This month’s magazine focuses on industry “partnerships”— relationships between retail security companies and wholesale vendors, distributors and service providers. These sorts of relationships are not true legal partnerships, but they are premised on principles of contract law and take many forms, such as dealer agreements, distribution agreements, vendor agreements and even order forms.
While many are based on multi-page written agreements reviewed, negotiated and eventually signed by the parties, others are based on unsigned writings — an acknowledgement sent in response to a purchase order may create a legally binding contract even if neither party has signed any of the forms. To make matters more complicated, in today’s age of “e-signatures,” the signature block on your outgoing email message may constitute a legally binding electronic signature (and therefore, a valid acceptance) in response to another party’s offer.
Here are five principles to consider when entering into industry relationships.
1. Remember the golden rule. This one’s simple — whoever has the gold rules (and you thought it was something else)! In our industry (like any other), the party with the most money (and the best lawyers) often has the most bargaining power in negotiations. Which party can exploit the golden rule in your particular negotiation? A new industry entrant, especially one starting from scratch, is much more likely to make important concessions than an established player. That’s because they are seeking the gold and they do not yet have it, which has something to do with rule #3.
2. The more motivated the party, the more the party moves. The more you want the deal, the more you will be willing to move on important terms. Keep in mind that the other side likely wants the deal too. Most deals have a rhythm — a give and take. Often there is little downside to asking for a concession, as long as the ask is commercially reasonable. Rely on your deal advisors for direction on what they have seen in similar circumstances — chances are, they have been through a similar issue in the past. Figure out what is really important and what is not. Give where you can and dig your heels in on what is necessary.
3. Don’t bet the company. This is the fundamental guiding principle for risk allocation in the electronic security industry — no amount of recurring revenue is ever worth putting the company at risk. Repeat that three times daily and follow it in contract negotiations. Some of the best deals you will ever do are those you walk away from.
4. Include insurance in every contract. I always do my absolute best in every industry contract to transfer liability to insurance and, if it is in my client’s interest, to make it extremely difficult (if not impossible) for the insurer to make a federal (or state) case out of it once there is a loss. If you are obligated to indemnify the other party in an industry agreement (e.g., if you are a dealer contracting with a monitoring facility), make sure your insurance includes incidental or insured contracts coverage, which means the insurer — not you — will pay the other party’s legal fees in the event of a claim. Buy as much insurance as you can and then buy even more — in this industry, you can never have enough.
5. Pay me now or pay for it later. In my years in the industry, the most successful companies tend to be those that include legal counsel in transactions on the front end rather than ending up with problems on the back end. This includes everyone from long-standing, well-known companies to start-ups that figure out how to strike a strategic alliance early on. If you do not consult counsel before you enter into a binding relationship, you are likely to pay a lot more down the road to fix the problems you missed (or created).
Eric Pritchard is a Philadelphia lawyer who spends his workday making the world safe for electronic security providers. Reach him at [email protected]. This column does not constitute legal advice; contact an attorney with questions.
