Transactions From the Litigation Perspective

The law, like most disciplines, has very few absolute truths.  However, it is my firm opinion that a good business transaction is always better than a lawsuit.  Therefore, it’s critical that business transactions and the underlying contracts be structured to maximize value, reduce risk and avoid uncertainty.  After all, risk and uncertainty often lead to disagreement and sometimes litigation.  Therefore, I recommend that parties approach business transactions and contracts with the mindset (but not necessarily the goals) of a litigator – and then use that mindset to avoid litigation.

I do not mean that parties should be argumentative or take one-sided positions.  Rather, what I mean is the deals should be structured and contracts should be drafted as simply, clearly, consistently and comprehensively as possible.  And once you’ve done that, they should be re-examined, and the following question should be asked:

• Is this the right deal, at the right time, with the right party?
• Is the deal structured as simply as possible?
• Is the contract drafted as clearly and simply as possible?  Is it consistent?
• Which provisions invite differing interpretations?
• Have you covered as many variables/contingencies as possible (you generally can’t cover them all)?
• Have you allocated between the parties as many of the risks/responsibilities as possible (again, you may not be able to cover them all)?
• Have you included appropriate insurance, indemnity and escrow provisions?
• Have you allowed for termination or some other type of walk-away if the deal doesn’t work out?  If so, have you anticipated the likely issues, disagreements and entanglements that can arise at this stage (they can be much different than those at the outset)?
• Have you considered how disputes will be resolved?  Mediation?  Arbitration?  Litigation?  Appraisal?  By whom?  Where?  Who pays?  What law/rules govern?  Etc.
• In light of all of these questions, and even assuming you’re comfortable with all of the answers, is this a deal that should be done?

Thinking like a litigator may be the best way to avoid litigation over your business deals.

The Value of Good Faith and Fair Dealing

There’s a principle, or really two related principles in the law known as good faith and fair dealing.  There are various definitions, but generally the combined concept means something like, honesty in fact and the observance of reasonable commercial standards of fairness.  I’d like to weigh in on the importance and value of good faith and fair dealing – not just in purely legal terms, but in all business activities including legal and contractual relationships, negotiations, and even litigation and dispute resolution.

The concepts of good faith and fair dealing have legal meaning and impact.  The UCC implies them in contractual relations between merchants.  Franchise law implies them in the relationship between franchisor and franchisee.  Courts sometimes find a failure by a party to act in good faith or to deal fairly and reasonably with another party as a basis for a breach of contract or tort claim, or as the basis for a defense to such a claim.

However, and I think equally important, good faith and fair dealing have direct value and benefit to the underlying businesses and business activities.  They lead to honest and efficient/effective negotiations.  They lead to clear and understandable contracts that reflect the parties’ actual agreement and intent, rather than hidden agendas and attempts to “trick” the other party.  They allow the parties to avoid misunderstandings and to resolve them more directly and efficiently when they do arise.  In other words, they save time and money and allow the parties to focus on the important business issues rather than protecting themselves from the other party’s devious behavior. 

Good faith and fair dealing is, in some ways like the law’s version of the “Golden Rule” – do unto others as you would have them do to you (and the world will be a better place).  Treat others with honesty and fairness, and it will yield value to you and to them – value that directly impacts your bottom line.