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Drafting for disputes: Keep individuals’ personal interests in mind

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:

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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