Business Contracts – Beyond Deal-Killing

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Originally a Special to THE GLOBE AND MAIL

When a lawyer creates a contract for your business, his job is to "fully protect your interests." Whenever a lawyer says this I cringe. Which interests? For how long? No contract can protect all your interests. Fair or mean, vague or precise, short or long, all have weaknesses. There are dozens of business questions to ask before dropping a contract in the mail. As people rarely trouble themselves with that many questions, I note these seven as the most important:

Is it a one-shot deal or long term deal (a relationship)?
In one-shot deals, many people take the attitude of "gouge away," and the attitude usually makes sense for those who are not particular about ethics.

Long-term deals need to consider fair play, ethics or not. Yet through greed or inattention or ego, many companies allow lawyers to run amok in writing each and every offer. Sometimes it makes no difference. A hardball contract selling insurance probably won't harm a relationship, because they are sent to consumers or middle managers who accept them as gospel. A hardball contract for electronic components sent to a fast-rising manufacturer might not even last as long as the first trade; when they don't need you anymore, they'll find a way out.

Are you looking for self-defense or a bludgeon?
Self-defense usually means you want the right to escape with your shirt on your back, whereas a bludgeon means you want to force someone to do something. There is a big difference. "Escape" contracts can usually be done in two pages. "Compulsion" contracts tend to run towards 20 pages.

I'm a strong believer in escape contracts. When your trading partner loses key people, when they are gobbled by a conglomerate, or when the new CEO decides you are a second-class citizen, it may be time to sever the relationship.

Compulsion contracts are dicier. If you are buying real estate, for example, a contract can compel the seller to close the deal, because you have the power to freeze the property, by filing a lawsuit and then placing a restraining motion on the property. If you are selling real estate, lotsa luck; all you have is a lawsuit. You probably can't afford to hold on to the property until the verdict is in, so you have to sell the property and file a financial harms suit.

The difference between self-defense and compulsion is not always clear, of course. There are occasions when your safety depends on your ability to force a company into providing something you need. This is not good. When only a bludgeon can defend you, you are far into dangerous ground. It's best to have a non-legal escape route in reserve.

How big or important is the deal?
If the amount is small, and the deal fairly impersonal, most people and most companies will ignore a gouging.

When the money gets bigger, tensions rise. Brains become activated. Humans scheme. The "standard" clause that escaped notice in the last 50 negotiations may be the deal-killer on today's multi-million-dollar deal. If you distribute hardball contracts willy-nilly, be flexible. Have an "exception process" to kick big problems to capable people.

Do they read?
Selling office furniture to middle managers rarely generates a reading. Entrepreneurs, real estate investors, or athlete's agents are prone to reading every deal contract from A to Z. With the former group, there may be no harm done in going the limit. On the rare occasions they call you on it, you can say it's "just business," and renegotiate. With the latter, cunning contracts always lead to renegotiation. Again, be prepared to kick the negotiations over to someone who can think.

What sort of people are you dealing with?
Investor Warren Buffet has said, "We have never made a good deal with a bad person." Of course Buffet is oriented towards relationships. One-shot deals with bad people may be extremely lucrative. Just remember that you will have to work, and work hard; a contract alone won't make the deal happen.

If you depend on a contract to cement a relationship with bad people, you'll be working forever. With bad people the deal is never the deal, and the contract is nothing but a bone of contention.

Is their star rising, or falling?
A lost deal with a falling company may be no cause to cry, though I can think of exceptions. When the company you annoy grows to be a McDonald's or McCain Foods, hardball can cost more than it gains. Corporate culture does exist, and hostility can survive surprisingly well through several decades of management changes.

Many companies will reckon this only applies to customers, but suppliers can also retaliate with any of a dozen strategies, from cutting quality, to filling your orders last, to the mother of all strategies, finding a new customer.

Will they cave in or fight if you find them breaching the contract?
Some companies will come back into line with a threatening letter from your lawyer. Others cave in when they are served with legal papers. And then some go to the mat. The phrase "fully protect your interests" usually fails the laugh test once litigation begins. The historian Hobbes noted that "Covenants, without the swords, are but words." I note that lawyers are a poor substitute for swords –or foresight.

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