Episode 20

Transcript

Chris Koehler: Hello, welcome to the latest episode of Frantz Ward's podcast series, Shoveling Smoke. I'm Chris Koehler, a partner at Frantz Ward, and I'm hosting today's discussion with my friend and colleague, Alanna Guy. Welcome back, Alanna.

Alanna Guy: Thanks Chris.

Chris Koehler: Alanna's no stranger to our podcast. Last year I interviewed her regarding the building blocks of forming a new business, and since then she's moved to the other side of the microphone by hosting some episodes. Today's episode is a topic she and I have worked on together for some clients, so she's back to being a guest. Today, we're going to talk about something that affects every business, the terms and conditions or T's and C's in sales and services contracts. We decided to discuss this topic together, because we come at it from completely different angles. Alanna is a member of our business and corporate law practice group and is involved on the front-end of transactions, where she evaluates and drafts terms and conditions and other contracts. My background's a little different. I'm on the litigation side, so I come at the issue from the backend, seeing where the terms and conditions of a contract or transaction have caused problems or resulted in disputes and lawsuits. So, hopefully the two of us together can give a well-rounded look at how the terms and conditions affect your business. Alanna, what have you been doing outside of work now that the world seems to finally be opening up? Knock on wood.

Alanna Guy: Yeah, so I think like most people my age, the wedding circuit has come back full force and hopefully can continue. So many of my friends and family have been planning out of town weddings, and it's been a great excuse to travel. Last year, a highlight, I got to go to Denver and it was my first time out there in Colorado, and I was there for a wedding. Then coming up, my brother's getting married in Alaska, so that should be a great adventure and a fun way to see that state.

Chris Koehler: Well, that seems more interesting than terms and conditions.

Alanna Guy: I mean, who knows, maybe we can liven this up and give everyone a good listen.

Chris Koehler: Well, I'm skeptical, but we'll see. Here's what we plan to accomplish today. First, we want to discuss why the terms and conditions of a transaction are so important. Second, we'd like to discuss our general approach to drafting or reviewing terms and conditions, and then third, discuss some specific ideas that we have when we evaluate T's and C's. But before we dive into any specifics, Alanna, can you provide a little background on why today this topic is particularly important?

Alanna Guy: So right now we are generally seeing a lot of changes in our world, and some of these certainly appear to be consequences of COVID and the pandemic. For instance, many industries are experiencing supply chain issues, and then it seems like people cannot stop talking about inflation and how it's impacting every single industry and then obviously individuals as well, and now we're seeing rising interest rates. So with some industries have been hit particularly hard by supply chain issues, for example, it might be incredibly burdensome or not even possible for companies to fulfill their orders or perform under contracts, so they've been forced to take a look at the documents governing the transaction to evaluate their options, and oftentimes that document is their terms and conditions.

Chris Koehler: I guess I have a pretty concrete example of that. When the world first closed down two years ago, within a week when the government orders shutting down businesses occurred, we were bombarded with calls from clients on their rights and obligations, when either they couldn't meet their contractual deadlines because they were shut down or where the other side couldn't do it. So, the first step we had to do was to look at the terms of the agreement to see whether the parties had included a force majeure provision or some similar term to account for what happens when a party is prevented from performing, not through any fault of its own. So if the contracts didn't have terms and conditions that dealt with that back then, they certainly have them now as they've reevaluated those terms. So, that's a concrete example that our clients faced.

Alanna Guy: That's exactly right. Oftentimes I feel like I am talking in terms of the before and the after with regard to the pandemic, but in thinking about before, a lot of standard force majeure clauses, some of them would account for an epidemic or a pandemic, but just as many did not. So now we're making sure to include pandemic, epidemic, governmental shutdowns, or mandates relating to the foregoing, et cetera. Sometimes the clauses even specifically reference the COVID-19 pandemic. But as some of these types of world events have caused companies to reevaluate or look at their terms and conditions, it's been a really good reminder that companies evolve and things change. What might have worked at one time for a company maybe even a few months ago, may no longer be applicable and it actually might be detrimental to that company now. So that's why as we're talking about this, it's important to remember, like we talked about last year on the podcast, Chris, with revisiting your governing documents, I would really caution companies against drafting terms and conditions, slapping them up on their website and then never taking a look at them again until there's an issue.

Chris Koehler: That makes sense. A key point to recognize for everybody is that the terms and conditions are really the heart or the basis of the contract. They're the rules of the game for any transaction you're entering into, and you need to know and appreciate what those rules are. Your company may have a form with your own preferred terms and conditions, the other side may have a form that has their own terms and conditions. Often these are in conflict or they'll have what we call a battle of the forms, so you need to understand what the terms are that the parties actually agree on that control the transaction so you go into any transaction with open eyes. So Alanna, if the starting point is the documents, what's your starting point when you're reviewing or drafting those documents?

Alanna Guy: That's a good question, because ideally I like to take a holistic approach when looking at terms and conditions. What this means is we need to understand, like you said, exactly what those documents are. What is the client providing to be signed in order to effectuate a purchase order or transaction? So some of those documents will be a quote, there might be a purchase order, there might be an order acknowledgement, and so we need to understand what the actual documents are that form the basis of that contract. More importantly, do all the documents, not only reference, but incorporate the terms and conditions? Do the clients provide a copy of their terms and conditions when they send a quote or do they simply reference their T's and C's on the website? If we don't have a good understanding of this, we might have a question down the line about what the actual controlling provisions are. That's why it's imperative to make sure that all of the various documents that form the understanding between the parties are consistent and that there are no conflicting provisions.

Chris Koehler: Yeah, as I said earlier, it's likely that the documents you have on your side, if you're a seller, you probably have a quote and an order acknowledgement or something similar that reference your own terms and conditions. If you're a buyer, you'll have a purchase order and maybe a shipping acknowledgement or something like that, all of which refer to your own terms and conditions. There's sure to be conflicts, I mean, it's rare that there are not, so you need to figure out which provisions trump one another or if they're consistent. So getting consistency in the documents, not just on your side, but on the other party's side too is paramount to understanding what the rules are going to be.

Alanna Guy: Definitely.

Chris Koehler: So once you have the documents in hand, and hopefully you have established a base level of consistency, what's your general approach in working through the transaction with the company?

Alanna Guy: So, the general approach is to get on the same page with the client. Which to be honest, that's an important aspect in every area of my practice, but it involves a few things in this instance. Perhaps most importantly, I want to partner with the client. At the end of the day, we're all on the same team here, so to be partners in it is most effective. Then although I adequately want to point out any risk, it's our goal to not be a hindrance to the deal as well. Oftentimes clients might be hesitant to involve their lawyer for risk of slowing down the process, and that's why the bigger picture that we have, the more of a team that we can be, and the better understanding that we'll have of the client's sticking points, which I'll circle back to in a few minutes. But broadly speaking, initially I'm identifying if we're drafting terms and conditions for a website or identifying if we're reviewing another company's terms and conditions that our client's been asked to sign and agree to, because that approach will change depending on what the goal is and the outcome. At the end of the day, it's really not a one-size-fits-all approach. That's another theme, Chris, that we've discussed before on this podcast, and that's why the bigger picture that we can have in the discussion with the client, the more able we'll be to adequately address their concerns.

Chris Koehler: Yeah, I agree wholeheartedly with those comments. First, the idea that a lot of business people don't like to get their lawyers involved. This isn't a pitch for the lawyers to get involved in every transaction, but they view us as an impediment to a deal or slowing down the deal, because we'll throw wrenches in. Our hope is that we're helping you balance your risk tolerance with your legal requirements, so that's what we try to do. Now as you said, it's about identifying the risk, not eliminating all risk. It's almost impossible to eliminate all risk, but we want to make sure the company knows what the risks are and they go into a transaction with open eyes, and then they can either negotiate away some or all of the risk or make a decision to bear some of the risk or adjust the terms so that the risk is shared. But until you identify the risk and get on the same page with the client, you can't get the transaction done. So, what's your specific approach in trying to work with the client to identify those risks?

Alanna Guy: Yeah, so the specific approach is first understanding their goals, because once we understand the goals, I mean, we need to know that before we even start pointing out risks. Then next we have to understand leverage, because again, before we're negotiating risk, we have to understand leverage. If we're representing a small mom and pop shop and they've been asked to accept Amazon's terms and conditions, I mean, that's an overly simplistic and exaggerated example, but it shows that sometimes we have no leverage and we won't be negotiating the terms and conditions, and they either accept the risk or they don't enter into the transaction.

Chris Koehler: You mean you've never tried to negotiate with Apple when you signed off on their terms and conditions on your iPhone?

Alanna Guy: I'm not going to say I haven't, but I will let our listeners guess how well that one went.

Chris Koehler: That's an exaggerated example that Alanna gave, but leverage can occur in many different ways. I mean, if you really want a deal or you really need an item that only one supplier can provide, you may have to bend to their terms and conditions more than you'd like to in order to get the product quickly. By the same token, if someone's a large customer of yours or it's a say a governmental customer, you might not have any choice but to accept their terms and conditions.

Alanna Guy: Exactly. That's why the one-size-fits-all comment comes back in, because also is this a $400 contract or is it a $400,000 contract? That might impact the importance we put on some aspects there and understand how it's going to impact our client. Again, it circles back to their goals, their goals and their leverage. So, then the last thing that we talk about is our client's appetite for risk. We have to understand what their deal breakers are in evaluating the terms and conditions that they've been presented with, or if it's their own terms and conditions, the changes that somebody has asked them to make. So when we talk to our clients about what their deal breakers are, there's a few topics that we tend to be focusing on, and the first one is the financial terms of the deal. When we're talking about the financial terms, we're also doing analysis on the delivery terms, and that's mainly involving the risk of loss provisions. Next, we like to talk about how can our client get out of the arrangement if necessary, and this goes back to the beginning of this podcast. We're not planning that our client's thinking about getting out of the contract or that they're going to need to, but if we're hoping for the best, but planning for the worst, we're evaluating the risk here. What is the option in the event that something not great happens, what's the option for our client to get out of the contract?

Chris Koehler: That would be true in the case of something like the pandemic where something very specific happens and you're not able to perform, or you need to get out of the deal, but sometimes you might have a long-term supply deal, for instance, that just is not working for one party or another, so you need to lay out not just what happens if something really bad goes wrong, but what happens if one party wants to terminate the contract. How do you go about that and what are the implications?

Alanna Guy: Exactly. Cancellation, termination, all of that's incredibly important, to at least understand. So, the next thing we think about is whether there are any industry-specific considerations. A good example would be transactions or goods of service where there's a heavy intellectual property component. So we need to understand our client's concerns relating to their IP, are we concerned about reverse engineering, protecting their IP, things of that nature.

Chris Koehler: This is really important too where parties are collaborating on a product or collaborating on a design or one party is providing a product that the other party is adding something to or incorporating component parts, to be clear if a new invention is made, who owns the invention, or who gets to make the decision of whether there's a patent. So, each side is likely to have some kind of IP and you need to figure out who has the right to use that, or who has the right to take advantage of it.

Alanna Guy: Exactly. Not to be thinking worst case scenario here, Chris, but in that situation, who's liable in the event someone gets sued for patent infringement then on the new product. So, all of these things are helpful to be thinking about and talking to the client and understanding from their perspective what their biggest concern is. Then, I mean, again, back to our preparing for the worst, but if the deal does go south, what happens? Who's bearing that risk? What are the warranties of the contract, and that'll govern maybe when there is a breach. Then if there is a breach, what are the party's remedies in that instance? Again, looking at the indemnification provisions or the insurance obligations, all of these things in isolation might not seem like a huge deal to a client or for a transaction, but when you're looking at them holistically, they can impact the transaction quite a bit.

Chris Koehler: When I talk to clients, these three that you just mentioned are probably the most important to me, because those are the places where you really limit your risk, first of all, by framing what the remedies are if there's a breach. So, someone can go into it and say, "All right, if I do something wrong here, this is how my liability is limited." Hopefully it won't be unlimited, there's ways to put your liability in a box. By the same token, the indemnification. If something goes wrong, who is going to bear the most risk there? Am I able to pass that off on the other side? Most companies understand that if they somehow screw up, they need to own that. To make sure that each party is owning its own screw ups is what indemnification clause does, it puts the risk where it should be. For everything else, you might not be able to cover through one of those clauses, you should always have adequate insurance and work with your insurance professionals to make sure that you're covered on that end. So, that to me is the core of eliminating risk.

Alanna Guy: I could not agree more with that, Chris.

Chris Koehler: I mean, as you and I have discussed this for clients, those are the primary things we look at. There's probably five things that I look at in any contract. I of course look at more, because every contract probably has 20 to 25 different clauses, but the ones that we just mentioned really form the heart of it. Are there any extra ones or ones that come up a little more frequently?

Alanna Guy: Yeah, so like you're saying, those are the ones that we will tend to negotiate the heaviest and make the priority for the client, but the other ones that we want to make sure they're aware of or have an understanding about, confidentiality, especially we mentioned reverse engineering and IP previously. It kind of depends on the industry and specific clients on how important that is, but you'll find a confidentiality term in every single one of these contracts. So if there is a dispute, what does the dispute resolution clause look like? Is there a choice of law provision? Is the forum contemplated? We like to make sure our client understands, for instance, if they're agreeing to, I mean, we're in Ohio, California law, that sometimes that's not the exact law that we want to accept in our transaction, or if they're agreeing to a forum in another country. So if there is a dispute, are they litigating it in a different country? Those are things that maybe we're not going to spend our time really negotiating, and it's not going to be the hill to die on, but we want to at least make sure our client is aware of it and is okay with it.

Chris Koehler: Yeah, we don't have time today to go through every single clause that might show up in T's and C's, but hopefully this overview hit on the primary ones that seem to cause the most angst to clients and seem to really affect the client's risks and goals the most. Alanna, we always ask guests at the end of one of our podcast to give a few takeaways in case they only want to listen to us for 30 seconds. What do you have for us on this topic?

Alanna Guy: Well, I certainly couldn't blame them for that, but first, I would say it's important for companies to be reevaluating their terms and conditions on a regular basis, whether or not that involves their lawyer. Secondly, it's imperative that as a company, you have a clear understanding of your goals as they specifically relate to your company standard terms and conditions. Then lastly, we just want our clients to understand the risks, understand what they may or may not be able to negotiate away and then to have a clear understanding of what their deal breakers are.

Chris Koehler: Thanks Alanna. To recap. Regularly review those T's and C's, understand your goals and understand and appreciate your risks. Thanks again, that's it for this episode. We appreciate your joining us and listening in and we look forward to our next discussion.

Alanna Guy: Thanks Chris.

Chris Koehler: Thank you.

Shoveling Smoke is a production of Evergreen Podcasts. Our producer and audio engineer is Sean Rule-Hoffman. Thanks for listening.