By Andrew Rudin and Aileen A. Pisciotta, Esq.
For many sales practitioners, Legal has earned a reputation as the Sales Prevention Department. “Look – to close this deal, the last thing we want to do is get lawyers involved . . .”
But it might surprise you that it should be the first thing.
The mere mention of “Legal” causes business developers to break into a cold, clammy sweat. Images of lengthy contracts and forms, chock full of fine print. Paragraphs saturated with intimidating words like indemnities, liquidated damages, limitations of liability and force majeure. Recollections of prospects on the delicate cusp of buying, becoming irreversibly baffled and skittish. Purchase delays, followed by more delays. Oh, the agony!
The Legal Department plays a crucial role in making B2B sales transactions successful. As fanatical as you or your company are when it comes to ensuring quality or having a state-of-the-art product, as meticulous as you are about being transparent and following through on promises, there are still many uncertainties. Things go wrong between vendors and customers. [Stuff] happens. Misunderstandings occur. Products don’t work according to specification. Occasionally, customers believe they have been misled. Same for vendors. When these situations happen, the problems can escalate into contentious litigation – even when they might seem minor or trivial. “But I thought . . .” – an ominous phrase that frequently occurs at the leading edge of customer relationship catastrophes. A preamble that most of us would rather not hear.
Salespeople have a significant stake in every transaction, called compensation at risk. And that stake can be protected by legal review. But the animus Sales often directs toward Legal adds to the risk by inviting customer relationship complications that can spiral out of control. So, before anyone signs on the dotted line, remember that legal review can be a life saver, or at least a commission saver.
When legal mistakes are big, careers are jeopardized. You may have to pack up your desk. Or your entire company. Here’s the problem: how can you ensure that a deal closes on terms that preserve the expected revenue and profit? Put another way, how can you prevent transactions from unraveling, and discovering that revenue and commissions you thought you had in the bank have, instead, evaporated?
Each of the following examples illustrate how a seemingly-profitable deal can be undone by sloppy contracting:
1. A sales representative for a telecommunications company used his customer’s purchase order template when executing a large order, not realizing that it incorporated the customer’s contract terms. Those terms obligated his company to compensate the customer, a financial services company, for lost revenue and profits (otherwise referred to as indirect or consequential damages) in the event of a service interruption. The terms and conditions that the two parties had painstakingly negotiated prior to purchase limited the vendor’s liability to a credit of the monthly recurring charges for the period of the interruption. But the customer’s terms embedded in the purchase order template included an “Entire Agreement” clause, precluding evidence of any agreements outside of those terms. Subsequently, a bug in the vendor’s software caused a catastrophic failure of the telecommunications system. The telecommunications company will owe its customer consequential damages for the failure.
Misfortune: The customer’s terms embedded in the purchase order template control the transaction, and the separately negotiated limitation of liability is irrelevant. Consequently, the telecommunications company will not only lose the recurring charges for the three days of interrupted service, but will be liable for the customer’s consequential damages for its loss of financial services revenue over the same period.
2. Carlos Quinones, a sales rep for MegaCorp, needed a $200,000 order to make his quarterly bonus level. On the last day of the quarter, Carlos emailed his largest customer an offer for the sale of his company’s widgets at a price that would put him over the top. His email specified that the widgets would be delivered FOB Origin (making the customer is responsible for all transport and insurance costs). The customer responded by email accepting the products and price, but countering with delivery FOB Destination, which made MegaCorp responsible. Anxious to make his bonus, Carlos hurriedly entered the order for same day shipment, but failed to specify the modified shipping terms, assuming that he and his customer would “work out the details” later.
Misunderstanding: Unaware that he had actually “accepted” the counter-offer delivery terms, Carlos committed his company to terms of the contract that were not what he intended. He exposed his company to greater risk and himself to a loss of commissions in the event his company cannot take the risk, or otherwise breaches the enforceable terms of the agreement.
3. Disruptacorp sold a CRM system to Company X. Disruptacorp made no explicit promises about the results Company X would achieve, but in the meetings leading up to the purchase, the sales rep repeatedly claimed that Company X would “improve its effectiveness.” Disruptacorp’s standard contract did not include an exclusion of implied warranties, including warranties of fitness for a particular purpose. After just three months, Company X became disappointed with the product, pulled the plug on the project, and sued for damages. Company X argued that Disruptacorp breached its implied obligation to ensure that the CRM system was suited to Company X’s specific requirements.
Mistake: Legal review would have ensured that implied warranties were excluded. Without the exclusion, Disruptacorp is liable for promises they did not realize they had made.
These cases illustrate legal issues that every sales executive needs to know: are the sales subject to an enforceable contract? If so, are you certain that all of the terms of that contract best serve your interests, or have you actually agreed to terms that better serve the other party’s interests? Have you successfully included all terms necessary to protect your interests within the “four corners,” or confines, of the contract, or can the other party produce evidence of preliminary discussions or implied terms that expose you to substantial liability? Finally, does the contract give you the recourse you need to collect from a customer that doesn’t pay, or that terminates early?
Each of these issues bears on a most important consideration for any company: cash flow. When trading partners have contractual difficulties, payments are commonly delayed, shunting receivables off into distant aging periods. Over-aged receivables eventually must be written off as bad debts. As any CFO will attest, when cash flow problems are especially large, the results can be strategically catastrophic.
Anytime a customer defaults on payment, the seller may be between a rock and a hard place, having to choose between foregoing payments, or incurring substantial legal fees to litigate the claim. In addition, when invoices are unpaid, CFO’s have little alternative to reversing revenue transactions, and asking sales management claw back commissions. When resolving these issues, it’s never good for sales morale when you’re continually stuck vetting the “least-worst” choice.
As with sports, the best defense is a good offense. That means training your sales force to get more finicky about sales terms, and to appreciate that close attention to contractual legal issues up front is the most effective way to lock in revenue from the sales that everyone worked so hard to close. “We won the Jackson account! We’re celebrating this Friday in the main conference room!” But without good contracts with effective recourse, sales revenue can evaporate. To ensure your bacchanal doesn’t turn into a post-mortem, make time to have legal counsel help cover the following with everyone on your business development team:
1. Have an enforceable contract.
- Be sure there has been clear offer and acceptance of specific commercial terms.
- Include an “Entire Agreement” clause to confine the agreement to the “4 corners” of the written contract, and preclude the other party from relying upon prior notes, phone calls or emails to contradict the terms of the written contract.
- Be sure the person who signs the contract (signatory) has authority to bind his or her company to a promise.
- If you rely exclusively upon terms and conditions posted on your website, be sure to require the other party to “click through” and accept, or provide evidence of affirmative assent, otherwise the digital terms may not be binding.
2. Have the right contract.
- If the other party’s document is used, make sure you have thoroughly reviewed it and understand the terms you are agreeing to.
- Be sure all important terms are addressed, otherwise, the law may provide “implied” terms, including facts required for a deal to be reasonable such as rates, timeframes or specific preconditions; or terms implied by law such as warranties of fitness for a particular purpose, reasonable notice requirements or duties of cooperation.
- If purchase orders or other ordering documents refer to terms and conditions in another document or posted on a website, be sure to review them because they may be binding on you – even if you believe you have negotiated other terms.
3. Limit your liabilities.
- Clearly circumscribe your warranties and effectively exclude any implied warranties that you don’t intend to provide. Be especially careful about implied warranties of non-infringement of intellectual property and, where possible, provide alternative remedies for infringement such as the right to substitute a non-infringing product.
- Limit the possible ways in which the other party can argue that you have breached the contract. Include adequate periods for notice of any breach and the opportunity to cure the breach before the other party can terminate the agreement or sue for damages.
- If possible, include a dollar limit for direct damages or include a liquidated damages clause for specific breaches. Be sure to exclude or limit both parties’ rights to claim consequential damages.
- Limit indemnities to narrowly defined third party claims and avoid indemnities for direct claims by the other party.
- Be careful to pass through to your customer any penalties that you have to pay to your underlying suppliers.
- Include a “force majeure” clause to excuse non-performance or delay in the event of disasters beyond your reasonable control.
4. Have adequate recourse if the other party breaches.
- Be sure that you have the right to mitigate your damages by such actions as suspending or terminating service, recovering possession of goods, or off-setting your costs against amounts you may owe to the other party.,
- Include effective penalties for non-payment such as requiring pre-payments or deposits, late payment penalties and the right to recover collection costs and legal fees.
5. Provide for least-cost dispute resolution procedures.
- I nclude your choice of law and venue and waiver of jury trial if appropriate, and consider requiring mediation before litigation or arbitration. Make provisions to require that claims that fit within “small claims” limits can be resolved in the most expeditious proceedings
- Be aware that many jurisdictions will not award attorneys’ fees in litigation unless the contract is crystal clear about the parties’ agreement on the subject.
Consulting your in-house counsel or trusted legal advisor, maintaining a good set of contracts, and ensuring that your sales force is informed about your legal obligations and responsibilities are indispensable for protecting your revenue stream. These steps will help prevent transactions you thought you had in the bag from going sour, and will give you effective recourse if they do.
This article was co-written by Aileen A. Pisciotta, Esq. of Executive Counsel PLC. She can be contacted at apisciotta (at) exec-counsel (dot) com.
Note: This article is offered only for general informational and educational purposes. It is not offered as a comprehensive review of the issues, and does not constitute legal advice or a legal opinion. In any specific contractual or commercial transactional issues you should seek the advice of a qualified attorney.