Negotiating 'take it or leave it’ contracts
One of the frustrations of being a lawyer who advises automation companies is that sometimes there is only so much I can do. Here's an example: Let's say Control Engineers Limited (CEL) wants legal advice in connection with a new project. Appearing in my inbox is a little gift from CEL's customer, consisting of a 40-page set of "general conditions," a five-page set of "special conditions," some...
One of the frustrations of being a lawyer who advises automation companies is that sometimes there is only so much I can do. Here's an example: Let's say Control Engineers Limited (CEL) wants legal advice in connection with a new project. Appearing in my inbox is a little gift from CEL's customer, consisting of a 40-page set of "general conditions," a five-page set of "special conditions," some intimidating specs, and a purchase order with very fine print.
"This is going to take me a few hours to go through, but I can already tell you we are going to need to change a whole lot of this to make it fair," I might say in response.
Why is it that I only "might" say this? Because I have learned that, in many cases, the reply from my client is the following: "The customer has a corporate policy never to change its terms and conditions."
What's a lawyer to do with that? (After all, what good is a lawyer who can't take out his red pen to justify his fancy diploma?) The answer is that lawyers must do what their clients have always done: be flexible. As a result, the contracting advice of lawyers in the automation field actually mimics the work of the companies being represented. Integrators typically are forced to adjust to the realities of their customers, not the other way around. So too with their legal counterparts. Flexibility is king.
Ultimately, what I’m getting at is that "take it or leave it" contracts require a flexible strategy with at least five potential components. And by "flexible," I mean that as each strategy fails, you move to the next—although not necessarily in order.
Strategy No. 1: Bid with exceptions. The assumption here is that your company is bidding on a project where at least some of the customer's terms and conditions are known ahead of time (although that is not absolutely necessary to make this work). Here, you create a simple and very generalized list that details the terms that are not agreed upon. By the way, you do not need a lawyer to create such an exceptions sheet. Your sheet simply would note items like, "Bid is conditional on working out a fair sharing of design risk." Or even, "Control Engineers Limited assumes no liability for lost profits of the customer."
No. 2: Provide specific alternative language. If there is a contract term that is particularly worrisome, it can be effective to show the customer the not-so-bad substitute language that you are proposing. Invite the customer to point out any problems with it.
No. 3: Appeal on the basis of fairness. This may seem obvious, but whenever you are able to engage a customer in a focused discussion on the fairness of a particular term, you are already 75% of the way home. Indeed, a contracting partner's statement that "we never change our terms" is nothing less than an attempt to avoid this discussion. One warning: To the extent you are successful in getting "fairness" on the agenda, pick your targets carefully. There should only be one or two, so that you do not wear out your welcome.
No. 4: Appeal on the basis of risk control. A widely-recognized tenet of good risk allocation is that risk should be allocated to the party that is best situated to affect the outcome. Some types of risk that owners try to pass on to contractors do not meet this test—and can be argued against accordingly.
No. 5: Incorporate your proposal. Get it listed as one of the official contract documents. Of course, this assumes your proposal comes with a set of terms and conditions that are more favorable than the customer's—and that you are able to navigate the several types of killer contract clauses in the customer's documents that seek to neutralize the effect of your proposal (for this you may need a lawyer).
There are other strategies. For example, some companies have had success in using a trade association "rider" (the Control Systems Integrators Association has a good one) by telling their customers, "My association won't let me sign your agreement unless we also sign this."
In then end, if there truly are no changes permitted, the best companies go through a risk assessment process that analyzes whether a deal is really worth it. That is because the smartest strategy of all when reacting to a take it or leave it contract may be simply to walk away.
Mark Voigtmann is a lawyer with Baker & Daniels, llp (with offices in Indianapolis, Chicago, Washington, D.C. and China). His group assists the automation and process industries in structuring projects and resolving disputes. Reach him at Mark.Voigtmann@bakerd.com or 317-237-1265.
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