Legal fine print in a recession

What is the role of legal "fine print" in an economic downturn? Is it something to ignore because of the overhead of dealing with it (lawyers, negotiations)? Does it go on the backburner because the most important thing now—really, the only thing, for heaven's sake—is landing the project before the other guy does? Some legalities deserve increased attention in an economic downturn, including...

03/01/2009


What is the role of legal "fine print" in an economic downturn? Is it something to ignore because of the overhead of dealing with it (lawyers, negotiations)? Does it go on the backburner because the most important thing now—really, the only thing, for heaven's sake—is landing the project before the other guy does?

I'm sure your company has its own answer for that and I am not here to fault it. Managing risk (including legalities) is one of the two or three most important buckets of institutional decisionmaking that every automation enterprise must make. And if your management doesn't have pretty strongly held opinions on those issues, just what is it that they do in those corner offices anyway?

But I am here to say (OK, I am here to urge) thoughtful risk managers to consider the following thesis: Some kinds of legalities deserve increased attention in an economic downturn. Why? Because during a recession, project risk is magnified in at least three ways.

Risk of insolvent partners

Let's face it—not everyone is going to come through this thing alive. Now I can already hear the rationalizations in response: "We can weather this thing. We know what we're doing. I'm confident it's going to be the other company—not us—that ultimately falls down."

But does that response really work on automation projects? There are typically several parties involved with legal connections to your company. What happens if one of those "project partners" goes bust? Obviously, such a development could have a cascading negative effect not just on the project as a whole, but on you.

How well you do in such a meltdown, in my opinion at least, will depend on whether you gave attention to some very specific fine print:

  • Are payments linked or unlinked? Unfair linkages include "pay when paid" clauses that can penalize your company for upstream problems that are not its fault. One potential upstream problem is an end user or middleman becoming insolvent.

  • Liens, bonds, upstream retainage. These are third-party sources of money that can make your company whole even when a contracting partner goes belly up. Do your project personnel have their eyes on all of the applicable requirements and notice deadlines?

Likelihood of litigation

A second reality in a recession is that litigation is more likely. When money is short, long-term business relationships are less certain, and backs are against the wall, companies fight. Are the negotiated "rules of engagement" for the war favorable? Does the battle have to be fought on your opponent's turf? Can you recover your expenses from your adversary if you win? Addressing those questions before problems start can be an investment with a huge return.

Risk of fewer projects

A third reality is that because projects are more scarce, each one can assume an outsized importance. This means that there is much less company resilience in the face of the upside-down project—and no resilience whatsoever in the face of a project that is suffering a meltdown. For this reason two questions in an economic downturn must always be asked:

  • Is the project a mine field? Although it's tough to turn away business in tough economic times, some automation projects are clearly "mine fields" and you are betting on walking a perfect path to make it through unscathed.

  • Is liability restricted? Limiting total liability to the contract price is fair. Excluding "consequential damages" should be a dealbreaker if not permitted.

I know what you're thinking. The guy writing this is a lawyer who makes his living advising automation companies throughout North America and beyond—and who therefore has a vested interest in promoting the use of lawyers. Well, true. But that just leads us to another reality that unhappily circumscribes all of the others: There is no avoiding lawyers in a recession.

In other words, see us now or see us later.


Author Information

Mark Voigtmann is a lawyer with Baker & Daniels, LLP (Indianapolis, Chicago, Washington DC and China). His group assists the automation and process industry in structuring projects and resolving disputes. Reach him at Mark.Voigtmann@bakerd.com or 317-237-1265.