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December 05, 2011 Articles

What to Do When the Deal Goes Bad

Your preparedness to respond to a client's call for help is critical

By Peter French

Business deals come in all forms, shapes, and sizes. Every day, clients enter into transactions to acquire or dispose of interests in real property, personal property, or intellectual property. Sometimes, clients will do a deal to acquire or dispose of an ownership position. At other times, the client's interest will be some contractual position that furthers its business needs or financial goals. Every deal is different, but some go bad.

A business deal can go bad for any number of reasons. When your client's does, the choices you make will determine whether your client receives the benefit of its bargain and a return on its investment, or significant, unanticipated, and unknown financial losses that most certainly will affect its bottom line. If you want to maximize your client's chances to achieve a return and minimize risk after a deal has gone awry, you need to know what to do. Time is of the essence. Your preparedness to respond to a client call for help is critical to the outcome.

Because every transaction is different, the opportunity for a positive solution depends on the circumstances presented. This article outlines some approaches that should be considered as you determine a strategy for maximizing the opportunity presented to your client and minimize the risk when a deal goes bad. This article does not address the process for avoiding disputes through use of best practices in due diligence, negotiation, and contract drafting, nor does this article address business disputes generated by one or more parties with a business purpose designed to be achieved through use of the litigation process. The focus is the narrow set of situations in which a deal has gone bad due to circumstances unforeseen by one or more parties and where there is an opportunity to achieve resolution by agreement.

Step One: Conduct a Triage of the Situation

Business people almost always broadly define their business relationships as "partnerships." To the typical business person, owners and investors are partners. Suppliers and vendors are partners. Even buyers and sellers many times view each other as partners in a transaction. This seeming overuse of the term "partner" makes sense in the business world because, at its base, the term partner means a relationship of trust, honesty, and loyalty. In the business sense of the word, a partner is someone who is trusted and who generates mutually beneficial financial and other business opportunities. When a deal turns sour, a creative lawyer will focus not only on rights and obligations but also on preserving the trust necessary to support the business relationship.

A deal can go awry for many reasons. Sometimes, transactional obligations are breached on purpose. Just as often, however, the breach is the result of forces beyond the parties' control, e.g., an unforeseen event, a lack of communication, a lack of attention, and other unintended breaches. It is not uncommon for the party who faces a breach from the other party to a deal to assume that a broken business promise is intentional, even when that is not actually the case. This attitude can make it difficult to cure the breach and save the deal. When your client’s expectations are not met, you must carefully consider and control what happens next. Do your best to steer the client decision maker away from assuming intentional wrongdoing and toward developing a strategic solution.

Effective triage requires that you do the following:

  • Gather information about rights and obligations associated with the problem transaction.
  • Obtain input from client decision makers and representatives.
  • Determine the potential causes for the breach in the deal.
  • Explain not only the inherent risks in the judicial system but also the direct and indirect transaction costs associated with using the formal legal process to achieve goals (i.e., not just the legal fees and costs but the costs associated with time away from income-producing activities and the consequences of a bad outcome on matters such as reputation, standing in the business community, and public perception).
  • Identify client needs, limitations, and goals.

Your analysis of the circumstances will allow you to develop a solution that best suits your client’s needs and goals instead of providing a narrower textbook explanation of legal rights that fails to consider the business factors that may affect your client’s desire for a purely legal approach to problem solving in business.

Step Two: Reach Out, Notify, and Seek Solutions

Although it is vitally important to conduct a triage of the botched transaction and gain the understanding necessary to advise the client of options to achieve desired outcomes, it is equally imperative to communicate with the offending business partner to encourage and induce productive corrective behavior. Timing, tone, and the substance of the message are crucial in this stage of your effort to obtain a prompt and desirable business solution.

Consider this analogy: Children do not respond well to adults who yell at them when they get in trouble. If you sit down with a child and calmly explain your expectations, the child is much more likely to respond in a positive way. The same holds true in communicating with your client’s business partner who has not met expectations. Demand letters filled with adjectives usually do not lend themselves to a positive response. Courteous, direct communication of needs and expectations is much more likely to elicit a positive response.

As lawyers, we are trained to take an adversarial approach to client problem solving. It is rarely the case, however, that firing a shot across the bow in the form of a demand, cease-and-desist letter, complaint, or motion will result in a timely, economical, or desirable solution to a business problem. Such actions certainly do nothing to preserve business opportunities or relationships. Rather, such actions usually evoke an equally adversarial and unproductive response. At that point, both sides “lawyer up,” the once cherished trust in the business relationship evaporates, and the deal turns into a lengthy and expensive business divorce. So, when a client's business transaction turns sour, it is important that you carefully choose the tone and substance of your communication.

Equally important to effective business problem solving is the method of communication with your client’s business partner. Most of us detest confrontation in person. It is so easy to send an email and avoid that uncomfortable interaction. Face-to-face interaction, however, is critical to preserving business relationships and managing business crises. The next best method is the telephone. Email, while convenient and immediate in delivery, doesn’t allow the recipient of your message to hear the sound of your voice or look into your eyes nor does it permit the shaking of hands and other human aspects that are essential to crisis management and preserving opportunities.

Indeed, the best approach to engaging your client's business partner in effective problem solving usually calls for personal interaction. Not a letter and almost certainly not an email. A face-to-face meeting is best if practicable, or at least a phone conversation.

Step Three: Meeting Preparation

To be open-minded toward resolution in a pre-suit settlement meeting, the client needs to be informed and prepared. Part of that preparation should include an explanation of the anatomy of a lawsuit, the risks and costs of litigation, a litigation budget tailored to the known circumstances, and a legal analysis of probable and possible outcomes (probable-case, worst-case, and best-case scenarios).

The client should identify decision makers who should be present. Anyone who intends to speak should provide your team with a written script so that the entire team knows what to expect from client representatives during any presentation before it happens. Prior disclosure will allow the team to put on its best face at the meeting. The team should identify important needs and goals—both short-term and long-term, micro and macro.

The legal team, for its part, should research and brief the legal issues, inform the client of strengths and weaknesses in positions, and identify legal tools that may provide business solutions. Prior to the meeting, the legal team should also ensure that the client is informed of legal obligations to preserve information, that sources of information have been identified, and that litigation holds are in place to protect that information in the event of litigation. A client's failure to preserve may impair its negotiating position and almost certainly will have a negative impact on its litigation position, if litigation becomes necessary.

Step Four: The Meeting

The business meeting is the proverbial fork in the road to a business solution or protracted litigation. As in anything, preparation is the key to the success of the mediation. Ensure that the meeting allows (as much as possible) the free exchange of information, proposals, and ideas by using Federal Rule of Evidence 408 (or any state counterpart), and that the confidentiality of the meeting is protected by a confidentiality agreement. If agreeable, the parties should strongly consider using a mediator to facilitate the discussion, identify common ground, and bridge gaps. A mediator also provides an additional layer of confidentiality protection and an exchange of information. Consider having breakout rooms available for private communications that may be necessary to keep the ball moving forward in group sessions toward a mutually agreeable solution. And, perhaps the most important consideration, have decision makers from both sides present and engaged.

At this juncture, the client likely will benefit from a legal team that includes a business lawyer and a trial lawyer. The business lawyer can focus on making a new deal, and the trial lawyer can spot risk and protect against it. To the extent practical, an agenda should be prepared and exchanged so that the parties can prepare, the meeting has structure, and any surprises can be controlled. The parties should come with open minds and be prepared to agree on terms, at least in principle.

Step Five: The Litigation Solution

The pre-suit meeting is the best chance for a business solution that includes a go-forward, mutually beneficial relationship between the parties. However, the pre-suit meeting works only if all parties (and their lawyers) are focused on problem solving and resolution. If one side to the negotiation is represented by counsel that incorrectly analyzes the situation or insists on taking an adversarial approach, the opportunities for preserving the business relationship and attendant opportunities are markedly reduced.

The good news is that your team came prepared to achieve a win-win business solution and is in an informed position to commence litigation at your client's now former business partner's election. The information needed to file a complaint is already compiled, preserved, and analyzed under the applicable laws. The client decision makers can report to their board or owners that best efforts were used to avoid the time, effort, and expense of litigation and achieve a business solution. Those same decision makers have at their finger tips an understanding of the legal issues presented; the best-case, worst-case, and probable-case scenarios; and the risks and rewards associated with a litigation solution. You should have a client who is well-informed and convinced that you have done your best to facilitate a negotiated solution. No one will have unrealistic expectations of the timing, cost, or risks associated with the use of the legal process to problem solve. You have maximized the opportunity to have a satisfied client.

Keywords: preventing financial loss, protecting your client, business partner relationship, business solution, business meeting

Copyright © 2011, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).