Business relationships can be fragile things. When drafting a contract, it can be useful to include six specific provisions to help cultivate a good working relationship and reduce the odds that a dispute will cause the parties to drift helplessly into a lawsuit. In the discussion below, the links are to the “General provisions” chapter of the Common Draft annotated form book.
1. Status-review conference calls upon request: Many business-contract disputes could be avoided if the participants would just talk with each other once in a while. (The G-PP-AA agenda template will always provide topics for fruitful discussion. In particular, it’s often extremely helpful to hold such a conference immediately after — or better yet, before — a missed deadline or other potential breach. Sure, this is just Management 101, but it can’t hurt for the contract to include a reminder. Read the annotated provision.
2. Consultation in lieu of consent: Sudden, unexpected moves by one party to a contract can make the other party nervous. For example, the business relationship between a service provider and a customer could be damaged if the service provider were to suddenly replace a key person assigned to the customer’s work without notice.
The usual, sledge-hammer approach to dealing with this problem is to contractually require the provider to obtain the customer’s prior consent before taking such an action. The provider, though, will usually push back against such a consent requirement. The provider will be reluctant to give the customer a veto over how it runs its business. Moreover, it could be a management burden for the provider to have to check every customer’s contract to see what internal management decisions required prior customer approval.
As an alternative (and compromise), the provider might be willing to agree to consult with the customer before taking a specified action that couild cause heartburn for the customer. That way, the customer would at least get notice, perhaps an explanation, and an opportunity to be heard, which can make a big difference in the customer’s reaction and to the parties’ business relationship.
Here’s a rough draft of a defined term that might serve the purpose:
Consult and Consultation:
(a) This definition applies if this Agreement requires a party (the “acting party”) to Consult with another party a specified time in advance of taking or omitting a specified action; such a requirement may be referred to as a Consultation requirement. The terms mean that, before taking or omitting the specified action, the acting party will: (1) advise the other party in writing, at least the specified time in advance, that it intends to take or not take the action; and (2) subsequently, if so requested by the other party, (A) provide such relevant information to the other party about its intention as the acting party deems appropriate in its sole and unfettered discretion; and (B) provide the other party with a reasonable opportunity to be heard concerning the action.
(b) For the avoidance of doubt, unless expressly stated otherwise in this Agreement, the decision whether or not to take or omit the specified action will be within the sole and unfettered discretion of the acting party.
With this definition, a software-development contract could say that, for example, “Except in cases of emergency, Service Provider will Consult with Customer at least 10 business days in advance of replacing the lead software developer assigned to the Project.” That will at least get the parties talking to one another, which can help avoid strains in their business relationship.
3. Escalation of disputes to higher management: Some lawyers believe that a dispute-escalation requirement can increase the chance of an amicable settlement. Getting different, more-senior people involved in the dispute can sometimes bypass individual animosities, hidden personal agendas, and other foibles; this can help break an impasse. See generally my 2009 post, Drafting for Disputes: Keep individuals’ personal interests in mind. Read the annotated provision.
4. Early neutral evaluation: When a legal dispute ariese, the parties’ lawyers can sometimes tell their clients what they think the clients want to hear. (In part this may be because lawyers — especially male lawyers — tend to be overly optimistic about whether they’re going to win their cases.) That can hamper getting disputes settled and the parties back to their business (if that’s possible). Consequently, if a contract dispute starts to get serious, an early, non-binding “sanity check” from a knowledgeable neutral can help the parties and lawyers get back onto a more-productive track before positions harden and relationships suffer — not to mention before the legal bills start to mount up. Read the annotated provision.
5. Mini-trial of disputes to parties’ senior management: Mini-trials, in which the parties’ lawyers put on a one- to two-hour “trial” to senior executives of the parties (and perhaps a neutral facilitator), are thought to enhance the prospect of settling disputes. Read the annotated provision.
6. Attorneys’ fees if settlement offer rejected but then not exceeded: OK, so all else has failed, and it looks like the parties are going to court over a dispute. This provision creates a powerful financial incentive for the parties to settle the dispute on reasonable terms. Here’s how it works: Suppose that one party (“Offeror”) makes an offer to settle, but the other party (“Rejector”) rejects the offer. Under this provision, then Rejector has to do at least 20% better at trial than Offeror’s rejected settlement offer; otherwise, Rejector has to pay Offeror’s attorneys’ fees and expenses incurred after the settlement offer. The rationale is that by rejecting Offeror’s settlement offer, Rejector forced Offeror to spend money needlessly on a trial that proved to be unnecessary, because Rejector could have had essentially the same results by accepting the offer; Rejector therefore should reimburse Offeror for those unnecessary post-offer expenses. Read the annotated provision.