Six contract clauses to help prevent lawsuits

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.

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 could 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.

For example, 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.Read this annotated definition.

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.