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Preventive Law Step #1: Proactive Contract Development

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“Step one! We can have lots of fun.”
- Danny Wood, NKOTB

Okay, so negotiating and developing contracts may seem tedious for business owners. However, being proactive about your contracting process—the first pillar of Preventive Law—can ensure that you are not assuming unnecessary liabilities in the business relationship, and that prospective business partners are in fact qualified to do business with you.

A Cautionary Tale

We were engaged by a national product manufacturer with numerous vendors and materials suppliers. Over the course of many years, contracting had been delegated to the point where at least twenty managers across several departments were responsible for reviewing and signing contracts. There was no centralized process for vetting potential business partners to make sure there were no red flags. There were also no standard “pro-company” form contracts in place, outside of basic Non-Disclosure Agreements. This meant the company had been simply reacting to one-sided contracts provided by business partners, many of which were in complex transactional settings.

Long story short, these managers were signing contracts with multiple business partners, across multiple business functions, without fully understanding who they were contracting with or the liabilities and obligations being undertaken. They did not understand, and therefore could not negotiate, many of the legalese pitfalls contained in the one-sided agreements. And they definitely did not like being pulled away from production schedules to tend to eye-glazing tasks like this.

Ultimately, this led to the following problems for the company:

  • Assuming onerous obligations such as implementing impossible or impractical compliance programs, aggressive payment and credit-worthiness requirements, unreasonable inspection and acceptance periods, and overbroad and one-sided indemnification language;

  • Vague and one-sided contract termination provisions, giving business partners broad rights to terminate contracts for any reason and at any time without consequence;

  • Overbroad and ambiguous service provisions, resulting in projects continuing for much longer than what was initially anticipated (or desired);

  • Limited recoveries in the event of a breach of contract, including the inability to recover attorney’s fees when litigation became necessary as well as being forced to litigate in unfavorable venues; and

  • Business partners with significant safety histories and lack of appropriate insurance being given access to company premises to perform maintenance and repairs on heavy industrial equipment.

On more than one occasion, key suppliers had availed themselves of their one-sided contract provisions, resulting in substantial business interruption to the company. It was clear the company’s executive management did not understand the benefits of being proactive with its contract negotiation and development practices, and continued to find themselves having to react to problems that could have been avoided up front.

The Fix

We worked with the company to become proactive in their contracting processes, rather than reactive, by applying Preventive Law methodologies. We started by dramatically minimizing the number of managers and departments involved. The procurement department was a natural fit to centralize this function, and its new director was more than happy to have more control over the contracting process.

We then worked with the director to develop proposed pre-qualification standards given different business settings, including vendor and supplier relationships. For example, in a vendor/supplier setting, the prospective business partner would have to provide the following documentation before being considered:

  • Compliance with appropriate safety incident standards, including Experience Modification Rates and OSHA incidence rates;

  • References from previous customers regarding performance and safety;

  • Copies of drug/alcohol, jobsite safety and accountability, accident reporting, emergency response, and project inspection policies in place governing vendor/supplier projects and employees while on-site; and

  • Copies of certificates of insurance on multiple lines of coverage, with appropriate additional insured endorsements in place that adequately protected the company.

We also developed a set of “pro-company” contracts which could be tailored across multiple business functions and deployed proactively, instead of the old practice of simply responding to the one-sided vendor/supplier forms received. Needless to say, our forms were also one-sided . . . but this time in the company’s favor! Of course, the process we developed was flexible enough to accommodate having to react to the other side’s forms when necessary.

We accepted the reality that some business partners would demand their forms be used. That was okay, and we did not want to immediately blow up relationships over initial stubbornness. Instead, if this occurred, the director would simply request a copy of the contract in Word or other editable format. Reasonable business partners should expect that you will want a copy to redline if they demand use of their one-sided form. And if they refuse to do so, this should be seen as a red flag warranting consideration of other business partners (hint, if they are going to be this difficult in these initial negotiation stages, just imagine how problematic they’ll become if there are any issues with regard to contract performance!).

Game Time

After developing the standard process and forms, we worked with the director to obtain buy-in from executive management. Given the contracting problems the company had faced over a number of years, it was an easy sell. As such, we began implementing the process to ensure an enterprise-wide understanding and appreciation of what we were doing, as well as why we were doing it (all part of the Preventive Law protocol!).

Our Preventive Law team continues to be involved, particularly when:

  • The director or other side has questions about whether certain pre-qualification requirements can be limited or waived under a given set of circumstances;

  • We have deployed our own form contract, but the other side responds with its own redlines requiring review and evaluation;

  • The other side demands its own one-sided form be utilized, requiring redlines on our side to balance things out; and

  • Assistance is needed to develop negotiation strategies in order to arrive at acceptable contract language after the parties have dug in their respective feet after several rounds of back-and-forth redlining.

Following implementation, the company noticed immediate results:

  • Managers are not burdened with contract review tasks and are able to focus energy on managing their teams and making good products.

  • There is an enterprise-wide consistency around the contracting process.

  • Contracts with business partners are more balanced between the parties, and often even skewed in favor of the company when the other side signs the pro-company form without negotiating it (hint, our client is not the only one in need of Preventive Law assistance!).

  • Since the contract language has been discussed and negotiated in advance, issues with vague, ambiguous and overbroad provisions are minimized.

  • The company is able to perform effective gate-keeping early on to determine which business partners should be considered long-term fits for sustainable success, and which ones should not.

  • The contracting process finally supports the making and selling of product, instead of hindering it.

Contract negotiation and development may not be the sexiest part of running a business, but it is a critical component. As one of the nation’s only practices focused exclusively on Preventive Law, KEEFER is skilled at deploying appropriate strategies that can help you anticipate and respond to risks with prospective business partners, leveling the playing field in the process.

KEEFER is your ounce of prevention. Contact us to learn more.



The Preventive Law Physical: An Important Part of Maintaining Business Health

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“Care is an absolute. Prevention is the ideal.”
 
- Christopher Howson

At its core, Preventive Law is about helping businesses look around corners and anticipate business and legal risks before they materialize. Using the preventive medicine analogy, it’s like a physical for your business during times of health designed to discover and treat areas of potential “disease.” Preventive Lawyers aim to keep their clients healthy . . . here are the top five items they address to ensure long-term business health:

Commercial Contracts

Businesses are often required to enter into numerous agreements with everyone from purchasers and distributors to vendors and suppliers. It’s amazing how many businesses do not have formalized processes for reviewing, negotiating and developing these contracts. Instead, several individuals in several different departments are given free rein to sign anything as a matter of “routine business” without fully understanding the exposure to the company.

Preventive Lawyers are adept at reviewing contracts with key third parties and then helping you understand potential areas of concern warranting further attention. Opportunities for further negotiation or clarification can then be explored with the other side . . . especially if that legalese contract hides unrealistic liabilities or impossible performance items within the fine print!

Prospectively, the Preventive Lawyer can further help your company develop pre-qualification and contracting policies and procedures to minimize being blind-sided, including:

  • Ensuring these third parties have appropriate safety qualifications and insurance levels;

  • Preparing a standard set of contracts favorable to you, which can then be tailored and used in different settings (instead of simply reacting to the other side’s forms); and

  • Identifying and training the appropriate manager(s) to own the contracting process.

Business Governance and Due Diligence

Your business may be a corporation, limited liability company, or some other form of legal entity. Most such entities have formalities that must be followed. If they are not, a whole host of problems can arise, including:

  • Void or voidable business transactions;

  • Potential violations of legal duties owed to other shareholders;

  • The ability of third parties to disregard the business structure and go after you individually; and

  • Government investigations.

Remember, what may seem fair to you is not necessarily what is required under the law. Preventive Lawyers can help you understand the difference, and then take steps to make sure your business is running on all cylinders in accordance with the law.

Speaking of business transactions, appropriate due diligence is a necessary component of entering into significant acquisitions. Sometimes things progress so quickly that important items are missed or overlooked. It is critical that businesses be proactive during these transactions to determine potential exposure to avoidable risks.

For example:

  • If your business is acquiring another business, you should be reviewing and analyzing things like the target’s business records, financials, agreements, insurance policies, compliance policies, intellectual property, licenses/permits, leases, assets, liabilities, claims and litigation (among other things).

  • If you are acquiring real estate, you need to understand potential risks such as title, zoning and environmental concerns, as well as any maintenance or structural issues that could run with the property.

Preventive Lawyers are skilled at analyzing these documents and then identifying issues warranting further investigation so a business decision can be made about whether to gather more information or proceed to closing. And when a project is green-lighted for closing, the Preventive Lawyer can further assist in advocating and negotiating positions when necessary, as well as developing the necessary agreements to take the transaction through closing (hint, see above contract skills!).

Compliance Policies and Training

All businesses are required to adhere to some level of compliance obligations whether legal, regulatory or contractual. It is important to fully understand these obligations and the possible repercussions you could face if the requirements are not met. While I don’t want to be a fearmonger, the importance of being proactive and the possibility of exposure in these scenarios is just too critical. Believe me, I’ve seen it all.

Here are just a handful of examples:

  • Failure to comply with employment laws can lead to EEOC investigations, claims and lawsuits.

  • Failure to comply with product-based regulations could result in sanctions, including removal of your product from the market.

  • Failure to comply with cybersecurity laws could mean sanctions and other losses in the event of a data breach.

  • Failure to comply with contract provisions can lead to withholding of key supplies or even lawsuit.

  • Failure to comply with antitrust or anti-corruption laws could result in a visit from the Department of Justice.

Preventive Lawyers help their clients avoid exposures like these by identifying key compliance issues facing your company, and then working with your company to develop and implement policies to address these issues. This includes training executives and managers to ensure enterprise-wide understanding and acceptance of these policies and procedures.

Insurance and Litigation Management

Oh, insurance . . . the necessary evil. Insurance contracts are mazes of legal mumbo-jumbo, likely filed away somewhere in your office collecting dust. Many businesses purchase these expensive policies without fully understanding the coverage terms and requirements (this is especially true for brands and manufacturers with global supply chains, cybersecurity risks and employment exposures).

Imagine your company suffers a loss you expect to be insured but your claim is denied. You’re left feeling frustrated and helpless, wondering where you went wrong. Perhaps you inadvertently hadn’t selected a particular line of insurance you ultimately needed, or maybe the type of event was listed as an exclusion in the fine print. Maybe it’s denied because of timeliness. Or, perhaps it’s based on the insurer’s interpretation of a particular provision or exclusion that was tucked deep inside that maze. The consequences could be severe but can be avoided.

Now, imagine a case where your claim is accepted but requires litigation. Your insurer will likely assign one of its lawyers to defend you, which is all hunky dory, right? Not so fast. Without proper oversight, the insurer-counsel dynamic can lead to litigation strategies which are not in your best interests. I’ve seen too many scenarios like this throughout my career (and have represented all sides) where the insured’s interests were the last being protected. Unfortunately, this leads to skyrocketing premiums at renewal or worse . . . loss of insurance coverage altogether.

Preventive Lawyers are skilled at managing and negotiating your company’s relations with insurance brokers and carriers so your insurance program is appropriately reacting to your particular business risks. And when the time comes, Preventive Lawyers can further assist in asserting claims and managing those lawyers retained by the insurers to ensure that business-forward, cost-effective legal strategies are being implemented.

Day-to-Day Business and Legal Strategies

Doing my best Cliff Clavin impression, it’s a little-known fact that lawyers undergo a bloodless lobotomy during their three years in law school. This “procedure” results in a unique style of critical thinking that can be of great benefit to your business.

Lawyers are often ridiculed for the frequency they say “NO!” to any business decision-making which involves some level of risk. However, seasoned Preventive Lawyers are business-forward in their approach, seeing risk as an opportunity to negotiate and make better-informed decisions. Their goal is not to be a hindrance, but rather to help you know what you didn’t know before, and then develop more informed business decisions and strategies based on this information. In this methodical way, Preventive Lawyers can be a valuable sounding board when it comes to business dealings and negotiations.

The best Preventive Lawyers further understand that their guidance should be cost-effective, and have developed progressive retainer models fostering improved access. For businesses seeking to be proactive about maintaining their health, but are not interested in traditional billing models of big law firms, Preventive Law practices can be a strong alternative. As always, we’re here to help.

Welcome to the Real World: Stories of Preventive Law Success

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“Treatment without prevention is simply unsustainable.”
- Bill Gates 

We’re often asked for examples of how we’ve used Preventive Law to help companies minimize risks. We’re not sure if it’s because people generally love a good story filled with gory details (giving them reassurance that things could be worse) or if it’s the happy ending they’re after (filling them with hope). Either way, here are a few real-world examples of how we’ve helped product manufacturers avoid disaster and operate happily ever after. 

What the Shell?

We were engaged by a product manufacturer which was looking to quickly become a public company and raise capital through merging with an existing shell company. Unfortunately, this client had conducted very little diligence on the shell and individuals involved. Like most businesses, it had trusted its new business partners, one of whom was a neighbor and friend of the CEO, who had been reassuring the executive team that this merger would help the company accomplish its goals quickly.  

Right away we began the due diligence process to get up to speed on the players involved, determine potential exposure to unnecessary risks in this venture, and ultimately to confirm whether or not the shell was “clean” enough to avoid problems with the Securities Exchange Commission, among others. That’s when we noticed some red flags waving. 

After digging a little deeper, we discovered this shell had all the hallmarks of a sham and that the individuals offering it had a history with these types of shady transactions. It was clear that if the company had continued down its current path, it could have been exposed to significant civil and even criminal liability.

Needless to say, the executive team immediately ended discussions with its “partners” and was grateful to have avoided what could have otherwise been a business-ending catastrophe. I believe the CEO’s exact words were, “Wow, thank you, man . . . that’s why we brought you on board!” We’ve since been strategizing with the executive team on less-risky means of raising capital, as well as commercial contracting, supply chain operations and risk transfer issues. 

Just Rub Some Dirt on It

When a national manufacturer was looking to establish a Pacific Northwest presence, the CEO came to us for assistance in reviewing some real estate agreements. The company was under contract for a large parcel of brownfield property and had trusted the Phase I environmental report finding “no recognized environmental conditions” (or “RECs”). The diligence period was set to expire in just a couple weeks, and the company would then be locked into closing.  

We took a closer look at the Phase I report, and then talked to relevant parties to learn more about the property and transaction. After a few days, it became apparent there were in fact significant environmental red flags surrounding the property, and the company needed to get out of the contract. We challenged the Phase I outfit as to the presence of leaking drums, underground storage tanks, fly ash piles, and an oil/water separator on the property, all of which had been noted but tucked away toward the end of the report and disregarded. We then pushed the outfit to revise the Phase I report to accurately reflect these conditions as RECs. This strategy enabled us to make a strong argument to back out of the agreement and avoid purchasing a property with hazardous environmental conditions. 

Fortunately, we were able to terminate the agreement and then help our client identify a less-risky parcel to set up operations. We worked with the company to develop and negotiate the necessary contracts and agreements to facilitate a successful closing. 

Going Off the Rails on a Crazy Train

Another one of our product clients, with factories in multiple states, had significant union involvement. Relations had become strained over the prior couple years with the union filing numerous unfair labor practice charges, largely to prove a point.

Prior to our involvement, the company had engaged a large law firm to defend the charges, racking up hundreds of thousands in legal fees in the process. This firm had even increased rates and made questionable staffing choices without first discussing with the company. The senior partner had further recommended taking the matter through trial and then appeals, despite the low probability of success, which would have resulted in the company spending several hundred thousand more in fees to this firm. The kicker was that trial was set in less than 30 days.

We were engaged by the company and immediately interviewed the firm to better understand the ongoing litigation strategy. Unfortunately, these issues were just the tip of the iceberg. Among other things, we learned there had been previous opportunities to settle at a fraction of what had been spent in fees, as well as the possible existence of insurance coverage to offset some of the losses, which had been missed. It did not appear the company’s best interests were being protected.

We quickly replaced this firm with a more business-forward firm, working closely with the new attorneys to pivot away from trial strategy and toward settlement discussions. In the meantime, we notified the insurance carrier of a provision in the policy that allowed coverage for a portion of the fees and settlement given the nature of the claims being made. Long story short, we successfully settled all of the pending charges for a fraction of what would have been spent litigating to ultimate conclusion, with over half of those sums reimbursed by insurance proceeds.

We then helped the company work productively with the union to rebuild trust and get the relationship back on solid footing. This involved collaborating with the company to develop internal policies to minimize the likelihood of this circus happening again. After a few months, the relationship had improved to a point where disputes were being handled amicably and without need for involvement by the National Labor Relations Board.

These are just a few real-world examples of how Preventive Law was a “pound of cure” for businesses. By looking around corners and taking the appropriate precautionary measures, companies can avoid significant exposure. Contact us to learn more about how being proactive can better protect your business.

How Preventive Lawyers are Innovating the Legal Supply Chain

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A guy walks into a lawyer’s office and asks, “Can you tell me how much you charge?”
“Of course,” the lawyer replies, “I charge $500 to answer three questions.”
“Don’t you think that’s an awful lot of money to answer three questions?”
“Yes it is,” answers the lawyer, “What’s your third question?”

Though lawyer fees have been fodder for jokes for as long as we can remember, they’re really no laughing matter. Companies routinely pay much more than $500 per hour to answer far fewer than three questions. How did it get to this point? The answer is bloat. Let me give you a peek behind the curtain.

As firms take on more business and begin to grow, they add more attorneys and staff to handle these increasing workloads. With continued growth comes potential for expansion into other states to take advantage of business opportunities there. Growth means expensive nameplates on big buildings and brass, mahogany and marble office spaces to draw larger corporate clients. This also means hiring more attorneys at high salaries, as well as partnership opportunities for those attorneys who are able to bill significant hours and generate business to enrich the firm.

Business development naturally leads to the need for even more attorneys and office space, and in turn more costs and overhead, much of which are passed along to the client in the form of exorbitant hourly rates. In most larger cities, these rates will exceed $500 per hour, which can have a chilling effect on the businesses these attorneys are meant to serve. Voila! You now have a bloated law firm. And guess who gets to pay to keep it afloat? That’s right. You.

DIY Could Mean RIP

What options exist for companies that want top-tier legal advice without the bloat? I can’t speak to all legal specializations, but in the area of Preventive Law, we often see businesses deciding to “go it alone” rather than pay these high law firm rates. While these companies may enjoy not having to pay legal fees, what few realize is that they place themselves at exponentially higher risk. Ironically, such DIY practices can cause even bigger problems:

  • Insurance policies are legalese monstrosities, containing complex language and articles that can later be exploited by insurers. A company that buries its head in the sand, hoping those policies will react in the event of loss, not only ensures the language will be exploited, but further increases the likelihood of gaping coverage holes. 

  • Failing to proactively manage your insured claims and lawsuits can lead to strategies which are not in your best interests, resulting in skyrocketing premiums or even loss of coverage.

  • Relying on non-lawyers such as insurance brokers to help you understand the legalese contracts and claims strategies could limit your recourse (hint, an insurance policy is a contract with your insurer, not your broker or anyone else).

  • Signing vendor and supplier (and other) agreements without fully understanding and negotiating the terms in advance means you may have unwittingly assumed obligations that can blindside your business later.

  • Failing to develop and implement internal policies and procedures can result in significant exposure to business interruption, cyber events, HR risks and regulatory actions.

These are not meant to be scare tactics, but rather highlight issues we see on a regular basis. Understandably, high law firm rates often result in second-guessing whether to enlist attorney assistance to address these concerns.

Escaping from the Rock and Hard Place

The emerging practice of Preventive Law presents a viable option for companies who want peace of mind without paying absurd hourly and retainer fees. Preventive Law develops and implements proactive strategies involving insurance, litigation, human resources, R&D, procurement, real estate, marketing and regulatory compliance. The rewards for companies that implement these strategies include:

  • More informed decision-making;

  • Improved efficiency and reaction time;

  • Lower contract, claim, litigation and regulatory exposure; and

  • Better opportunities to recover significant insurance proceeds when necessary.

These benefits are primary reasons why larger companies hire lawyers to serve as in-house corporate counsel. On-boarding attorneys also improves predictability of corporate legal spend. No longer does the business have to worry about a department head picking up the phone to call an expensive attorney to discuss a business or legal strategy when you have a lawyer on staff.

Of course, adding in-house corporate lawyers means rising costs, and your business may not have the need for full time legal services, let alone resources to afford them. Again, this is where Preventive Law practices can provide value and flexibility, and in a cost-effective manner. Let’s peel back the curtain even further.

Mindless Habitual Behavior is the Enemy of Innovation

How is Preventive Law able to offer top-tier legal support without astronomical fees? Successful Preventive Law practices eliminate billable hours altogether and offer instead a retainer-based, client-facing, value-driven model. Okay, that’s a lot of hyphens, so what does it all mean?

In short, a Preventive Law firm thrives when the client thrives. The preventive legal practitioner’s fee is not calculated using inward-facing attorney billing rates, but rather using on-boarding costs, adjusted to reflect that client’s relative need for preventive legal services on a monthly basis (hint, review glassdoor.com and salary.com for average corporate counsel salaries/benefits in a particular city, and then adjust for the size of the company, type of industry, and potential legal and business risks facing that company). Next, the preventive lawyer determines an appropriate term for engagement, which will again depend on each client’s particular needs. A minimum of four- to six-month engagement is considered optimal to develop institutional knowledge and exposure to different departments and personnel which can provide efficiencies for the client down the road.

Once engaged, the preventive lawyer keeps detailed daily time entries for work performed. “But I thought you said not to bill clients!” you astutely point out because you’ve been paying attention. Here’s where Preventive Law departs from its traditional legal counterpart.

Preventive Law serves the client rather than padding the law firm. This is why time isn’t kept for purposes of billing, but rather to track the effective hourly rate on both a monthly and aggregate basis. These updated time-sheets are made available with each monthly invoice to assist the client in determining the value of services rendered, both subjectively (through perceived quality) and objectively (through the effective hourly rate). If it’s discovered at the end of the term that the effective rate was higher than anticipated, the lawyer offers to reduce the monthly fee for the next term. After all, the mindset is not “winning” in this business relationship, but rather demonstrating a trusted partnership and adding true value.

When done properly, Preventive Law practices offer accessible, cost-effective access to attorneys on the front end, which in turn can enhance business decision-making while minimizing exposure to catastrophic risks. We know this is a new option for some and would enjoy helping you better understand its benefits. We've found that companies are better off paying for quality legal counsel instead of mahogany, brass and marble. If you have any questions about Preventive Law, please reach out. As always, we’re here to help.