move from first draft to final draft to execution as soon as possible after negotiations are complete.

These are pretty simple guidelines, but they will help you to avoid disputes and get your deals done.