by Mark Grossman

Technology Contracts: Lawsuits Waiting to Happen

Sep 29, 20087 mins
OutsourcingRisk Management

Got a technology contract to cover your latest deal, like an acquisition, merger or commercial transaction? It may not protect your interests the way you think it does.

Got a technology contract to cover your latest deal, like an acquisition, merger or commercial transaction? It may not protect your interests the way you think it does. Horribly written contracts for tech and telecom deals cross my desk every day—they’re a lawsuit waiting to happen. When a lawyer writes a contract, he should be writing a document that tells a story about the deal, albeit with a tilt toward his client. Often, what I see isn’t a tilt—it’s illiteracy. (Also read The Keys to Vendor Management for more on the basics to negotiation to ROI and SLAs.)

In the past, legal documents, whether private placement, merger and acquisition, or documenting a large commercial transaction, used a time-tested formula established by quality lawyers. The deal process was a sophisticated one, done using a mature contracting process. The lawyers involved even understood what it was they were doing.

The problem these days largely surrounds tech and telecom contracting. Usually, the first draft of the contract comes from the seller of the services. It might be services like managed network services, the development and maintenance of a website with Web 2.0 features, or for the customization of some software. While in many ways the Web 2.0 world is more sophisticated than the go-go dotcom 1990s, more often than not these deals still show the wisdom of the 20-minute-old dotcom driving the deal. (All that’s missing are pimples on the documents.)

However, don’t think this arises only when doing deals with smaller or startup companies. I once did a deal with IBM and I smiled when I read the master agreement because it was a well-written document crafted by some major New York law firm. It had the pro-IBM bias that I expected, but it’s simple to negotiate it back toward the middle (as your vendor is kicking and complaining—and lying—that you’re the most difficult customer they’ve ever had).

But then I read Exhibits A – F. Now I was reviewing the workmanship of six different writers from different departments with titles varying from paralegal, to contract specialist, to sales person. They did not collaborate before they added their piece to the agreement and the only things they seemed to share was that none had ever read the master agreement and they had no skill in legal writing.

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It’s really a simple formula. Poorly written contracts lead to war. (In our society, we call legalized and ritualized warfare—”civil litigation.” Some speculate that it’s an improvement over dueling, but I wonder about that.)

Assume New People Will Be Involved

When people are negotiating a deal, they have a natural tendency to assume that the team putting it together will be the team implementing it, but it’s best to start from the opposite perspective.

Assume that none of the players at the negotiating table will be involved after the parties sign the contract. Businesses are sold all the time, people are promoted, and consultants move along. When these things happen, it means that whoever knew what the contract “really” meant is gone. The written document has to stand on its own.

When the person across the table doesn’t want to take the time to clarify a provision in the contract, he’ll often say something like, “Come on, you and I know what it means. Just trust me.”

At that point, I like to say, “I do trust you, but I assume that you’re so good at what you do that you’ll be outta here doing bigger and better things in about four minutes. It’s not you I don’t trust, but rather it’s your replacement I don’t trust. So let’s clarify the clause.”

You know you have a well-written contract if someone who knows nothing about the specifics of your deal could read it and understand the deal. If your contract doesn’t meet this standard, you need to negotiate one that does.

The “Why” Behind “Poorly Written”

Let’s do a reality check. Why are tech contracts often so bad?

It turns out that many factors are at play here. Tech contracting is a relatively new legal specialty. Outside of a few places like Silicon Valley and New York, you just can’t find many lawyers with legitimate experience doing these deals.

Of course, as you might expect, the definition of “legitimate experience” may just vary depending upon whom you ask.

An aggressive General Counsel who’s a generalist with budget constraints may think he has “legitimate experience.”

An aggressive outside counsel looking for business may believe that he has “legitimate experience” because he’s a lawyer, he’s written a contract, and his assistant uses WordPerfect 5.0 on a 386 running DOS. (For those of you under age 35, DOS was an ugly operating system brought to us by Bill Gates before he gave us Vista with all of its pretty visuals that bog down your PC.)

Now, the potential client asking about the experience might have the audacity to think that “legitimate experience” has another meaning. She might think that it includes actually having done several of these deals in the past and involves general knowledge about intellectual property and the underlying technology that the contract addresses. Sometimes people paying fees can be so darn demanding.

Having said this, before you think that lawyers are completely at fault for bad tech contracting practices, let me assure you that it’s not true. Many times, the first draft that I see has never crossed a lawyer’s desk.

After all, why involve your tech lawyer when you have the contract form that somebody else in your industry used or you have the contract your lawyer gave you for a completely different deal?

As for the answers to bad tech and telecom contracting processes, we could start with the idea that one size doesn’t fit all. While it’s tempting for a vendor to use the form his competitor used, he really doesn’t know that it’s any good—and the odds are that it isn’t. In fact, chances are that they “borrowed” it themselves.

Propose Your Own Contract

If you’re on the buying side of a tech deal, you should consider having your lawyer prepare the contract from scratch. While this may seem like an expensive fix, it may not be—it takes more time, and more money to try to patch a poorly written agreement. Moreover, the result of a complete rewrite is often better because no matter how hard you try to repair a bad first draft presented by the other side, experience tells me that you can never quite make it right.

If the other side doesn’t like this idea, tell them that it’s a Board requirement and then have your Board require it. (Don’t you just love hiding behind that faceless Board when it’s convenient?) If your tech deal is worth doing, it’s worth doing right too.

If you’re buying tech services, you should demand that the other side agree to high-quality legal documents. If excellent documentation doesn’t seem important to them, you should question at what point high quality will become important to them.

Mark Grossman is a tech lawyer, business advisor, and negotiator. He is the founder of the Grossman Law Group with offices in Manhattan and South Florida.