Cramming down a killer contract might give you a wounded tiger to deal with later on

(Revised 2020-01-30)

Something else we discussed in class yesterday: Suppose a customer company has a lot of bargaining power. And suppose the customer uses that power to force a vendor to make some tough concessions in a contract negotiation.

The customer’s negotiators might well regard those concessions as an entitlement: We’re the big dog; of course we get what we want.

But they should recall that ultimately, all contracts have to be performed by people. And people will almost certainly be influenced, not just by the words of the contract, but by their employer’s then-current interests — and by their own personal interests as well.

If the vendor’s people feel they’ve been crushed by the customer, they’re unlikely to harbor warm and fuzzy feelings for the customer. (This is at least doubly true if the contract later proves to be a train wreck for their company — most business people know that being associated with a train wreck is seldom good for anyone’s professional reputation.)

The vendor’s people are not likely to be motivated to go above and beyond for that customer. They may be tempted to “work to rule,” to use an expression from the labor-relations world — to do just what the contract requres, and no more. That does neither party any favors.

The reverse can be true when the shoe’s on the other foot. Suppose the customer thinks that it’s been taken advantage of by a vendor. When it comes time for renewals, or repeat business, or recommendations to other companies, that vendor probably won’t have a lot of brownie points with the customer’s people.

(Added 2020-01-30:) When Texaco got hit with a $10.3 billion damages verdict back in the mid-1980s (for tortiously interfering Pennzoil’s acquisition of Getty Oil), Texaco couldn’t find anyone to finance the required appeal bond in the same amount, and it even had trouble getting routine working capital, because of the high-handed way it had treated others in the past. As one author recounts:

When Texaco was doing well, it had played hardball with its lenders as well as with other oil companies. Now that it was in trouble, these lenders and oil companies may have been looking to exact a little revenge. At a minimum, they were unwilling to take any risk to do a favor for someone who had refused to do favors for them. The New York Times quoted a New York banker as saying, “If it were Exxon or Mobil, all the big banks would rally around it.”

Robert M. Lloyd, Pennzoil v. Texaco, Twenty Years After: Lessons for Business Lawyers, Transactions: Tenn. J. of Bus. L. 330, 349-50 (2005) (footnotes omitted).

The lesson for contract drafters and negotiators: Even if you’ve got the power to impose a killer contract on the other side, think twice before you do so. You could be setting up your client to have to deal later with a wounded tiger.