I recently had a case where a new client disputed their former lawyers’ bill. Although sophisticated, the client did not have a good handle on how lawyers typically bill – that is, other than the adage “as often as they can”. The case has given me grist for this column’s mill.

First, let us start with your pop quiz for the month. Do you really know if the price of that lawyer letter is too much? For many, the answer is the same as that of a Supreme Court Justice’s called upon to define obscenity … “I know it when I see it”. The truth is that it is sometimes hard to gage when a lawyer’s billing is legitimate. However, this does not mean that you are unable to critically look at your attorney’s bills.

I break lawyers time into two categories. The first I call “unique services”. This is the so-called lawyer letter, phone call, document negotiation or attorney to attorney meeting. These are the billed items for which there really is no standard. For example, a phone call lasts as long as it takes. To be sure, an hour call to arrange a meeting date is probably not a good sign. However, it is generally hard to determine a typical amount of time for these unique services.

Contrast this with services comparable to other similar lawyer expenditures of time. In this category would fall items such as contract review, lease preparation or preparation of a lawsuit. Many businesses already have an historical record of what attorneys have charged for these activities. While your “historical” standard is useful, do not overlook the fact that even the more standard services can also vary greatly. For example, has combative opposing counsel driven up the time, or are the issues complex – even for your attorney experienced in your business area?

Here are some useful suggestions to avoid uncomfortable calls about the bill. First, define with your attorney the scope of their work. This helps both sides better understand the work’s complexity (i.e. cost). Second, set parameters. Things rarely go as anticipated. Therefore, ask your lawyer to explain likely scenarios that could increase the costs. Third, agree to a budget. This can be formal in writing or as simple as a “guestimate”. But remember, attorneys advise, they do not guaranty – especially fees.

Attorneys are expected to be honest and loyal to their client’s cause. They are held to the very highest of fiduciary standards. Clients use the bill as a barometer of the relationship. Client doubts about the bill can be tantamount to questioning the attorney’s honesty and loyalty. Little wonder why billing conversations are generally more uncomfortable for the client than the lawyer.

Happily, lawyers generally have legitimate explanations for questioned billing. Sometimes they don’t. Most are willing to make reasonable adjustments for honest mistakes. However, you do not get to that point without informed (not emotional) communication about the concerned bill. Therefore, make an effort to identify why the bill appears out of line, and don’t employ the Supreme Court Justice’s test of what seems “obscene”! … At least that’s what this lawyer thinks.

Having operated companies as CEO, I like to tell my law clients that the bigger the contract, the greater the basis for distrust between the parties. With that homily said, a constant source of tension between lawyers and their business clients is whether or not to use a “letter agreement”. First, lets emphasize the key word – “agreement”. It may look like a letter but may be a binding contract. Therefore, be clear in your mind whether you want the letter to be a full expression of your deal or merely a preliminary expression of some of the key deal points.

Second, what is the nature of the business arrangement. Is it a simple single transaction where one side is selling a single shipment of goods with a single payment in advance, or is it a long-term interactive agreement such as the development of proprietary software with multi-year technical support. Generally, the more interactive the contemplated business relationship, the greater the need for contract specificity – i.e. more paper and lawyer time. Your lawyer may help determine how detailed the potential relationship, however, this part of the process should remain firmly under the control of business decision making.

Third, can you survive the other guy not living up to the deal. The local computer store not delivering the desired computer probably won’t put you out of business. However, a small software developer landing a big Microsoft deal can not afford to battle that giant over contract terms when its resources are fully engaged in performing. Remember, it’s David not Goliath that needs the big contract.

Fourth, do you trust the other side. This intangible brings us full circle to my opening comment – “the bigger the agreement the greater the distrust”. If the deal should be handled in a simple letter agreement but you want more details (i.e. protection), consider not doing the deal. Of course, having been CEO, I know this is often easier said than done.

Fifth, is this relationship governed by a standard in the community that may be used to supply details left out of the letter agreement. Often manufacturing details may be established by reference to industry standards. In real estate construction, for example, detail can be supplied by incorporation of established form agreements. It is important in today’s economy not to overuse your lawyer. However, doing-it-yourself just to save legal fees may cost more if the deal goes sour… At least that’s what this lawyer thinks.

SOURCE CODE, SOURCE CODE, WHOSE GOT THE SOURCE CODE

Your company has just decided to dump six or seven figures into the development of proprietary software that will automate your order fulfillment process. Your projections say it will save 10 to 15
percent in direct operating costs not to mention giving you a much needed competitive advantage over your arch rival and competitor – “Breathing Down Your Neck, Inc.” Lacking adequate software development skills in-house, your IT staff submits a couple of proposals from software developers experienced in your needs. Having little experience in this area, you ask each of these vendors, Tweedle Dee and Tweedle Dum, to provide you with a written contract proposal. What will it say, what should you ask for, and what are the ways to reach a compromise?

First, break down the process to its components – development, installation, use and ongoing maintenance or upgrade modification. The first three will be part of the software development agreement
(SDA). The last should be covered by a maintenance agreement. SDAs are generally either fixed price or time and materials agreements. In either, but especially in a fixed price agreement, it is
important to make sure the scope of work (i.e. software specifications) is thoroughly defined. Not heeding this warning can lead to costly change orders. Along this line, be wary of too cheap a
price. You may be a good negotiator but not that good. Remember, you do want to go back to your friends on the golf course and explain why the program may have cost a buck but the key to turn
it on cost a million!

Next, you want to make sure that the payment and performance schedules are tied together and well defined. You want a reasonable interim period to test each phase of the project development.
Typically this is around ten days for testing and approval of interim phases and around a month for the complete project. However, this may vary depending upon your project. Who will own the program? Do you have the right to modify (e.g. upgrade) the underlying program? It may be your million dollars, but don’t be surprised if the SDA only grants your company a nonexclusive use license limited by geography and scalability (i.e. number of users). Your next shock comes when your vendor refuses to assign all the rights (e.g. all intellectual property, “IP”, rights such as copyright, or patent for a business process). His response is likely to be that the cost will be substantially higher if he is unable to use your proprietary software to create a more generic platform for sale to other end users. The compromise varies depending upon a number of factors not the least of which is the parties’ relative bargaining position. Things such as obtaining exclusivity of use for your industry or owning all IP rights while granting back to the vendor a license to use the program in non-competing industries are examples of available options.

Another area often appearing onerous in the vendor’s SDA covers the subject of warranties and indemnifications. Understandably, vendors carefully craft these provisions to the point where, from your prospective, they are more properly described as liability limiting rather than affirmative warranties and indemnifications. As a result, many customers wind up with little or no remedy against the developer when Breathing Down Your Neck, Inc. sues for infringement of their patent, copyright, or some other technology rights in “your” program.

Finally, who controls the source code? This is the programming language readable by humans. In turn, the source code is than compiled into an object or machine code readable by the computer. Your concern should be that if the vendor goes out of business, how could you obtain the critical source code so that you can continue to update or maintain the program. Now days, it is not uncommon for parties to agree to place the source code in a source code escrow. Depending upon the activities surrounding the escrow, this can be a costly proposition. On the other hand, this is a potential operational choke point. Just imagine a year or two from now and Breathing Down Your Neck, Inc. is gaining on you, the last thing you want to hear yourself asking is “source code, source code, whose got the source code?” … at least that’s what this lawyer thinks.