Letter Agreements, Do You Trust the Other Guy?
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.
