Recently I negotiated a software hosting contract with a customer on the West Coast. The contract, a template that I wrote for the hosting service, has a liquidated damages clause. I set the amount of the damages based on several factors including reprovisioning data center resources to another customer.
In the negotiation call, the customer asked me several times over if the damages clause was all that he would owe if he stopped paying us for the service mid-contract. I replied yes, that the purpose of liquidated damages is to settle up without having to go to court. Then the customer showed his hand. He wanted to negotiate a right to terminate for convenience. The damages clause in the contract wasn’t really much different than termination for convenience, the customer argued, because the clause allowed him to get out of the contract for a fee he considered inexpensive relative to the contract’s multiyear term. I responded no, that by signing the contract, he was taking on a legal obligation to purchase the service in its entirety.
To summarize, I have observed the following:
- Business people understand that not making good on commitments looks bad
- Business people place more importance on relationships than they do on legal obligations
- Business people demand the ability to deal with change and uncertainty with the fewest possible constraints
What do I conclude from these observations that will help me and other in-house counsel with business contracts?