Representing Weaker Parties in Commercial Transactions
A Cleveland tagger seems to have had the good taste to adopt the Noble Beast Brewery font and name. Stealing from the best!
Small business lawyers have plenty of opportunities to represent clients who are “weaker parties” in contract negotiations.
The weaker party in a commercial deal is the one who has less negotiating power than the other party. Smaller businesses that are growing especially will encounter opportunities to enter into valuable contracts with much larger companies. The larger companies usually send over their “standard terms” that shift costs and risks to the smaller company in 50 different ways. To the extent your client is willing to accept unfavorable terms in order to secure the contract, you represent the weaker party.
Your client’s options in the face of a new contract can vary. Sometimes the weaker party is presented with a take-it-or-leave-it situation. Sometimes the weaker party has some room to negotiate and has the chance to make strategic decisions as they propose revising the terms. In all cases it’s interesting for you lawyers representing the weaker parties because you have the chance to analyze the risks built into the language of the proposed terms, consider them in relation to the business of your client, and help your client prioritize negotiation details.
Unfavorable terms are those that create costs or risks to your client; the greater the cost or risk, the more unfavorable the term, so it’s important to rank the risks to your client. Certain contract terms will be unfavorable on their own terms. Indemnification provisions probably top the list of potential contractual strangleholds; lousy payment terms, subjective pricing or scheduling terms, and plain old onerous performance conditions can also increase the burden on the weaker party from the get go. As an aside, I am reminded of a weird term I’ve seen a couple of times: a statement that the weaker party has “a duty of trust and confidence” to the stronger party. This sounds like a warm and fuzzy term that makes some clients feel like a happy puppy but I think it’s a legal knife in the back because a “duty of trust and confidence” is a definition of fiduciary duty! Don’t let that one slip by, counsel. You don’t want your client to inadvertently pledge to put its customer’s interests on par with its own.
Other contract terms will take on a favorable or unfavorable color based on your client’s business. An unreasonable noncompetition covenant might be neutralized by your client’s state law. A severe lien provision doesn’t apply to your client’s services-based work. A long payment term is mitigated by a credit from another project. At the negotiating table (or on the negotiated red-line documents) you can make room to concede on these issues while focusing on the ones that are more consequential. The lawyer who understands something about the client’s business operations, culture, and risk tolerance will be able to provide a much better analysis than the one who doesn’t.
Lawyers also have to listen to their clients’ business-side reasons for accepting risk. A client may be so confident in its ability to deliver a job well and quickly that it’s willing to accept, say, a harsh liquidated damages for delay provision. A client may have finally landed a “must have” contract on the perfect project and is going to accept the work at any risk in order to meet its business aspirations. A client may have a “final straw” contract from a problem customer and is not willing to make any concession no matter how small (you could say the client that’s ready to walk is not the weaker party). If you have articulated the legal risk and the client has decided to accept it — well, that illustrates the separation between the lawyer’s role and the businessperson’s role.
Once you’ve figured out the principal risks your client needs to mitigate, you can talk with your client about different ways of approaching the contract. Aside from just negotiating better terms in the final documents, you can add value to the negotiation by parsing the risky terms and discussing ways your client might be able to mitigate the risk on the business side. A long payment term might be offset by a chance to raise prices, in effect implementing a “late fee.” Physical risks might be handled by insurance, and other risks by passing the liability on to the client’s subcontractors.
It's also efficient to know your client’s “dealbreaker” terms. Some businesses won’t accept unfavorable indemnification terms at all; some won’t accept arbitration requirements; some won’t waive lien rights. Knowing these points with your client saves them time on futile or drawn out negotiations. Again, a client’s willingness to walk away is a form of negotiating strength, and you should push firmly to get the term your client demands.
In the end, your “legal analysis” of a contract is a detailed process of breaking down the parts of the contract into quantifiable or speculative discussion points in a way that helps your client prioritize and assess the legal and business risks of the document. It’s a tool that allows your client to make informed business decisions about contractual risk.