When drafting a contract, it can pay dividends to give some thought to how to manage agency costs arising from the personal interests of individual players. That’s because when disputes arise, the involved individuals will naturally want to protect their own interests, such as —
- not having fingers pointed at them;
- being thought of by their side as a committed team player who’s willing to fight to win, not a defeatist who throws in the towel;
- protecting their bonus, their commission, their pay raise, their promotion, etc.
These desires can manifest themselves in a variety of ways; here are a few, along with some possible ways of managing them contractually:
| PROBLEM | POSSIBLE MANAGEMENT |
| Things change, and memories are short — people may now have an entirely different view of what’s important to them than they did during the contract negotiations. (Buyer’s remorse might be one such change.) | It can sometimes be useful to include explanatory parentheticals and/or footnotes in a contract to remind later readers why the negotiators agreed to certain things. |
| If a purchase goes sour, the individual who authorized the purchase might stubbornly insist on an aggressive strategy against the vendor, out of a secret concern that his purchase decision might come back to haunt him at bonus- or promotion time. | A dispute-escalation clause, requiring disputes to be kicked up to higher levels of management, may get people involved who have less personal skin in the game and therefore can assess the situation more objectively. |
| If the contract is vague or ambiguous on an important point, then the lawyers who negotiated the contract will be inclined to pound on the table for an interpretation that covers their flanks — even if that interpretation barely passes the laugh test. | An early-neutral-evaluation clause can provide a useful sanity check from an outsider, before the parties’ positions become set in stone and their legal bills start to mount up. |
| Partners at outside litigation firms will be pleased about the prospect of a lawsuit that could require lots of associates and paralegals to bill time on document review, witness preparation, etc. | A micro-arbitration clause, requiring arbitration of specific issues (for example, issues of reasonableness such as “reasonable efforts”), could let the parties cut to the chase before their legal fees get out of hand. |
COMMENT: Taking into account the interests of individual players seems to be just a variation on public-choice theory.
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Signing a business contract: