Muddying the Waters: Why You Should Negotiate the Terms of Every Contract
Updated: Apr 2, 2021
'Muddying the Waters' is the practice of writing contract terms that appear typical, innocent, and benign, but which, when read closely, operate to the heavy favor of one party.
In response to COVID, many organizations looked closely at their contracts - particularly at the 'force majeure' and 'termination' clauses - and were disappointed to find less-than-ideal terms. Associations trying to cancel contracts in the wake of cancelled conferences were shocked to find their 'force majeure' clause only applied if their conference was made "illegal" or "impossible." Businesses filing claims against their business interruption insurance policies were dismayed at being rejected because their policy lacked inclusions like "pandemic" or "other similar causes beyond the control of the parties."
These outcomes aren't the product of dumb luck. They occurred because the hoteliers and insurers in these situations 'Muddied the Waters' - they carefully and intentionally curated their contract terms in their favor. They came out on top (at least in the immediate sense) because their counterpart lacked the attention to detail or contract knowledge to understand not just what was in the contract, but what wasn't.
However, although organizations around the country have learned that they need to pay closer attention to their contract terms, most simply don't know what to look for. Even if they do, they often lack the expertise to draft counter-clauses that re-balance the parties' interests. Worse still, they typically don't have the drafting and negotiating prowess to tip the scales in their favor.
That's where Out-House Attorneys can help.
A Working Example
I recently negotiated a multi-million-dollar contract between a professional services company and their client. The client insisted on including service level agreements (SLAs) and a penalty clause to incentivize meeting the SLAs. The penalty clause they proposed was a 5.00% reduction in the Service Provider's entire monthly invoice for each SLA they failed to meet.
Considering there were 11 SLAs, the proposed clause had the capacity to reduce the Service Provider's invoice by up to 55%. Ouch!
The Service Company refused to consider a penalty with such dire implications. The Client refused to contract without the assurance of a 5.00% penalty. The Service Company hired me to get the Parties to terms.
Here's the clause I countered with:
"The Parties acknowledge and agree that Service Provider must make reasonable efforts to consistently meet all Service Level Agreements (SLAs). Client will notify Service Provider in writing if Service Provider fails to meet any SLA. In the event that Service Provider fails to meet the same SLA in the month following written notice of failure, Client shall be entitled to a 5.00% credit against that month's fees for the service associated with the failed SLA."
At first glance, many will read this and simply notice that the 5.00% penalty still exists. However, this clause inserts several qualifications and limitations on the 5.00% penalty.
First, the clause requires the Client to notify the Service Provider if they miss any SLAs. In some cases, Clients won't know that an SLA is failed unless they're receiving metrics reports, or service quality indicates a failure. Even if this Client does learn about a failure, they must then notify the Service Provider in writing.
Second, even if the Client does notify the Service Provider about a failed SLA, the credit only applies if the Service provider fails the same SLA in the immediately following month. This means that if they fail a different SLA, no credit is due. If the Client gives a failure notice for one SLA in July, and the Service Provider doesn't fail the same SLA again until September, a credit still isn't due! If the Client wants their credit, they will have to submit a written failure notice for every failed SLA, every month.
Finally, if the Client gives notice AND the Service Provider fails the same SLA in the immediately consecutive month, the Client is only entitled to a 5.00% credit against the second invoice, and only against the (singular) service associated with the twice-failed SLA.
Perhaps my counterpart simply saw the words "5.00% credit" and was content? Maybe they didn't read the clause closely? Perchance they just didn't understand it? Whatever the explanation, my counterpart accepted the clause, and the Parties signed the contract the next day.
In this case, the penalty clause was rendered almost completely meaningless. Although it's unlikely that my reputable client will fail their SLAs, it's even less likely that a penalty will become payable because of all of the qualifiers and limitations inserted into the applicable clause.
The Bottom Line
'Muddying the Waters' is not a rare practice. It can be accomplished as simply as in the given example, or achieved through a complex and subtle weave through multiple clauses and agreements. It's something Out-House Attorneys does for its clients every single day. We review, draft, and negotiate every kind of agreement and legal document - and we do it without 'lawyering' your deals to death.
COVID taught many organizations that they need to pay closer attention to their contract terms. Be the organization that actually does something about it. Contact Out-House Attorneys, and have us review and negotiate your contracts so you're not the one left holding the bag when it's time to trigger these clauses.
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