I’ve listened to quite a few business people complain about contracts. “They’re too complex.” “They’re full of lawyer-speak.” “They’re ridiculously lengthy.”
It seems many managers would prefer to complete their deals with a handshake, which might be fine if the life of the “deal” was short – as in a few hours, or even a day.
When a deal’s terms and impacts extend out into months or years (or longer), however all of that complexity and lawyer-speak is necessary. It protects you, your employer, and your successor.
All that gobbledygook
Negotiating long term contracts is all about anticipating what might go wrong – possibly a long way down the road – and planning for it.
Sure, it’s a tedious pain in the backside, but believe it or not all that lawyer-ese does provide protections when something goes wrong. In my experience, when your contracts extend over years, things go wrong a lot.
The parties negotiating the contract normally know exactly what they’re agreeing to, but what happens when one of them changes jobs? Sometimes what is written in the contract is the only tool available to subsequent managers to understand what was intended when the deal was originally struck.
So toughen up, read the provisions carefully, ask questions when you don’t understand. Don’t delegate this responsibility. Don’t take a short cut. And please don’t assume your lawyers have everything “covered” – they follow your direction, not the other way around.
Do unto others…
Is all this work for your benefit? Probably not. By the time problems come to light, someone else is likely to be responsible for the agreement and dealing with the ongoing relationship. But that still doesn’t mean you can skimp.
There are few things that can mess up your job for your successor than having to devote a tremendous amount of time to fixing something that never should have been broken. After you’ve walked into a few of these yourself, you’ll appreciate the predecessor that “did it right.”
Probably, you’ll never be taken to task over a sloppy job in long term contract negotiation, but your reputation could still be damaged by it. Most likely a dispute caused by a poorly written contract provision won’t eat up your time, but if things get nasty enough you might still be dragged into court over it. Yes, your reward may actually come in heaven.
But just do it anyway. It isn’t that difficult.
A few examples
A licensing contract I inherited seemed like it had all the elements in place to my employer when the deal was unwound. Except for one. The contract had an arbitration clause, where arbitration was to take place in the UK under the tenets of Sharia law. That single provision completely destroyed our ability to enforce the elements of the contract that protected our intellectual property. In the end, the licensee ended up stealing our technology and copying our product. Without other alternatives, we were forced to meet them in a bloody marketplace battle. While we successfully contained this new competitor, we didn’t eliminate them from the market, and it didn’t happen without plenty of pain. A little more negotiation up front could have made a huge difference in the outcome.
Hold-backs, escrows, and liability limits are a big deal, and I can state from experience that no matter how much you think you’ve got it covered, it won’t be big enough or long enough. In one particular acquisition, the million dollar liability limit seemed like it should cover any problems and then some. That was before a state government went after us for something that occurred when the seller owned the business. The price tag for that problem ended up being over three million dollars, and our share ended up being two million. Because the hold-back period had ended by the time these damages came to light, the seller didn’t have the cash to pay his share. I ended up taking the property where the business was located as partial compensation – less than two years before we were forced to close the business. Ouch.
I made my own mistake on a long term licensing agreement by allowing the seller of the technology to retain a sales territory in his home country. At the time, I thought of it simply as an inexpensive part of the compensation for access to his invention. Unfortunately, the inventor quickly proved to be an ineffective salesman. Later, when we wanted to change distribution strategies in the country by appointing a master distributor, he became a huge impediment. It took many long hours of negotiation – and a very large cash settlement – to get a portion of the territory released. My fundamental error? Not recognizing how the concessions I was making would hamper me in the long term.
The worst contract I ever came across was a distributor agreement in which the company guaranteed to compensate (at the full sales value, no less) the distributor for any sales made by other distributors in his territory – an eventuality that was definitely outside of our control. While the distributor in question never made a claim based on the wording of this provision, he used it repeatedly as leverage to get other things he wanted – greater discounts, more corporate support, expanded territory, etc. I was never able to figure a way out of this box, and suspect the contract remains enforce even today.
Those large, complicated contracts you loath are like that for a reason. Take the time to listen to your attorney, ask for advice from others, and read everything in great and gory detail. While doing so may not directly benefit you down the road, if you do things the right way a future successor may be offering you silent thanks for your diligence. 32.3
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Non-Fiction: NAVIGATING CORPORATE POLITICS
To the right is the cover of LEVERAGE. This novel explores the theft of sensitive DOD designs from a Minneapolis Tech Company, and the dangers associated with digging too deeply into the surrounding mystery. Its sequel, PURSUING OTHER OPPORTUNITIES, was released in May of 2014. A third book in the series, OUTSOURCED, is in the works.
My books are based on extensions of my 27 years of personal experience as a senior manager in public corporations. Most were inspired by real events.