Wednesday, June 16, 2010

Legal Assessments: Mean What You Say in Both the Contract and the Relationship

I’m back after a whirlwind of work related to some litigation matters with which I am periodically solely occupied.  My old boss and mentor Rob Baldwin used to tell clients when he was really busy with one matter that he expected they would want the same thing when their matter required the same kind of attention.


Previously, I’ve discussed some issues regarding entity structure for companies and corporations from a relational perspective.  These discussions have focused primarily on internal relationships, specifically between owners, principals, shareholders, or members.  I want to turn the attention now to the relationships an entity has with third-parties, whether customers, suppliers, independent contractors or the like.

The Contract Governs Over Informal Negotiations

In general, the same principles apply such as accurately identifying the duties and responsibilities, providing notice or disclosure, and actually complying with the terms and conditions.  But what I want to do here, is point out that often, the people involved in a legal relationship formalized by a contract of some kind, tend to allow for a bit of a incongruity between what they understand the relationship to be, and what they included, or excluded, from the actual document formalizing the relationship.  Specifically, what I want to point out is that the contract will most often govern any dispute, regardless of the informal negotiations before hand.  As a result, the contract matters more than the informal negotiations, and a company can do a lot to stand out by making sure their contracts accurately reflect the informal negotiations.

A personal example

Let me give the example of a form contract you might get from a service provider.  I recently had computer troubles after the lightning storm here in Denver a week back.  I took the computer (my really old G4 iMac) to a service provider to retrieve data Hard Drive small from the hard drive.  I explained that I suspect the drive is fine and it is simply the power to the computer that is a problem.  After discussing the situation with the representative at the store, confirming the price for the services, and what I needed done, I was given the standard service contract the provider uses for me to sign and initial.  Of course, being an attorney and all, I actually read the terms.

Turns out that the standard form contract I was supposed to sign included a certification by me that I had a back-up of the data off the hard drive.  It then went on to state that I would not hold them responsible if the data on the drive was lost during the repair work.  This gave me pause.

As you can imagine, the terms are there because the provider needs the freedom to work on a broken machine without concerns that their efforts might accidentally destroy data which cannot be replaced.  However, the situation in the form contract did not fit my circumstances.  I was there because I needed them to retrieve the portions of the data on the machine for which I did not have a back-up.  If I had the back-up, I would not need them.  In addition, they wanted me to release them from responsibility, even if they lost the data because they were negligent (which is another way of saying they lost the data because of their own fault when they reasonably should not have lost the data).

This put me in a quandary.  First, I was not about to lie and certify that I had a back-up.  Second, I got a little concerned that they might be a bunch of hacks.  I am willing to pay them because they hold themselves out as being capable of providing the services I am requesting using a skill I do not have.  But their form contract implies that if they delete my data because they do not really have any skills, or because they have those skills and failed to apply them to the job, I basically have no recourse.

The Application

I bring all of this up as an example of how we do business and form legal relationship.  In talking with the representative, I felt comfortable that they understood what I needed and had the skill necessary to do the job.  I also received assurances that they understood my problem and would do what they could to help by applying skills I do not have, without accidentally deleting the data they were trying to recover for me.  But after all of this conversation and forming of the relationship with the provider, the contract, which actually formed the relationship, was different in important respects.  So the question arises, which one will actually govern the transaction: the informal conversations, or the contract.  The answer is generally going to be that the contract will govern.

My issue with repair work on a computer is small.  But when this principle is applied to a bigger transaction, with larger consequences, the same problem arises.  One might have a great interaction with the other person, but get a contract that contradicts one’s understanding of how things are going to work.  It might provide for discretion by the other person that keeps them from being responsible in certain situation, or limit how much skill they have to actually apply to the job.  In the end, it is the contract which will govern any conflicts, and the discussions and expectations formed outside of the contract will probably not be worth much.

What many of us tend to do is pretend that the informal interaction is the real relationship and will actually be how the other party will perform in the relationship, even if the contract does not force them to do so.  However, the contract is where the rubber hits the road.  If someone is willing to say they can do something informally, they certainly ought to be willing to back it up by making themselves accountable in the actual contract if they cannot do it.  Otherwise, we are simply entertaining a form of lying.

An Opportunity for Businesses to Stand Out

I think it is better, and actually a way for businesses to stand out among their piers, for businesses to draft their contracts in a way that honors the informal relationship they form to get business. 

Using my example of the computer repair, it is perfectly possible to craft language in a form contract that addresses the concerns of both the provider and the customer.  One way is that rather than asking a customer to release the provider from the responsibility to exercise the skill they hold themselves out as possessing, the provider could simply specify what the provider will be responsible for while also specifying what they will not be responsible for (like faulty equipment or incidental damage caused by good faith attempts to do the work requested on the machine).  The provider could focus the form contract on getting authorization from the customer to do what is deemed necessary by the provider, at the providers discretion, to accomplish the task at hand, with a disclosure that such activities may have unintended consequences which the customer is willing to accept as a condition of providing the machine for the work, including a loss of data.  The provider could state that they are limiting their liability for legitimate screw ups that could have been avoided to the amount of the charges for the work performed so they have an incentive to exercise their skill, but do not have to worry about a screw up sinking their business.  And the provider could use the contract to suggest the customer get a back-up of the data before allowing the work, noting that if the customer chooses not to do so, the provider cannot be held responsible for inadvertent losses of data.  

The Contract Matters, SO Draw a Line

Another point is that businesses and individuals should pay attention to the actual contracts.  The informal relationship is a legitimate basis for some concessions in the contract terms, knowing that when all is said and done, one will have to live with the contract terms if things go bad.  However, we do have to draw the line somewhere.

For me, I only crossed out the term in which I was asked to certify that I had a back-up of the data because, while it bothered me that they wanted me to release them from all liability for deleting my data while doing the work, it was not critical data and they had agreed to significantly limit the charges for doing the work if they could not retrieve 75% or more of the data.  On the other hand, I was not about to lie.

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