how to negotiate contracts by brian burt

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/


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

6


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


The Unfortunate Reality

The “Wild West” days are over

It’s time to get back to contract basics

…at least for now

8


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



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”

10



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



Engage the other side…productively (continued) Don’t be (or deploy on your behalf) any of these individuals

12



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

13




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




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

15



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.

16


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”

17


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

18


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

19


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

20


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

21


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

22


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

23


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

24


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

25


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)

26


The Emerging Business Seminar Series

First Wednesday of Every Month7:30 - 9:30 am

SkySong – NEW Synergy Room!

Upcoming Program How (and Why)To Create A Corporate

Succession Plan

March 4th

Follow me @EmergingBusines

how to negotiate contracts by brian burt

Law

business business

s v e g

b o s o r

best of arizona business

n g e c o u n t y p

yesphxd e n v e r

e c i t y t u c s o

best corporate law firm