CEOs and Government Officials often share a common trait: they are fond of signing ceremonies. Big productions, built around signing a piece of paper, appeal to human nature for the same reason weddings are well attended. It’s a party, and a photo opportunity. People feel good. Speeches are happy and upbeat. Everyone sees a rosy future filled with mutual cooperation. Optimism abounds; the possibility of failure is never mentioned.
I know of an Asian country where a former President would only visit another country if he could sign something; no matter how trivial the exercise; no matter how vague or meaninglessthe piece of paper.I have worked for CEOs who have instructed me to “…get something signed…” even when the state of negotiations does not warrant and there is no agreement yet to memorialize. An unscientific sampling of my peers, both in business and government, indicates that such practices are quite common.
These situations have led to a proliferation of paperwork that goes by various names, such as: Letter of Intent (LOI), Letter Agreement, Memorandum of Understanding or Heads of Agreement. (For simplicity I will refer to all these forms collectively as “Preliminary Documentation”) The most obvious problem encountered with some Preliminary Documentation is that the title bears no relationship to the substance in the body of the document. Many times there is no “agreement”, no mutuality of intent or no “understanding.” It is as if the draftsman tried to change the nature of a horse by painting the word “COW” on its side. This practice is usually justified by making such paperwork non-legally binding. Yet, some parties to these kinds of documents have actually tried to enforce legal obligations and won!
Herein lies the practical danger of paperwork that is not legally enforceable: a court or arbitrator may see it as one-sided and unfair and impose a quasi-contract or implied contract obligations in equity, rather than in law.
This is not to say that Preliminary Documentation has no value or that it is inherently dangerous to use. These types of documents can serve a useful purpose provided they are clear and unambiguous, so that a CEO or Government Official knows what they are getting. For example, here is a partial list of circumstances favoring the use of some form of Preliminary Documentation:
- As evidence of the state of negotiations (to show areas of agreement and open items);
- To make some terms enforceable obligations from the beginning of negotiations (i.e. Confidentiality, Exclusivity);
- To have something both Parties sign that is more formal than “Minutes of a Meeting” or, to prevent leakage during negotiations. (Stock Sales or other Asset Transfers)
On the other hand, here are some situations when Preliminary Documentation should be avoided:
- When Negotiations are still in the early concept stage;
- When Negotiations are non-exclusive; or,
- In high velocity negotiations, when time would be better spent working on the package of major agreements.
A well-defined Preliminary Document with a purpose can add clarity, discipline and relevance to the negotiating process. It can also add auxiliary support to the main agreements in a project in much the same way that legislative history supports laws that are passed. Finally, it can give that CEO or Government Official “…something to sign…” that really matters.