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How To Negotiate ContractsBy Brian J. Burt, Snell & Wilmer L.L.P.
Mention:@EmergingBusines
Hashtag: #PHXstartupweek#ChaseBasecamp#yesphx
D E N V E R L A S V E G A S L O S A N G E L E S L O S C A B O S O R A N G E C O U N T Y P H O E N I X S A L T L A K E C I T Y T U C S O N
February 27, 2015
Phoenix StartupWeek
How To Negotiate Contracts
Brian J. Burt (602) 382-6317 | [email protected] | www.emergingbusinesslaw.comwww.swlaw.com/blog/emerging-business/
©2009-15 Brian J. Burt, Snell & Wilmer L.L.P. 4
Snell & Wilmer L.L.P.A little background
Founded in 1938
Largest law firm in Phoenix and Arizona, and one of largest in the West with over 400 lawyers in 9 offices
Offices in Phoenix, Tucson, Denver, Los Angeles, Reno Orange County, Las Vegas, Salt Lake City, Los Cabos
A true full-service firm – all of the legal services required to help you start, grow and sell your business
Business, labor and employment, commercial finance, private equity, real estate, immigration, litigation, intellectual property, franchise, employee benefits, healthcare, tax, estate planning, environmental, mergers and acquisitions
Ranked the best corporate law firm in Phoenix for the 12th consecutive year by Corporate Board Member magazine
Ranked #1 law firm in Arizona by Ranking Arizona: The Best of Arizona Business
Learn more - www.swlaw.com, www.swlaw.com/blog/emerging-business/
©2009-15 Brian J. Burt, Snell & Wilmer L.L.P. 5
Presenter
Brian J. BurtPartner and Chair of Emerging Business GroupBrian is a business lawyer advising entrepreneurs and emerging growth companies in all stages of development, from formation to liquidity.
He has extensive experience in corporate formation, reorganization and governance; private equity and debt financing; shareholder/owner relations, buyouts and disputes; employment and consulting agreements; employee incentive programs; general contract negotiation; supplier/manufacturing agreements; securities regulation; technology transfer and licensing; joint ventures and strategic alliances; fund formation; cloud computing; corporate asset protection and succession planning; and mergers and acquisitions.
Brian represents clients in a wide variety of industries, including banking and financial services, biotechnology, capital investment, consumer products and services, education, entertainment/media, healthcare, high tech, Internet, manufacturing, marketing/public relations, medical device, nutraceuticals, outdoor, professional services, real estate development, renewable energy, and software and information technology.
Having previously founded, raise capital for, and run his own company, Brian brings a unique “real world” perspective to his practice.
Professional Recognition• The Best Lawyers In America® - Business Organizations (2015)• Arizona’s Finest Lawyers • Southwest Super Lawyers® - Rising Stars Edition, Business/Corporate (2012-2013)
Education• Harvard Law School (J.D.) - Managing Editor, Harvard Journal of Law & Public Policy• Allegheny College (B.A., Political Science & Philosophy, summa cum laude) - Valedictorian, Phi Beta KappaSelected Activities Entrepreneurs’ Organization (EO) / Accelerator Arizona / AZ Furnace / Center for Entrepreneurial Innovation (CEI) / Arizona Collaboratory Invest Southwest Capital Conferences - Executive Committee; Selection Chair Better Business Bureau - Board of Directors; Vice-Chair Valley Leadership, Class 30
©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Agenda
1) Challenges of doing business in today’s market
2) Contract negotiation best practices
3) Capturing agreed upon business terms
4) Ensuring today’s deal remains tomorrow's deal
5) Key areas of exposure and ways to limit liability
6) Ways to resolve disputes and help avoid them
7) Why “miscellaneous” provisions matter
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Your business associates(i.e., partners, employees, customers, suppliers, contractors, etc.)
are looking for ways to challenge and exploit
the “hand-shake deal” and the poorly written contract
The related disputes
are damaging and even destroying companies
The Unfortunate Reality
7
©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
The Unfortunate Reality
The “Wild West” days are over
It’s time to get back to contract basics
…at least for now
8
©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Negotiation Best Practices
Conduct pre-negotiation preparation Understand your objectives
Determine whether the overall deal makes economic sense Prioritize your objectives and identify “must haves” Understand the legal implications / nuances Determine whether you can walk away without a deal
Requires understanding of alternatives
Determine value of contract to your business…and allocate negotiation time / resources accordingly
Do diligence on your potential contract partner Do they do business in an ethical manner? What leverage do they have in the transaction (and your industry)? What is their negotiating style…or is the deal “non-negotiable”?
9
©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Negotiation Best Practices
Conduct pre-negotiation preparation (continued) Analyze your objectives from your contract partner’s perspective
Identify the non-starters – institutional, economic, etc. How is your proposed deal attractive to them? What are you offering in exchange for your special request(s)?
Select your negotiating team Identify a business point person
Tap someone who is not emotionally invested…or who can at least negotiate with minimal emotion
Identify and engage other members of the business team whose input will be required
Engage an experienced lawyer who understands how, and is motivated, to “get deals done”
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Negotiation Best Practices
Engage the other side…productively It’s a “negotiation”, not a “competition” (i.e., you can both win!)
Work to build trust, not score points
Collaborate to reach a shared objective – the completed contract
Follow the “golden rule”
Remember the negotiation is only the initial phase of what may be a long-term relationship
Treat it, in part, like a job interview
Listen to the other side Check your assumptions…you may be wrong
Understand why they are advocating / holding firm on a given position
Focus on the issues - don’t make it personal11
©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Negotiation Best Practices
Engage the other side…productively (continued) Don’t be (or deploy on your behalf) any of these individuals
12
©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Negotiation Best Practices
Engage the other side…productively (continued)
Don’t be (or deploy on your behalf) any of these individuals
The “table bangers,” “screamers,” “bullies” and “scorched earth” negotiators may win an individual battle, but they will eventually lose your company the war
If you even strike a deal, those tactics will poison the relationship with mistrust and resentment
Used regularly, those tactics will taint your company’s reputation and increase your cost of doing business
If making the first offer, present one that is favorable, not obnoxious
Include terms you would like to have, but are willing to concede
If the other side goes first, encourage a similar approach, but analyze the offer to see what they actually presented
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Negotiation Best Practices
Engage the other side…productively (continued)
Negotiate from a term sheet or letter of intent
Focuses attention on major issues
Cover as many points as possible
Much more efficient and cost-effective process
Much quicker and cheaper path to “no” (if the deal can’t close)
Works even when you have a “form agreement” to use
Control the first draft
Provides substantial advantage in negotiating the definitive agreement
Avoid use of “negotiating capital” to correct poor drafting 14
©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Negotiation Best Practices
Engage the other side…productively (continued)
Engage in principle-based negotiation
Let other side know the rationale behind your position
Don’t just circulate marked drafts without commentary
Live conversations are always better than emails
Negotiating means concessions…on both sides
Make concessions on a global basis
Get creative to bridge substantive differences
Make the lawyer the bad guy…but do so sparingly
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Negotiation Best Practices
Be collaborative, but not naïve – watch for these tactics:
Claims the revised draft captures the business deal when it doesn’t
Marked drafts that don’t show all of the changes
Requests to “split the difference” when your position is already closer to the middle
Requests for “reciprocal rights” when not appropriate
Intentional delays leading to end of game time crunch
11th hour changes to the deal requested by the other side’s “board”
“Psychological pre-sale” commitments – internal and third party
Last minute changes coupled with “take it or leave it” threats
Claims that your lawyer “is being unreasonable,” “is focused on irrelevant details,” “doesn’t understand the deal,” etc.
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Capturing The “Business Deal”
Ensure that your contract clearly and accuratelycaptures the “business deal”
What do the following provisions mean?“Company will be entitled to 50% of the Average Net Revenue”“The purchase price will be Four Hundred Thousand Dollars ($350,025)”“The supplier will be responsible for all damages resulting from its breach. ... Under no circumstances will supplier’s liability exceed the actual fees paid to supplier hereunder within the two months preceding such breach”“Promptly following execution of this agreement, the parties will discuss and agree upon the software to be included and the price thereof”“The agreement shall continue for a period of 5 years, and thereafter for successive 5 year terms, unless and until terminated by 1 year prior notice in writing by either party”
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Capturing The “Business Deal”
Ensure that your contract clearly and accuratelycaptures the “business deal”
Avoid these common mistakes:
Typographical errors
Undefined terms / concepts
Internal inconsistencies
Omission of key deal points
Agree to agree (or “feel good”) provisions
Missing schedules, exhibits, attachments
Use of industry-only terms
No termination rights
No rights at termination
Unenforceable provisions
Unclear pronouns
Wrong contracting party
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Keeping The “Business Deal” Intact
Your contract must not only clearly and accuratelycapture the “business deal”…
…but must also keep that deal in place
Supply contract provides for price of $2.50 per item…
…but doesn’t prevent supplier from increasing prices on day two
…but doesn’t require supplier to accept buyer’s purchase orders
…and supplier must accept orders, but there is no minimum capacity requirement
…but doesn’t require supplier to deliver items on a timely basis
…but doesn’t require supplier to deliver items that meet specifications
…and has the terms to address those issues, but no penalties for violations
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Keeping The “Business Deal” Intact
Having the right to terminate the agreement serves little or no purpose if you have no alternative
Make breach “hurt” with liquidated damages(1) reasonable estimate of damages for harm
(2) damages difficult to estimate at time of contract
*punitive penalties are usually unenforceable
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Limiting Liability
Limit your liability to the other side Limit the reps/warranties provided and expressly disclaim all others Limit the types of claims for which you will be liable
Example: not liable for ordinary negligence
Specify remedy for a given claim Example: will repair or replace defective item
Exclude consequential and related forms of damages Limit the claim period Provide for an aggregate liability cap Make sure that limits apply to entire contract
Limits contained in indemnification section are useless if indemnity is not the exclusive remedy
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Limiting Liability
Limit your liability to third parties Ensure reps/warranties do not run to third parties (if legally permissible)
Example: distributor not liable to retailer’s customers
Require the other side to indemnify you for third party claims caused by other side’s bad acts or omissions
Your company Third party
Other side
Other side
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Ways To Resolve Disputes
Discussion Between The PartiesNon-Binding Mediation
ArbitrationLitigation
Required discussion (i.e., “cooling off period”) can resolve disputes
Non-binding mediation can resolve disputes
Arbitration is not always quicker and cheaper
With arbitration you may be more likely to get a “split the baby” result
Analyze whether a jury will understand your dispute and is likely to favor you
If not, consider waiving the jury
The nature of your contract may favor arbitration or litigation
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Ways To Avoid Disputes
What are the two best ways to avoid disputes?
Enter into a properly drafted contract…
…with a party that does business ethically
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Why The “Miscellaneous” Or “Boilerplate” Provisions Matter
Provision Why It MattersAmendments Ensures agreement can’t be changed orally
Assignment You want right to assign to affiliate and buyer, and prevent other side from assigning to unknown entity
Attorneys fees Requires other side to pay your legal fees if you have to pursue legal claims for breach
Counterparts Don’t want contract to be deemed unenforceable if all parties don’t sign same signature page or you don’t have an original in your file
Entire agreement Ensures agreement can’t be changed by reference to previous oral and written, and contemporaneous oral, agreements
Governing law State law will impact how your contract is enforced
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P.
Why The “Miscellaneous” Or “Boilerplate” Provisions Matter
Provision Why It MattersExpenses You want other side pays its own transaction expenses
Further Assurances Provides other side will complete additional acts / documents necessary to complete transactions
Notices Provides instructions for proper notice so you can’t be held responsible for notices not deemed received
Severability Provides that if any part of the agreement is held to be unenforceable, the rest is not affected
Successors/assigns Provides that the agreement is binding on the other side’s successors and permitted assigns
Venue for disputes Can be very costly and disadvantageous to arbitrate/ litigate in other cities and states
Waivers Provides provisions can’t be waived orally or by course of dealing (i.e., failure to enforce rights)
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©2009-15 Brian J. Burt, Snell & Wilmer L.L.P. 27
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