Partnering: Strategic Considerations

Kanata CA personal injury, family, and real estate law firm

Partnering relationships are contractual relationships between two or more parties that are strategic and have inherently unpredictable and indefinable outcomes.

The strategic nature of the partnering relationship underscores the importance of the relationship to the contracting parties. Each party’s long term performance may be materially affected by the outcome of the relationship. The lack of predicable and definable outcomes means that the relationship must be managed in a manner quite unlike ordinary commercial relationships.

All contracts entered into without coercion are by definition win/win relationships. In an ordinary contract neither party generally has to consider whether or not the other party obtains sufficient benefit; this is assumed otherwise there would not be a contract. In a partnering relationship this assumption cannot be made. No partnership relationship will work in the long run unless all parties receive sufficient benefit that retains interest and commitment to the relationship. A deal that is too good to be true – is never the basis for a partnering relationship.

For clarity, partnering relationships are not partnerships. A partnership is the jointly carrying on of a (common) business with a view towards making a profit. There is no common business in a partnering relationship. Partnering relationships include the development of technology or products, joint marketing, teaming arrangements, joint ventures and out-sourcing operations.

A. Identification of Purposes.

The negotiation of any contractual relationship is always predicated on the purpose. This is particularly true of partnering relationships where the complexity of the deal may permit the purpose to be lost among the details. During the course of negotiation – which can extend over many months – it is crucial to keep the purpose in mind and not to be consumed with “tactical” victories.

Typical partnering purposes include:

1. Efficiency/ Focus on Core Business. Efficiencies and a focus on core business are two sides of the same coin. By downloading business functions that are not part of the core business, a business may streamline its efforts and focus on its core competencies.

2. Leverage. Leverage may be financial but is more commonly technological, operations or marketing. Technological leverage may be early access to emerging technologies that cannot otherwise be purchased (or only at a prohibitive cost). Operations include outsourcing business functions including production. Marketing leverage may involve relationships with organizations with complementary products and technologies to deliver solution and product suites.

3. Risk Management. Risk management includes allocation of risk related to the cost of sourcing components and price fluctuations, exchange rate considerations, unpredictable market demand and under or over achieving forecasted demand.

B. Identification of Benefits and Risks.

Risk/benefit analysis is at the core of all business transactions and there is not much to add to that topic except that the analysis may be less financial and of greater scope. For example, a partnering relationship for the marketing and distribution of products may allow a business to focus on its core competency in technology development. However in the long term the lack of direct contact or communication with the customers may impair the ability of the business to understand the market and anticipate where developments are needed or required. A partnering relationship may not make sense unless mechanisms that effectively proxy for direct contact or communication with the customers are developed.

C. The Players.

Identification of the “players” in an organization is a key to the success of the negotiation of partnering relationship with that organization. The management level that has the authority to make the decision must be engaged. Many organizations are not an homogenized whole; and a partnering relationship may “trod on the toes” of some members of the other organization. Strategies to assuage or circumvent these members must be devised.

D. Back-up Positions and Flexibility

The complexity of a partnering relationship mandates that the matrix be constructed. Each negotiating position should have at least one back-up position. Consideration has to be given to the combinations of positions, as agreeing to a back-up position on one point may require no flexibility on another.

E: Structure (the Business Deal)

Letter of Intent.

A letter of intent by definition in not meant to be, and should never be a legal commitment (other than in respect to some limited matters such as “standstill” provisions and confidentiality). A letter of intent is not complete and there are terms left unstated. No maxim is ever truer than “the devil is in the details” and business relationships that are carried out on letters of intent are ticking time bombs. However letters of intent do have legitimate purpose. They establish the framework of the deal that the parties have been able to establish and, if properly drafted, should identify (and overcome) potential deal breaker items.

Agreement

The Agreement for a Partnering will differ from an ordinary commercial agreement both quantitatively and qualitatively. Schematically, inter-relationships a Partnering Agreement may typically be described in the attached schematic:Partnering Relationships Schematic

a) Business Deal. The Business Deal is the framework over which the contractual agreement is built. The Business Deal is usually achieved at high level and works as long as the universe unfolds as forecasted. It rarely does. The contractual agreement must then anticipate what happens if the forecasts are wrong, and how this impacts on the relationship.

b) Contract Obligations. Contract obligations in this context are those obligations and rights, which relate to the business deal (as opposed to management, dispute resolution and termination). A recurring issue in many partnering relationships is ownership of intellectual property rights (“IP”) that result from a Partnering relationship. IP rights are increasingly important and many organizations are less and less willing to give up IP rights to which they have contributed. Joint ownership of IP rights is increasingly common as well as ownership by one party with rights licensed to the other. No matter what the form, thought must be given to what the ownership/licensing rights are and how the rights of the parties are delineated. For example, may a co-owner of patent rights unilaterally register a patent application without the consent of the co-owner? What about the right to pursue infringers? How about the right to further sub-license? What rights to are there to the other party’ IP which was not created in the partnering relationship but it necessary for the use of the jointly created IP. What indemnities are given against infringement? What indemnities are given against third party claims? The range of issues relating to IP rights are extensive and must be detailed in considerable detail.

c) Management. The extent to which the relationship is managed is a key feature, which differentiates a Partnering relationship from an ordinary contract. Effective management is impossible without the right information.

i) Information. Information is required in order to understand what the range of potential outcomes are, if those outcomes may be influenced, and how to influence is most effectively asserted to achieve the desired outcomes. Partnering demands consideration of qualitative (the quality or type of information) and quantitative (the quantity and frequency of the disclosure of the information) information requirements.

The contract is the vehicle by which the information needs are met. The contract must explicitly provide in both general and specific terms the quality and quantity of information required. The specific terms define the minimum expectation for the delivery of information. The general provisions allow for the demand of other information not specifically mandated by the agreement. It is simply not sufficient to provide for the general requirements and “work out” the specifics at a later date or assume that the level of exchange of information which pervades during the negotiation will continue.

The reverse side of obtaining information from the other party is that you will also be obliged to disclose information. Consideration as to what may be disclosed and what should not be disclosed must be identified. While the contract will usually provide for restrictions on the use of information disclosed, such restrictions may not be sufficient for particularly sensitive information.

ii) Delivery. Information is useless unless the right people obtain the right information in a timely manner. There is no model for how to the flow of information must be managed to maximize the achievement of desirable results. Even within an organization, information flows don’t necessarily follow a chain of command and indeed, distributed information flows can be much more effective. However the bottom line on most partnering arrangements is that although the organizations may be allies today, they may be competitors tomorrow. There are consequences, including substantive legal ones, which result from decisions made and actions taken in a partnering relationship. This generally means that:

A) Information flows must be identified and flowed through channels. Information of a technical nature will generally flow through technical managers and information of a financial nature will flow through financial managers. Some information will be of a hybrid nature and will flow through both channels.

B) Information which is proprietary and secret must be identified as such. It is not sufficient to assume that everything that you provide is proprietary and secret – it is not. If your information is misused, it is a matter of evidence whether or not it was disclosed under obligations of confidentiality. If it is clearly identified as confidential – the evidence will be hard to overcome. Similarly, the maintenance of logs which record with confidential information is disclosed, to whom and when creates the evidentiary trail.

d) Dispute Reconciliation. Most complex commercial agreements provide for some mechanism of dispute resolution. In most cases, these mechanisms simply substitute mediation or arbitration or both for the Courts. Some mechanisms do not go far enough.

i) Escalation Procedures. Escalation procedures are useful to prevent small disputes from escalating into major disputes. Escalation procedures are mechanisms which permit disputes to be addressed at relatively low levels in the organization and involve the people directly affected. The process is less formal, often does not involve legal advisors and tends to be much less adversarial. Disputes tend to be resolved earlier and with less damage to the participants and the relationship.

ii) Mechanisms. Many alternative dispute mechanisms fail in their intent to provide a quicker and less expensive process with “better” results than use of the Courts. A principal reason for this is that the process is not sufficiently addressed in the agreement. Parties which genuinely consider it their mutual best interests will make the dispute reconciliation work – because it is in their best interest to do so. If one party does not consider it in its best interest to cooperate, a simple dispute reconciliation provision is rife with opportunity to delay and disrupt the process, and to considerably increase the cost, particularly to the party least able to withstand financial hardship.

Well drafted provisions deal with these issues either by reference to a set of rules published by an arbitral association. Well drafted rules are usually preferable because the parties have actually considered every provision and reached agreement – however such provisions are themselves complex and negotiating such provisions may exhaust the parties. The rules of an arbitral association will reduce this risk.

J. Robert Allan

J. Robert Allan

Partnering Relationships Schematic