Mind Your Fences

This is the first of a periodic series addressing legal issues of possible interest to the GSE industry. You, of course, know best the issues that are of particular concern. We invite your questions and suggestions and will do our best to incorporate responses in future articles.

The New England farmers' adage of "good fences make good neighbors" is useful advice for business persons as well. Contracts are the fences that define the deal for businesses at many levels. Unfortunately, they are often boilerplate forms that are dispatched without a second glance or computer files whose tweaking is soon forgotten. Eventually, these agreements (yours or theirs) may no longer effectively enable you to obtain what you desire or to adequately protect what you desire to keep when things go awry. Just as farmers mind the fences each spring, it is time well spent to periodically review one's own agreements and to always review the other side's proposed agreement to ensure the lines are clear, understood and acceptable.

We address below some of the areas where one might invest in periodic review. Their drafting or omission can signal something of a company's character as well as affect the outcome of a project. Our approach is to follow through the sequence of a possible business deal.

The New Deal

Finding a new business partner or closing a new deal is a happy time. All too often, however, it is fraught with optimistic projections with too little attention devoted to defining the terms that will keep matters on track if the deal should stumble along the way.

As a preliminary note, not used as often as might be, a Memorandum of Understanding or Agreement ("MOU/MOA") can be a simple document that memorializes the key terms of a deal struck. It can confirm the presumptions, basis, key commitments and terms upon which the parties consider a deal to have been struck. Though often superseded by other agreements, an MOU/MOA can be a valuable instrument to dissuade a party from straying to the other's disadvantage.

A Teaming Agreement is often the critical first document that establishes the relationship and going forward efforts of new business partners. All too often the failure to consider their terms in some depth, or to skip one entirely, works to the detriment of one party.

Establishing the parties' business relationship from the outset is important, in the sense of it being a prime-subcontractor, or a joint venture of equals, or something else. This process will also dictate what other agreements may need to be struck.

Critical to the process is defining the Scope of Responsibility and/or Work for each party both under the Teaming Agreement and under the projected contract. Failure to do so can result in severe consequences—e.g., one party providing key assets on which the other party relies to win a project only to find itself largely excluded under the project. Depending on one's perspective, the more of the future contract that one builds or incorporates into the Teaming Agreement, the more secure it becomes should one party need to enforce it.

Equally critical for some is addressing issues about Proprietary Information and Intellectual Property (IP). This may include its handling, use, dissemination and remedies for misuse. Boilerplate language often needs to be tailored. If not already in place and incorporated, the agreement likely will include a Non-Disclosure Agreement (NDA) which should be viewed as serving a party's long-term interest of protecting its IP throughout and after the project. Like Non-Compete Agreements ("NCA"), which also may be incorporated in these agreements, they need to be drafted in a manner that protects one's interests but also can be enforced. All too often, one-sided NDA's and NCA's are so oppressive and expansive as to duration and scope, that they either expose entities or persons to unexpected liability or are themselves subject to challenge as too broad.

Indemnity and Insurance Clauses are important for limiting exposure when matters go badly.

Unfortunately, some craft these clauses in such a convoluted manner that they are ignored in the hope they will work out. Depending on the nature of the project and one's exposure risk, e.g., for proprietary information or liability, discerning the meaning of the terms may be essential. Suggesting that a seemingly one-sided clause be made mutual will often flush out an onerous clause proposed by another. Including a Limitation of Liability Clause also should be considered.

Although addressing Disputes and Claims is often viewed as unsavory at this early stage, it becomes less so if one considers how one would want to resolve a meritless matter asserted by the other side. There are numerous alternatives regarding method, location and choice of law. One should select an approach that fits one's corporate personality and budget.

One should carefully consider when a party may terminate a Teaming Agreement. One should ensure the agreement survives until there is a proper contract in place and cannot be terminated, limited or circumvented unfairly by a party who thinks it has discovered a better deal. Terminating an agreement that no longer serves a purpose is usually not a problem.

Teaming Agreements are an early opportunity for two entities to work together, build trust and learn about the other side. On occasion, they even become the contract under which the parties operate. Ensuring that boilerplate is current and fits the situation is worth the effort.

Contracts/Subcontracts

Contracts (including subcontracts) are the fence lines that define a deal. They range from hastily completed order forms with few terms other than quantity, delivery and price, to small-print boilerplate on the back side of an order form, to lengthy tomes covering every issue the parties can conceive. Finding the proper balance is a significant and ongoing task as one's business grows and/or diversifies. For example, adding services to a product-based contract requires adjustments, as does taking on a public sector customer as a prime or as a subcontractor. Moreover, one's leverage vis-à-vis the other party will affect one's ability to structure a contract to one's liking. That said, many fail to challenge oppressive boilerplate or fail to press for omitted clauses in form contracts, while others waste time quibbling over insignificant terms instead of tailoring clauses that may affect the outcome of a deal. Knowing what is important to your business is critical in approaching contract review and negotiation.

For those who have negotiated a comprehensive Teaming Agreement the contract negotiation may be limited to addressing relatively few terms. Regardless, many of the concerns addressed in the context of Teaming Agreements also will arise in addressing Scope of Work, Intellectual Property, Indemnity, Insurance, Limitation of Liability and Disputes and Claims issues under the contract. Existing NDA's and NCA's can be carried forward and incorporated into the contract.

At the contract stage, there are additional issues that merit review. Delivery terms should tie to the Scope of Work and require one to be realistic in committing to what one can timely deliver. A reputation for overcommitting and failing to deliver can be devastating. Invoicing and payment terms, particularly in a prime-subcontract context, can vary substantially and saddle either party with a financial burden if not properly addressed.

Inspection terms should be reasonable as to place and time. Warranty clauses should be assessed for scope, duration, options and transportation aspects. Unexpected obligations to pay freight back from overseas or allowing the purchaser to select whomever and charge back all costs can be as troublesome as not having an adequate remedy to address defective products.

The focus of Termination clauses varies somewhat from Teaming Agreements. Besides termination for cause, parties must address new circumstances when a party may terminate for its convenience and whether such a right will be mutual. Payoff rights under such circumstances can be sensitive.

Parties often overlook two clauses that can short-circuit nascent disputes. First, a good Definitions Clause should clarify all terms unique to the Contract. Second, where attachments, addenda or other documents are to be included or referenced one should add an Order of Precedence Clause which defines the relative weight to be given to clauses and items if they conflict.

If Services are to be included, one may have to address the array of associated clauses regarding conditions, compensation and the like. Depending on the scope of the effort, it may be prudent to consider a separate agreement.

Conclusion

Periodically policing and updating one's own contract agreements and reviewing the significant clauses of those proposed by others should be a part of every company's basic compliance plan. Although most contracts proceed without difficulty regardless of the terms, those who have suffered the consequences of a poorly drafted contract often find the resulting costs (financial and lost time) outweigh the costs they hoped to have saved.

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