How To Negotiate Contracts by Brian Burt

How To Negotiate Contracts
By Brian J. Burt, Snell & Wilmer L.L.P.

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@EmergingBusines
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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 | bburt@swlaw.com
www.swlaw.com | www.emergingbusinesslaw.com
www.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. Burt
Partner and Chair of Emerging Business Group
Brian 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 Kappa
Selected 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 personal
11

 Engage the other side…productively (continued)
 Don’t be (or deploy on your behalf) any of these individuals
12

 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 accurately
captures 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 accurately
captures 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 accurately
capture 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 Parties
Non-Binding Mediation
Arbitration
Litigation
 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 Matters
Amendments 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 Matters
Expenses 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 Month
7:30 - 9:30 am
SkySong – NEW Synergy Room!
Upcoming Program
 How (and Why)To Create A Corporate
Succession Plan
March 4th

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