Maybe it’s just me, but, how would you feel if a sales executive, from a company you are considering doing business with, told you that his company should be allowed to, knowingly and negligently, deliver one of the parts you designed/built into your product, based on their specifications and warranties, that is defective and/or will not function as specified; and if/when they do that, and if your product fails, and the consequences have a significant impact on your company, they expect you not to hold them liable for any of the damage they caused you.

I am sure, like me, you would probably have a strong negative reaction and consider not doing business with the company, or simply just throw the sales person out the door. And yet, company attorneys insert this kind of language into the contracts that eventually follow most business discussions and agreements, without a second thought. Here is an sample below from one client:

IN NO EVENT SHALL COMPANY BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL OR SPECIAL DAMAGES, WHETHER DIRECT OR INDIRECT, ARISING OUT OF THE USE OF, OR INABILITY TO USE, PRODUCTS SOLD OR EQUIPMENT OR SERVICES PROVIDED BY COMPANY HEREUNDER, WHETHER SUCH DAMAGE, LOSS OR EXPENSE RESULTS FROM BREACH OF WARRANTY, NEGLIGENCE OR ANY OTHER CAUSE AND WHETHER OR NOT COMPANY KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH LOSS, EXPENSE OR DAMAGE.

My reaction to language similar to this one on another project got a conversation started with one of our attorney partners, whom I have worked with for years and have great respect for, about the role of attorneys, and the General Counsel in today’s business environment. As usual, clients and names are altered to protect the innocent, but comments and feedback are welcomed.

I, and my trusted attorney friend, happen to believe there are two types of business lawyers.  Those who see their role as a facilitator to make business happen within the boundaries of the law, and those who see themselves as being the final arbiter of all company decisions, based on the assessment of legal risk. In my role at Ideasphere Partners, and as a corporate executive, I can work, and have worked, with both types but I clearly prefer the first.

In my experience, the relationship between the Chief Executive Officer (CEO) and the General Counsel (GC), whether employee or outside attorney, is a partnership very critical to the success of any business.  The current litigious environment notwithstanding however, the CEO and the operating team still must have the final responsibility for making business decisions and being held accountable for them. My simplified view of the relationship is that the GC is responsible for understanding and explaining/quantifying the legal risk of any transaction, contract, or business document, and proposing legal strategies and contract language to mitigate it, and the CEO, with additional input from the executive team and the Board, is responsible for the final decision of whether to accept it or not.

At least, that’s how I have worked with GC’s and other legal experts over my years as an executive inside companies, or as an executive consultant in M&A and Turn-around situations with Ideasphere Partners. In its simplest term, the job of the GC is to protect the company by providing counsel and competent legal advice; hence the title. Even though some GC’s go beyond that, and add incremental value to the business by driving certain operations/transactions, or acting as the independent consciousness of the company when it comes to ethics and business practices, that is not always a requirement for the job.

Running a business requires taking some calculated risks. Fear of litigation is just one more factor the CEO and the operating team must consider when making decisions. A good CEO needs to listen to their GC and, especially, if even the potential of interpretation of an activity as illegal exists, follow their guidance. However, a management team can not hide behind their GC, or delegate the decision of accepting/refusing /mitigating risk to her. Unfortunately, some CEO’s, are using the fear of litigation, as an excuse to do exactly that. They ask, or allow, their GC to attempt to mitigate all risks, at the risk of violating common sense, through legal means such as contract language and agreements. That is an exercise in futility that also makes doing business with these companies more difficult. By definition, the law is not perfect and can not contemplate all possible scenarios; therefore legal language is an imperfect means to protect the company in all cases and from all risk at all times.

Just like the example above! This clause attempts to perfectly isolate the company, at the expense of common sense. I am sure I will get e-mails from some of my attorney friends explaining to me that this is standard language designed to protect the company; that other sections of the contract should allow for holding the partner accountable; etc. etc. etc. I know all that, and, in the particular case I am talking about, we made sure we added language in other sections of the contract to protect the client; but please, read this from a business executive’s perspective and consider your reaction if you had to do business with someone who walked into a meeting with you and with a straight face yelled at you (notice this is in all caps) that:

IN NO EVENT SHALL COMPANY BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL OR SPECIAL DAMAGES, WHETHER DIRECT OR INDIRECT, ARISING OUT OF THE USE OF, OR INABILITY TO USE, PRODUCTS SOLD OR EQUIPMENT OR SERVICES PROVIDED BY COMPANY HEREUNDER, WHETHER SUCH DAMAGE, LOSS OR EXPENSE RESULTS FROM BREACH OF WARRANTY, NEGLIGENCE OR ANY OTHER CAUSE AND WHETHER OR NOT COMPANY KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH LOSS, EXPENSE OR DAMAGE.

Again consider this; if that message was delivered verbally in a meeting between executives from the two companies, the reaction would have been one of absolute shock. This language is a real sample of contract language. It is similar to the one in the contract that got me started on this.  In all the meetings, the company executives praised their quality control systems, their engineering prowess, their attention to “doing business the right way,” etc. etc. etc. In all the meetings they talked about partnering with this client and being an “integral part of the success of this new product.” And after the deal was agreed to, the attorneys, well intentioned, or instructed, as they may have been to protect the company from everything possible that could went wrong, sent a document with language similar to the one above.

Of course they fully expected that section would be modified by my client’s attorney’s, or even negotiated out, but imagine the reaction of the business team who did the first review of this document. Some of the engineers on the team, before our attorney calmed them down, just wanted to drop the partner and look elsewhere. Cooler heads prevailed, and in the end, the deal was done, but creating language in other sections of the contract to counter the impact of this paragraph took away valuable weeks of productive time and increased the legal costs significantly.

And in the end; for what? Does any one really think that if the company knowingly and negligently ships bad parts that are off spec and cause the product to fail, there will not be litigation? Does anyone really think that they can permanently hide incompetence, unethical behavior, or stupidity behind legal language? This Kabuki dance goes on all the time and really accomplishes nothing other than test the ability of the lawyers from each side to write clever language to counter the other party. But then again, what do I know?  I am just an operator!