Tag Archives: contract negotiation

Don’t Overlook These 6 Important Contract Clauses

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Managing the review and negotiation of contracts involves regular stack ranking of projects. With many agreements to review and other job responsibilities for both in-house counsel and business counterparts alike, the value or strategic importance of the agreement often determines the amount of attention it receives. Given this, attorneys and their business counterparts generally do not have time for a “deep dive” into every nook and cranny of an agreement under negotiation. They focus their available resources on the big-ticket items — obligations of the parties, termination rights, ownership, confidentiality, indemnification/limitation of liability, and the like — and may only have time for a cursory review (at best) of other contract terms that appear in most agreements, called the “legal boilerplate.”

If you have a little extra time to spend on an agreement, here are six clauses that are worth a closer review. Why these? If worded improperly, each of these clauses can have a significant adverse impact on your company in the event of an issue or dispute involving that clause.

(1) the Notices clause.Failure to provide timely notice can case major issues. So can failing to receive a notice that was properly served. If mail can take some time to be routed internally, consider avoiding certified or first-class mail as a method of service. Personal delivery and nationally or internationally recognized express courier service (FedEx, UPS, DHL, etc.) with signature required on delivery are always good choices. Notice by confirmed fax or by email to a role address (e.g., “legal@abc.com”) are also options to consider, either as a primary method of notice or as a required courtesy copy of the official notice. Use a role and not a named person in the ATTN: line – if the named person leaves, routing of the notice may be delayed. Consider requiring that a copy of every notice be sent to your legal counsel. Consider whether to make notice effective on delivery, versus effective a fixed number of days after sending (whether or not actually received). It is also worth considering making notice effective on a refused delivery attempt – the other side should not be able to refuse a package to avoid being served with notice. Ensure delivery is established by the delivery receipt or supporting records.

(2) the Dispute Resolution clause. Ensure the agreement’s dispute resolution mechanism (litigation vs. arbitration), and any dispute escalation language, is right for your company given the potential claims and damages that could come into play if you have a dispute. Make sure you’re OK with the state whose law governs the agreement (and ensure it applies without regard to or application of its conflicts-of-laws provisions). If neither home state law is acceptable, consider a “neutral” jurisdiction with well-developed common law governing contracts e.g., New York. Ensure you’re OK with the venue — consider whether it is non-exclusive (claims can be brought there) or exclusive (claims can only be brought there), and whether a “defendant’s home court” clause might be appropriate (a proceeding must be brought in the defendant’s venue). Finally, ensure the parties’ rights to seek injunctive relief — an order to stop doing something, such as a temporary restraining order or injunction, or an order to compel someone to do something — are not too easy or hard to obtain. In some cases, whether a party needs to prove actual damages or post a bond in order to obtain an injunction can play a critical role.

(3) the Order of Precedence clause.If your agreement has multiple components (e.g., a master services agreement, separate Terms and Conditions, incorporated policies from a web site, service exhibits or addenda, statements of work, project specifications, change orders, etc.), which piece controls over another can become critically important if there is a conflict between the two (e.g., liability is capped in Terms and Conditions, but unlimited in a Statement of Work). Ensure the order of precedence works for you. Consider whether to allow an override of the order of precedence if expressly and mutually agreed to in an otherwise non-controlling contract component. Don’t forget about purchase orders — they often have standard terms which can conflict with or override the contract terms unless they are specifically excluded. If you are negotiating a SaaS agreement, consider how acceptable use policies, terms of use, and other online policies may relate to the agreement. Watch out for other agreements/terms incorporated by reference, or on the other hand, consider incorporating your standard terms and having them control in the event of conflicting terms.

(4) the Assignment/Change of Control clause. If consent to assignment or a change of control is required, the clause can create significant headaches and delays during an M&A closing process or during a corporate reorganization. A client or vendor with “veto power” could leverage that power to get out of the contract, or to obtain concessions/renegotiated terms. Consider whether to include appropriate exclusions from consent in the event of a reorganization or change of control, but keep a notice requirement. Consider whether a parental guaranty is an appropriate trade-off for waiving consent. Also consider whether consent is needed in a transaction where the party continues to do business in the same manner it did before (e.g., change of control of a parent company only).

(5) the Subcontractor clause. Ensure you have approval rights over subcontractors where necessary and appropriate, especially if they are performing material obligations under the agreement or will have access to customer data or your systems. A service provider may not be willing or able to give an approval right to a subcontractor providing services across multiple clients, but may be OK with approval of a subcontractor providing services exclusively or substantially for your company. Include the ability to do due diligence on the subcontractor; remember that subcontractors can be an attack route for hackers seeking to compromise a company’s network. Ensure a party is fully liable for all acts and omissions of the contractor. Consider pushing security obligations through to the subcontractor. Require subcontractors to provide phishing training.  Consider limitations on what obligations of the other party can be subcontracted.

(6) the Non-Solicitation clause. Consider limiting a non-solicitation clause to those employees key to each party’s performance under the agreement, and other named personnel such as executive sponsors or corporate officers. Most often, neither party can live up to a clause that covers every employee at the company. Ensure there are appropriate exclusions for responses to job postings, recruiter introductions, and contact initiated by the covered party. Consider whether the clause prevents soliciting an employee as well as hiring them, and whether you want to restrict one or both.

10 Common Negotiation Positions and How To Work Through Them

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One of the more frustrating things to run into during a contract negotiation is the “stock position.”  These are negotiation positions often used as tactics to shut down discussion on a point, or to push back on an otherwise reasonable request  Part of every attorney’s job is to find and leverage ways to make the negotiation cycle more efficient.  Being prepared for these 10 common negotiation positions, and knowing ways to work through them, can help you avoid a stumble on your way to the negotiation finish line.

10. It’s Locked Down (“We only send our agreement as a [PDF/locked Word document].”)
Why you hear this: Some companies try to limit redlines to their agreements by only distributing agreements as a PDF or a Word document locked against editing, making it very burdensome if you want to propose changes.
How to respond:  Propose capturing any changes in an amendment or rider to keep the agreement itself as-is, but ask for a Word version so you can show the changes you’d propose be captured in the amendment or rider.  If they won’t budge, consider creating your own Word version to redline (modern versions of Adobe Acrobat Pro have built-in OCR that lets you save a PDF in Word format, or you can print and then use Optical Character Recognition (OCR) to convert the PDF to an editable version). You can also create an unlocked version of a Word document for editing purposes fairly easily – see my earlier article on this topic.  If you create an editable version yourself, be sure to state in your cover note when sending the agreement back that you have created a Word version solely to facilitate your and their negotiation of the agreement, and reiterate that you would be happy to capture the agreed-upon changes in an amendment or rider to the agreement.

9. Can’t Help You There (“I don’t have the authority to negotiate that.”)
Why you hear this: The person you are negotiating with either doesn’t have the authority to approve changes to this provision, or wants you to think that he/she can’t make changes to it.
How to respond: If the change is important to your company, let them know why, and ask them if they can break out to seek approval from a person with authority (you’ll hold if on a call). Alternatively, ask if the person with authority can join the conference call or meeting so you can explain the importance of the change or provision directly.  If they balk, ask them to set up a follow-up call or meeting with the person with authority.  If they’re bluffing, asking them to bring in someone with authority may result in a change in position.

8. We’re The Best Around (“Do you know who we are? We’re the number one [vendor/supplier/provider/client] [of/to] [thing] in the [geographic area].”)
Why you hear this:  This response is the equivalent of “we’re the big fish in this pond – be lucky you’re working with us.”  They’re trying to use their market position to get you to back off your position or request.
How to respond: This is one of the reasons it’s important to have a credible backup partner/supplier/vendor waiting in the wings, or at least know who the other party’s major competitors are.  If your position or request is reasonable, you’ll need to stand your ground.  Let them know that while you are aware they are a major player, your request is important to your company, and that you hope they can negotiate on this point.  If you hold fast, you may have to drop the names of their competitors (if you know the name of a sales rep in your area, drop that) and let them know, expressly or by implication, that their willingness to work with you on this point is more important than your desire to work with the top player in the market.

7. Don’t Stop Us Now (“Why are you asking about that? You’re slowing the deal down/this [will/may] cause us to miss our [contract execution date/launch date/etc.].”)
Why you hear this: All too often, parties enter negotiation where one or both are already committed or invested in the relationship — implementation has already started, financial forecasting has already assumed the agreement is completed by a certain date, commitments regarding the agreement have been made to senior management, etc. The other side may be trying to leverage a “need for speed” on your company’s part to avoid discussion of potentially contentious or unfavorable points.
How to respond: It depends on what is more important to your company — getting the deal done quickly, or taking the time to negotiate your point.  If it’s a “nice to have” point, discuss the pros and cons internally of giving on the position in the interests of time.  If it’s a “must have,” call the other side’s bluff and let them know that while you understand that digging into this point may impact the negotiation or launch schedule, resolving this point must take precedence. If you do that, be aware that the other side may try to “forum shop” and reach out to one of the negotiating parties, or a superior, who they think is feeling pressure to close the deal and can exert leverage to get past this point. Propose alternative or compromise positions, and offer to work on a compromise in real-time on a call or via a WebEx or GoToMeeting session to keep the ball rolling.

6. Take Our Word For It (“I know the contract doesn’t say that, but it’s our practice.”)
Why you hear this: The contract template you are working from may be old and no longer tracks to the operational realities of the parties’ obligations and duties.  It’s also used where the other side is unwilling to commit contractually to a negotiating or marketing statement or position.
How to respond: Stress that the contract needs to accurately reflect the business and operational reality of the relationship.  If it’s their practice, they should be willing to give you a contractual commitment on it. If they refuse, let them know that if they can’t back up their statement with a corresponding obligation in the contract, that’s a red flag and you’ll need to discuss their position with your business team (in other words, give them a Don’t Stop Now). Consider ending the call/meeting early to huddle with your business team on this point – it can send a message to the other side that you are serious about this issue.

5. We Can’t Afford That (“That will affect our revenue recognition.”)
Why you hear this: The requested change could require them to spread the revenue across a longer period of time, or shift it from one fiscal month/quarter/year to the next. If the sales rep has already committed a contract close to the business, or is planning on it to meet quota or get bonus, this can be a major stumbling block for them. For example, a termination for convenience clause can often affect revenue recognition.
How to respond: This can be a legitimate argument.  However, there is often a creative way to structure terms that meets their revenue recognition requirements yet gives your company the flexibility it needs.  Put on the creativity hat and work with your business/legal counterpart, and your finance team, to try to find an alternative that will work.  If not, you’ll need to stand firm and see whether they want the business even with altered revenue recognition terms.

4. You Don’t Need To See That Now (“We don’t give our [customers/partners] our [documentation/policies] before they sign the agreement.”)
Why you hear this: If an agreement has policies that apply to your company and are referenced or incorporated by reference in the agreement (e.g., Terms of Use, Terms of Service, Vendor Code of Conduct, Conflict of Interest Policy, Trademark Guidelines, etc.), taking the time to review these policies can extend the negotiation cycle.  They agreement may also contain a warranty that the product or service conforms to the documentation, which you’ll need to review to understand how strong of a warranty you’re getting. If there’s anything in there that your company can’t abide by, you could be setting your company up for a problem out of the gate.
How to respond: Explain that your company can’t fully commit to an agreement until it has reviewed and signed off on all terms and policies related to the agreement. If they’re balking at providing documentation relating to a warranty section, let them know you need to see the documentation first.  See if there’s a group within your company that can play “bad cop” here, e.g., “Internal Audit needs to see it before we can sign.” Consider adding a 30-day right to rescind to the agreement in your client’s favor, which lets you sign first, but lets you back out if you don’t like the terms of their policies. Search online — many times you can find a policy on the other side’s own website.

3. I Can’t Believe You Said That (“We take offense to your position that we might [lose your data/breach the warranties, etc.]”)
Why you hear this: The “rightful indignation” argument is common when the other party wants to avoid a discussion on a topic, or truly doesn’t understand why you would be asking about that.  They may be confusing your risk management with an insinuation that you don’t trust they can live up to their obligations.
How to respond: Explain why the issue is important to your company.  If your company has been burned by the issue in the past, or your General Counsel/management team is focused on this issue, let them know — almost every company has some hot-button issue that can impact its contract negotiations.  You can also let them know you’ve seen recent articles about this issue and it’s top of mind.  Be sure to stress that you’re not playing Devil’s advocate and looking at the worst-case scenario, but you’re rather be prepared for the worst and have some extra words in the contract than be caught unprepared when the unthinkable happens.

2. That Comes Later (“We will [address/schedule] [your implementation/that topic] in a [SOW/Addendum] after we sign.”)
Why you hear this: Punting on a contentious or time-consuming issue, such as ownership of deliverables, can help move the agreement to completion.  Once the contract is signed, however, you may lose your leverage to negotiate that provision.  Alternatively, the other party may attempt to include a provision in the SOW/Addendum that will take precedence over a corresponding provision in the base agreement, essentially renegotiating it.
How to respond: If a provision is material or critical to the agreement or to your company, insist that it’s negotiated as part of, or at the same time as, the agreement. Ensure you have a strong order of precedence clause so your negotiated wins in the agreement aren’t undone in a later document.

1. That One’s New (“No one has ever asked us for that before/we’ve never given that to anyone before.”)
Why you hear this: Unless a company is very new, it’s very uncommon that no one has ever asked for a particular request before.  It’s more likely that the person you are negotiating with has never heard anyone ask for that before.
How to respond: Ask them to confirm they are saying that no contract the company has ever signed has had that provision.  If they hold firm, use it as an opportunity to push for a contractual representation to that effect (putting their money where there mouth is), and/or push for a “most favored nations” (MFN) clause on that term so that if they do offer that term to anyone in the future it will be automatically incorporated into your agreement. These approaches often lead to a change of tune. They may try to limit a rep or MFN clause to similarly situated clients/partners – consider whether this makes sense.

Six Tips for Working Efficiently and Effectively With Your Attorney in Contract Negotiations

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Some people dread having to go to their legal counsel with a contract for review and negotiation.  “It’s the department of business prevention”; “we’ll never get it done”; “my attorney doesn’t understand what the business needs.”  Quite the contrary. In-house counsel want to partner with you to facilitate the company’s business objectives and help the company succeed, while at the same time managing risk to our client – the company. Ensuring you and your attorney work together as effectively and efficiently as possible is key to this process.  Here are 6 tips to keep in mind when working with your attorney in contract negotiations.

  1. Contract negotiation is a partnership, not a handoff.Contracts contain both legal and business terms. We will largely defer to you on the business terms (unless it’s something we’ve seen before that we know is a problem), and will focus on ensuring the legal terms are in order. You need to be a part of the negotiation process to provide guidance and approvals on business terms as they are negotiated.  If you submit a contract for review and then just wait for an email saying it’s done and signed, it will slow down the process as we’ll have to reach out to you, or worse, make assumptions about what your business needs are or what you are OK agreeing to in the contract.
  1. Negotiations can take time – don’t wait until the last minute to engage Legal. Negotiations can take time, but attorneys don’t want to drag them out – we have a lot of work on our plate, and we want to enable you to start working with the company or vendor so you can meet our corporate objectives. However, part of our job is also to negotiate terms that protect the company, and to help you navigate around the pitfalls and mountains.  If you come to us at the last minute and there are major issues (e.g., risks we can’t accept without high level approval), it’s a no-win situation – we feel you’re not giving us time to do our job as attorneys, you’re unhappy because the agreement can’t get done by your desired completion date, your boss is unhappy because you missed your deadline, others whose work depends on the negotiated partnership or vendor relationship are negatively affected, etc.

Build time for the legal review process into your project timeline, and if you’re unsure ask your attorney how much time they think it will take before you even get to the contract phase.   Engage Legal with questions on business terms or legal terms early in the process if it will help streamline the negotiation later on — we can help you structure business terms up front while they are being negotiated, to make the negotiation process go more smoothly.

  1. Provide complete business terms when you submit your contract request. Unless you are requesting a standard form agreement on your company’s paper, we need to know as much detail on the business terms as you can provide when you submit a contract request to Legal. Otherwise, we may have to make assumptions about what you’re looking for, and if we’re wrong it will mean redrafting work which will slow down the process. If you have a term sheet, attach it. If not, summarize the business terms in the request with as much detail as you can provide.  Include the full legal name of the other party, and their street address.  We’ll call you to flesh out any terms on which we have questions or need more information or detail.  Also, read the draft carefully before you forward it to the other side.  If the contract doesn’t match the business terms that were discussed, we’ll stumble right out of the gate on the contract negotiation.
  1. When you get a draft or get back redlines, add your comments on the business terms before submitting it to Legal.  If you send a draft on the other side’s paper or you receive redlines from the other side, go through it before you send it to Legal and mark it up with your comments and edits to any business terms.  If you need to reach out to internal business owners for their input or approval (e.g., Finance on payment terms, IT on SLAs, etc.), either do it before sending the draft to Legal, or indicate in the draft that you’re following up on an open business point before you send it to Legal.  Otherwise, the internal discussion draft you get from Legal will just include notes on where you need to provide input on business terms, slowing down the process.
  1. Listen to your lawyer’s suggestions – we’ve done this before. We have been in many contract negotiations, and have seen most contract provisions before.  We often know what provisions work with the company’s internal processes and requirements, and how third parties are likely to negotiate and come out on a given provision. If you come in with a business term or a position on an open point that we think may be a tough sell to the other party or is “out of the box” from an internal process perspective, our experience can help you avoid going down dark alleys or dead ends in the negotiation.  Good attorneys don’t just spot problems, but also offer alternatives to try to find a workable solution.  We may be able to offer an alternative provision or wording that meets your business needs, works for the other party, and satisfies your internal processes.

Attorneys usually have a sense as to which approach to contract negotiation (exchanging redlines right away, hopping on a call with the other side right away, exchange redlines first then get on a call, etc.) will be most effective for a particular contract or third party.  Your instinct may be to jump on a call with the other side as soon as you send or receive a draft, but in some cases that may end up unintentionally slowing down the negotiation. Tech-savvy attorneys may also suggest leveraging technological tools to increase speed and efficiency, e.g., WebEx online conferencing to make edits to the draft in real-time as if all parties are sitting in a conference room together.

  1. Attorneys will advise on the risks and share their opinion, but the business needs to “call the ball.”Every contract involves risks and rewards.  My job is to shift as much risk as I can (e.g., through contract terms), and to help explain how to mitigate risks (e.g., through internal process or procedure to control it).  Any remaining risk needs to be accepted (we understand but the benefits are worth it) or rejected (the benefits aren’t worth it) by the business.  Unless something is illegal or there’s simply too much pure legal risk to proceed, the attorney isn’t the one who should be making that risk decision.  We may share our opinion, but we can’t make the decision.  You (or someone higher up in the company) needs to make the risk decision after weighing the pros and cons.  If no one wants to be the decision-maker, the negotiation will grind to a halt.