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How Lawyers Kill Business Deals

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The economy is reeling. Everyone is hungry for business. American firms are locked in intense competition with global competitors. A recent experience I had illustrates how the difference in cultural approaches towards business places American firms at a distinct disadvantage.

I was asked as a favor if I would review a complex agreement relating to IT services for a privately held company. The provider was a publicly traded, U.S. based company. I found these two clauses in its standard agreement troublesome:

1. It required my client to indemnify the provider for any legal fees it might incur in defending against any lawsuit brought by third parties concerning my client, even if my client was found blameless.

2. It required all disputes to be resolved by litigation in the county where the provider had its headquarters.

I proposed these very simple (and I thought very reasonable) substitutions:

1. Eliminate the indemnification clause. Each party pays its own legal fees, which is the typical rule in this country. I noted that my small client could not afford to pay the legal fees of the law firm likely chosen by the publicly listed IT provider. I also observed that, if my client breached the agreement, it would be liable for damages.

2. Substitute a mediation/arbitration clause for the litigation clause, with the location of the proceedings to be agreed upon by the parties or determined by the American Arbitration Association. I pointed out that my client wanted to avoid litigation and this seemed like an alternative that was more fair and much less costly.

Hours of negotiations followed, which involved the in-house legal department of the provider. They had no flexibility on these issues. I told her my client really wanted to use their services and I could not understand how these requests could jeopardize the relationship. She would not budge. We terminated negotiations.

I then contacted a Canadian based company, with offices in the U.S. and elsewhere. I reviewed their standard agreement, which contained similar clauses. I told them those clauses would prevent further discussions and asked if they would modify them in the same manner as I had proposed to the U.S. company. Thirty minutes after making this request, I received a revised agreement with my changes included and a call from a Senior Vice-President (based in Canada) thanking me for bringing these issues to his attention. He said he found these suggestions "most fair and reasonable" and he was considering revising their standard agreement to include them.

As American companies struggle to compete, executives of those companies have to decide if they want their success to be determined by lawyers keen to protect them with one-sided agreements covering every contingency, or they want to build long term relationships, using common sense and agreements fair to both sides.

Many non-American firms have already made this choice. More American firms need to follow suit.


Dan Solin is a Senior Vice-President of Index Funds Advisors (ifa.com). He is the author of the New York Times best sellers The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read. His new book, The Smartest Portfolio You'll Ever Own, was released in September, 2011.The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.