Authors: Paper Presented by Stanislav Roth of Source Legal and Leif Godwin of Godwin Legal at the Thomson Reuters, Contract Law Masterclass – 6th June 2012
Sydney, NSW, Australia
“My only regret in life is that I am not someone else”
The purpose of this paper and the workshop session is to:
- allow participants to understand the “big picture” in their contract negotiations;
- consider where they as lawyers “fit” in any contract negotiations;
- consider how they can be most effective in achieving their legal “positions”; and
- highlight some legal issues that come up in legal contract negotiations.
1/ Preparation – Tactics and Strategy
“80% of success is showing up”
- 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 and bargaining – 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.
2/ Behaviour During Negotiation
“I think being funny is not anyone’s first choice”
- 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.
- 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 sides’ rudeness, aggression, ego or bad behavior but keep your eyes on the result for your business/client – That can be hard at times.
3/ Getting Contracts Across the Line
“If you want to make God laugh, tell him about your plans.”
- 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 – During negotiations, 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.
- Communication 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 conciliatory and positive role.
4/ Letters of Intent- Why they may not be a good idea?
“Confidence is what you have before you understand the problem”
- 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 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 non-binding, 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.
5/ Reviewing Contracts – Pragmatism v Perfectionism [LG]
“Most of the time I don’t have much fun. The rest of the time I don’t have any fun at all”
- 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).
- What really matters and to who – Be aware when it is appropriate and commercial to achieve all aspects – Dependent on time, place (and the client’s legal funds).
- Business centered model – Have a business focus on what is important – rather than a lawyer’s focus on getting everything right and being right.
6/ Working with Technical/Commercial Team
“I failed to make the chess team because of my height”
- 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 another aspect 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.
7/Working with External Advisors
[SR] “There are worse things in life than death. Have you ever spent an evening with an insurance salesman?”
- 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 – They are not experts in these areas (you are) – Need to manage insurance brokers to ensure that their input is practical and commercial.
8/ Compliance with Terms of Requests for Quotations [SR]
“I’d never join a club that would allow a person like me to become a member”
- Tenders – The idea is to create a level-playing field, but it is often used to impose unreasonable or un-commercial 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 drafting ambiguities?)
9/ Reliance on implied terms?
[LG and SR]
“What a world. It could be so wonderful if it wasn’t for certain people”
- Competition and Consumer Act 2010 – The Australian Consumer Law 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 different definitions of “consumer” applying to such guarantees.
- 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 (Part 5-4) depend on seriousness of the breach – whether a ‘major failure’ – 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 suggest you rely on implied terms.
- Clarity & certainty – Aim for contracts that provide clarity and certainty, and avoid litigation.
10/ Ethical Contracting
“If you are not failing every now and again, it’s a sign you are not doing anything very innovative”
- 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.
- 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”!
FIVE TAKE-AWAY POINTS
- Preparation is key.
- Swap perfectionism for pragmatism.
- Leave ego at home.
- Be wary of letter of intent and the like.
- Give a go to ethical contracting.