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Have You Read Whatís In That Contract?

This article by Stuart Adams appeared in Louisville Computer News July, 2001

   In the last chapter we talked about starting a client relationship by responding to a request for proposal or submitting a "cold call" proposal to a prospective client. Weíll follow up on that in this chapter, but first, letís back up and talk about another method many companies use to start the ball rolling, the "spec job." This is basically working up part of a clientís solution on speculation that the client will hire you to finish at least a substantial portion of the full project. The art is to tickle the prospective clientís fancy without giving away so much that the client: (a) can do it in house; (b) will farm it out to someone else who will do it cheaper than you or under other circumstances the prospect perceives as more favorable to itself than hiring you; or (c) decides it really doesnít want to proceed with the job or project at all.


    Of course, what could be worse is for the client to initially give the appearance of agreeing to allow you to proceed with the project, but to later terminate the relationship with little or no compensation only to you, and only after you have devoted substantial resources to the project or decided to forego other opportunities. As I write this chapter, while in the car on the way to Florida (yes, my wife is driving this section of the trip), Iíve just gotten off the old cell phone with a client who thought it was days away from receiving a nice "concept stage" check from a major international company to start a big project it had been working on. My client called in a panic because it had just received word that the contract was to be awarded to another company, located just minutes (instead of hundreds of miles) from the headquarters of the prospective customer. My client has gotten wind that the other bidder on the project has received, and is using, the original concept my client developed. It appears the prospect loved my clientís concept but wanted the convenience of checking on development of the project a little closer to home.

    This is far from a unique situation. As I write this, the solution for this client is uncertain because, classically, the big company understands it has the money while my client may be on deathís door, with insufficient resources to "stay the course" as the first President Bush used to say, and see negotiations or litigation through to a successful conclusion. There are several ways to avoid this situation.

    Initially, my client seems to have done the right thing in the way it approached this work. Before any work was started or concepts shared, other than the prospect having given a general outline of the goals of the project, the prospect required my client to sign a pretty typical non-disclosure agreement. The industry my client is engaged in is heavy in software development. Consequently, such non-disclosure agreements (NDAs) have become pretty commonplace at the outset. They have also become relatively standardized as a mutual NDA, rather than unilaterally, as was more common just a few years ago.


    People in the software industry have become so paranoid about piracy, not that paranoia is a bad thing in that environment, that they are pretty much accustomed to signing such documents at the beginning of any meaningful stage of a prospective business relationship. Given the fact that the greatest assets of such businesses are typically the mental concepts each side may be bandying about in casual conversation, usually neither side wants to open its mouth without such an agreement in place.

    My client, to its credit, did not show the prospect anything meaningful before signing a NDA. What it did was to show off some of its prior work in somewhat unrelated circumstances and did not give the prospect any digital media at that stage. Fortunately, the NDA presented by the prospect was a pretty fair, mutual NDA. My client followed the mandates of the NDA and marked all the e-mail to the prospect, as well as the concept documents and shell demos attached to the e-mail, as proprietary property which my client owned. My client seems to have done everything right, except to deal with an apparent pirate in the first place. Probably 95% of the time, none of this would have been a problem, because the prospect would have had some integrity and never even considered stealing my clientís intellectual property. Itís that last 5% or so, when an "e-bandito" tries to suck the gray matter right out of your skull, that you will be happy you put some safeguards in place. Of course, after you accuse the thief, you may still have to possess both the muscle and the stamina to take it back.

    The Geeks Guide to Internet Business Success, by Bob Schmidt, (1997, International Thompson Publishing Company) gives an example of an ad agency account representative trying to make a sale with a prospective client. The story starts with the agency rep. saying "letís go to lunch." The prospect says "I thought you were going to pitch our account before we went to lunch." As the story goes, the agency rep. basically says "I just did." The rep. had shown the prospect some examples of fairly unrelated (and thus unuseable by this prospect) work product, but of a very high caliber. The prospect was impressed by the quality but puzzled that this constituted the "pitch." The repís reply was that if the prospect was impressed by the high quality of the solutions developed by the ad agency for other clients, as demonstrated by the examples the rep. had shown him, they would love the quality of the solutions tailored for the prospect if the prospect actually hired the ad agency.

   I must admit, I wish Iíd read that book twenty or so years ago. I historically have not charged for an initial consultation with a client. Over the years, Iíve debated the merits of this practice with some of my friends in the law business, many of whom do charge for an initial consultation. Iíve also discussed it with many of my IT clients, most of whom have a very basic level of "free" consultation, but then quickly convert most negotiations to a fee based relationship. There is some wisdom to the old saying that people donít appreciate what they get for free. There have been studies which indicate that people will be more likely to use a service or product which costs a relatively substantial sum of money, than to use an alternate which is free. The studies indicate that people expect to get the quality they pay for and they commonly think that if legal advice is being "given away," it must be worthless.

    When I first started practicing law, I didnít have many clients. When one was lured into my den, like the spider and the fly, I naturally wanted to impress the prospect. In my area of the law, prospective clients usually engage a lawyer when they are faced with a business situation they donít know how to handle themselves or through others. Often the lawyer, having been through similar transactions before, can see fairly clearly through what the client perceives as the foggy uncertainty of the situation, and easily tell the prospect what the lawyer can do to resolve a bad situation or capitalize on an opportunity. I can remember many times when I spent an hour or three, asking the prospective client about all the issues involved in the prospectís dilemma and talking through the positive and negative aspects of the various options.

    For many years, in the early years of my practice, and sometimes still today, Iíve wondered why the prospect didnít return to sign the engagement letter or follow up on our lengthy initial conversation. After all, the chemistry seemed good between attorney and prospect, and the client seemed really pleased with the process described to avoid damage or take advantage of the complicated situation the client was faced with. When I later found the client represented by another lawyer, I just chalked it up to experience and tried harder with the next prospect. I probably thought the other lawyer likely was charging less, or figured the prospect had decided to employ an alternate strategy which had less chance of success although costing the prospect less initially.

    Iím certainly not recommending that you work less hard on the next prospect, but one point I was missing was that I had to put more effort into working smarter, not necessarily that I had to give away the whole solution to the prospect before being hired, just in order to get hired. Of course, some times that may be true, but that is the "spec work" dilemma. Just how much work do you do before you have an "iron clad" contract?


    Not that thereís any magic solution to this dilemma, other than refusing to do any spec work, but the Geeks Guide offers five suggestions:

CLUELESS - Use low end media for a discussion point, rather than elaborate digital versions, which can be more easily translated by the other bidders or the prospect itself, in house, if it chooses to go that way. If possible, simply talk the prospect through the proposal without leaving any real clue how you would actually engineer the solution.

TASTY - Give the client something like the ice cream stores do when you want to sample the flavor of their new product, a tiny spoon. Just giving the prospect a small sample to get the flavor of the quality of your solution should be enough if youíre working without a contract. Remember this could all be free time. You could always spend your time volunteering for the Red Cross if you want to go non-profit.

DEMO-LESS - If you must give a demonstration of your abilities, do so somewhat abstractly, using something the prospect couldnít steal if they wanted to. By carefully selecting the right examples of your work and orchestrating the pitch, you may be able to show the "consistent uniqueness" of your approach to client projects, without talking about anything except your ability to do so again for this prospect.

STRINGS - At the outset of the relationship, make sure you have something in writing, as my client did, which will adequately describe even a demo you will create for the client, as something in which only you have property rights, and which prohibits the client using it in any way without full compensation. My client also was able to essentially watermark or emboss pretty much all of its concept work with identification which clearly related it back to the NDA the parties had signed. The Geeks Guide recommends adding liquidated damages (a specific amount of money or formula for arriving at such an amount) language to the NDA, based upon an example of a tool used by ad agencies to fight this problem.

REVENGE - The Geeks suggest that, if you are really bright, even if someone steals your concept, you probably have not given them enough at that stage for them to really pull off as successful a project as you could. Adding that to the presumption that youíll have lots of other brilliant idea which you should be able to sell to other, more honest prospects, they seem to suggest you use extra-judicial means to even the score. Their literal recommendation, in the case of a pirated Web site concept, is that you link to the finished site from your online gallery of links to clientís sites youíve created. On this one, however, they seem to suggest that you mention that this particular site was "ripped off" from your company. By the way, I EXPRESSLY DISCLAIM ANY AND ALL WARRANTIES CONCERNING THIS CHAPTER, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. AND IT MAY BE FULL OF NASTY VIRUSES WHICH WILL EAT YOU ALIVE.

    Sorry, I got carried away there. I donít condone, nor do I think it a reasonable strategy, to erect a spite fence, place a "you done me wrong sign" in your front yard, or engage in Web publication vindictiveness. I think this cheapens you and takes you down close to the same level as the object of your animosity, as well as subjecting you to the risk of retaliation may be worse than the damage caused by your own attempt at revenge. I donít even necessarily suggest that you sue the #*&^$!. You should consider the cost-benefit ratio or return on "investment" such a course of action will net your business. Strange for a lawyer to even hint you shouldnít sue, but then, Iím a business lawyer. My goal is to make my client as successful as I can. That is not necessarily the same as making them the poster child for a "Napster" type piracy suit. Sometimes the cost of success is more than a client can bear.


    Now, in keeping with my long standing practice of seldom following my own advice, Iím going to give away the ranch. Actually, Iíve done it several times recently for some intentionally not-for-profit organizations Iím involved in, so its hardly hurts at all. Here are some things to do or not do in drafting a proposal of almost any sort.

    First, watch your language. A proposal is partially a marketing piece, but it may also end up being at least partially contractual. Many prospective clients will have a tendency, sometimes on advice of counsel, to incorporate or attach your proposal (and sometimes even raw marketing brochures and other propaganda) into the final contract. This seems to be particularly true of e-commerce and IT companies, perhaps because, being pressed for time, itís easier to just cut and paste a document than to draft a fuller contract properly integrating and giving appropriate weight or verbiage to a salesmanís proposal document.

    If you use language in a proposal, such as "state of the art," "turn key," "best," "fastest," "seamless," "fully functional," "totally integrated," "user friendly," "easy to use," and comparable words in your proposal, be ready to test their accuracy in a courtroom with attorneys F. Lee Bailey or Johnny Cochrane cross examining you. There is much judicial precedent discussing the "puffing" or marketing lingo common in TV ads. Typically, such language is not considered to be a warranty nor binding on the publisher of the language, depending on the context in which it is stated. Chances are, however, your business plan doesnít make provision for you wanting to risk your client relationship or testing your grasp of the English (or any other) language, except maybe Java or C++, in court. When such words are drawn into a contract dispute, you will always lose something, even if you ultimately "prevail" in litigation.

    Make your proposal as limited as possible. Once you type up a proposal on paper or send it by e-mail, do you really expect to honor it as stated, forever? Put an automatic expiration date on it, such as 10 or 30 days, depending on the type of business you are in and the impact of your own cost and availability variables. You can always extend the expiration date if the prospective client requests. Actually, this can even give you an opportunity to call a prospect back, to see if they need an extension, because it will expire soon and you donít want them to miss this limited opportunity.

    You can also make it specifically subject to certain conditions. In the case of my computer salesman, it should have been conditioned upon the customer having an available and clean source of appropriate electrical current at the site the computer was to be install, as well as an acceptable phone connection. In the alternative, it would have allowed my client to charge an appropriate, and profitable, amount for his services and materials to provide this additional installation service. A couple of simple "boilerplate" sentences could have made my client money on this deal and kept him from losing both his profit margin on that transaction, as well as the likelihood of repeat business from a less than totally satisfied customer.

    Another clause to insert is one allowing you to escape under specific circumstances, or for no reason at all. You may normally be able to provide that prices are subject to change without notice. You may also be able to pass on the cost of material increases or other potentially fluctuating costs directly to the customer. This is particularly true with special order goods and with long term projects where it may be likely some prices will increase over the course of the project. Incorporating such anticipated cost increases in your original proposal may put you in the bidding at a relatively high price. On the other hand, it may be possible to bid at a relatively lower current market price, but insert a clause which will allow you to simply pass materials or other cost factors on directly to the client. This may take some messaging and extra documentation with the client so they donít later feel theyíve been "taken" but could net you a low bid, handled honestly.

    Unless compelled to do otherwise, I suggest you insert, as tactfully as possible, a clause that the proposal is not binding on you until signed by "management," or some such phrase. After all, when you go in to buy a car, usually you first make a "deal" on a trade-in and negotiate a price for that shiny new "Beamer" with the sales person. After that person knows about how much you have in your pocket, he or she will inform you that the price youíve negotiated is a steal and youíre going to make his children starve, but heís happy to make you a great deal. Then, of course, he remembers he just has to get the sales managerís approval on the paperwork, and heíll leave and return shortly with that signature and the keys to your shinny new BEAMER.

    About ten minutes later, he returns, not quite as perky, but still enthusiastic, and tells you he forgot to add the undercoating or some other handling charge, or the 500 CD changer doesnít come with the model you picked out, so the bottom line is it will cost you another X% to get the car YOU have already committed to. In other words, according to the ancient "law" of negotiations, the one who says a number first, loses. Donít let it be you. Allow yourself as much "wiggle room" and escape avenues as you can. Most customers in most industries should be accustomed to having a proposal countersigned by management of the proposer. This should not be an opportunity to gouge your prospect or do what some car dealers seem, at least from my experience, to be accustomed to doing routinely to their customers. I can tell you Iíve walked out on more than one car dealer who pulled that stunt and this is not a reputation you want. Use this option as a shield to protect yourself from price fluctuations or other variables, not as a sword to "slay" your prospective customer.

    Another excellent strategy in dealing with proposals is to include language asserting that the document is merely a non-binding proposal and, if accepted by the prospect, will be subject to being incorporated (either by reference or by restatement) in a fuller and more detailed formal contract. This gives you the opportunity to get tacit approval from the prospect without risking your neck in "the field." You can have others in your organization, such as your spouse or your really smart 13 year old kid, who will develop the web site anyway, review what you have "sold," to see if it is really viable and will net you some money. This also means you donít necessarily have to put ALL that scary "lawyer language" in what started out as a marketing piece, which would, of course, scare your prospect to death if it started with language such as: Whereas, the Party of the First Part specifically DISCLAIMS ALL WARRANTIES, etc. They expect such legalese in a contract, but may shy away from it in a proposal they are analyzing for practical and financial purposes.


    Finally, remember that every prospect is not necessarily one you should convert into a client. Sometimes you will meet a client you can never satisfy. Lawyers are told by their malpractice carriers to be particularly careful of being the second or third lawyer performing services on the same matter for a client. If a client has already fired one lawyer, there is always that chance that the first lawyer did a satisfactory job, but the client did not feel the same for other than proper and valid reasons. It could be that the client had invalid expectations, or there could have been a change of circumstances, or it could even be that the client interfered in some fashion, such as by simply not following the lawyerís advice.

    Many of the disputes Iíve handled for clients, particularly in the IT world, involved a change in key customer personnel, acquisition of the subject customer by a larger company which wants to change directions or to do this project in house, etc. It could also be that the customer really doesnít know what it wants, and is going to punish you to try to make you do what may be impossible, or at least commercially unreasonable. Clearly this means you are walking a fine line as you try to "qualify" your prospects to make sure they are serious, have the money, understand (or can be taught) what they want, and will have reasonable appreciation for what you are proposing to do. If any of these elements are not present, try to correct the situation or walk away, but donít try to make an improbable situation work. At the least, youíll likely expend considerably more in resources than you would if you stayed within the bounds of your prototypical client and work. After all, you are in it for the money, arenít you?

    © 2001 by Stuart Adams. This is the 15th installment in the Authorís online book. Your comments and input would be appreciated in helping the Author make this an "organic book," which will continue to grow and adapt to change, just as any business itself must do. E-mail your comments and suggestions to the author by clicking on the link below:

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