In corporations, where contracts can become a robotic enterprise with pages and pages of boilerplate language that most “normal” people do not read or understand, human relations and corporate contract review can sometimes be perceived as incompatible. For some companies, contracts are perceived to be the lawyers’ business where legal review is just a technical check in the box after thorough negotiations. However, this approach fails to address a fundamental nature of contracts: they are an agreement that depends on some type of human interaction. Without an understanding of what has actually been agreed among the relevant parties, breakdowns occur between the contract language and performance.

This is true with all contracts, but when the client is an individual, there is normally a straightforward understanding that the individual needs to comprehend what they are obligated to do. This becomes more nebulous when the client is a corporation, where the contract may cover obligations performed by multiple departments and numerous employees from both a legal and business standpoint. Because of this set up, corporate counsel (especially in-house) must have their finger on the pulse of their client organization to understand what can be agreed to, how the contract should be reviewed and provide assistance beyond just an analysis of the legal language.

A Need for Proactive Counsel

Consider the scenario of hypothetical Company A: The sales manager discusses commercial terms with a customer and then the customer sends a draft contract that is forwarded to Company A’s legal counsel for review. Company A’s counsel reviews it meticulously, scrubs it for all manner of technicalities, haggling with opposing counsel for language changes, and produces enough redlines to enrage a bull. Finally, the counsel gives his CEO and sales manager the green light and the contract is signed. Whew! The counsel pats himself on the back for shrewdly negotiating more advantageous terms for the client. The contract is filed away, and contract performance begins.

Six months later, Company A is sued for breach of contract. During negotiations the customer had negotiated a non-solicitation clause in the contract where Company A was not allowed to hire any of the customers’ employees during the duration of the business relationship. Company A’s counsel, sales manager and CEO had no issues with the provision because there was no intention of soliciting employees from the customer. Unfortunately, this new negotiated provision was not communicated with Company A’s Human Resources (HR) department. Inadvertently, HR for Company A hired an employee from the customer for a manager in a different department who was unfamiliar with the contract. In this scenario, Company A’s contract review process was not set up to communicate non-standard terms to the relevant departments.

This situation is where corporate counsel should be more proactive. After all, the best language in the world isn’t worth the paper it’s written on if the performing party has not read or understood it. If corporate counsel is not going to be the contract compliance authority themselves, they need to at least be cognizant of how negotiated terms will be implemented, which requires an understanding of the human element. Most contract attorneys are familiar with the distinction between “legal terms” and “commercial terms.” Usually, this language is used in the context of contract review when delineating between what it is the lawyer’s responsibility versus that of an operational department.

Theoretically, the operational departments review the “commercial” terms, and the lawyer reviews the “legal” terms. But this creates a false dichotomy because every term in a contract has legal significance when there is a dispute. As stated in the Tennessee Court of Appeals, “While contract interpretation is generally treated as a question of law … [w]hether a party has fulfilled its obligations under a contract or is in breach of the contract is a question of fact …”¹ Clearly, both the law and facts cover all the language of the contract, and not just the sections that are traditionally viewed as “legal sections.”

A False Dichotomy

The case of M&M Electrical Contractor v. Cumberland Elec. Membership Corp. highlights this issue. In that case, within the contract, there were safety requirements added that placed requirements for a party to implement “reasonable precautions for the safety of employees…” Ultimately, that party was found to be in breach of contract due to using ungrounded trucks while performing work on energized electrical lines in violation of the distributor’s safety policy.² Safety protocol may not traditionally be considered within the scope of “legal terms,” but clearly the failure to comply became a legal issue, and the language was analyzed from a legal standpoint.

In another Tennessee case, a contract dispute arose between a contractor and subcontractor over the contract’s language regarding responsibility for asbestos abatement. Ultimately, the court affirmed that the contractor breached the contract by failing to test synchronous condensers for asbestos as the contract had stated the contractor “has removed all known asbestos-containing materials.”³ In a case like this, within the bounds of a legal review where there is a superficial division between legal review and operational review, a lawyer may defer to the operational department to determine whether the asbestos attestation could be carried out. But those operational departments may not be familiar with how the language would be reviewed by a court in a lawsuit down the line, essentially creating a gap between contract language and successful performance.

Some large companies attempt to fill this gap with contract compliance teams, specialists or administrators. But often, these teams focus on commercial terms such as price and schedule and may not be trained in enforcing niche terms outside of standard terms and conditions. Further, many smaller companies do not have the staff for this type of oversight.

Communication Across Departments

As contracts become more extensive, careful attention needs to be paid to the capabilities of the company to track and comply with all the requirements contained within the contract. This is one of the reasons that some large companies blanketly state that they do not alter their standard terms and conditions, and it is not just because the language of their terms is so perfectly written that no one could possibly suggest improvements (however true that statement may be). It is also because deviations may require compliance that their organization are not be set up to track or handle. Unfortunately, smaller companies, hungry for customers, may not have this luxury.

Ultimately, somebody needs to decide who the required reviewers to a contract should be. However, this can essentially create a Schrödinger’s Cat-like scenario: You can’t know who should review the contract … unless the contract has been reviewed. Depending on the contract, there could be issues involving multiple departments, Health and Safety, HR, Operations, Customer Service, Finance, Legal, Records Management, Communications.

The good news is that a savvy and proactive corporate counsel can navigate these tricky areas. But it involves building relationships, understanding and cooperation. Below is just a sampling of how certain contract terms would require communication and performance across departments. Although in-house counsel does not necessarily need to supervise the protocol, they should be aware of how the company will be compliant with the requirements and cognizant of the organizational structure and how terms will be passed down to the relevant parties during negotiations:

IP/Confidentiality/NDA
Obviously, it is important for the language of confidentiality clauses to be correct, but once it is signed, the people involved in the work need to be aware of their obligations to protect confidential information. For example, what is considered confidential, and how should such information be labelled, transmitted and disposed of? Have the relevant employees been advised on how to transmit this information? Training may need to be created to handle compliance with this clause.

No Publicity
If there is a provision specifying that there can be no mention of the business relationship with any third party, how will this be enforced? The corporate client should be aware of how they would need to implement this provision. This type of language needs to be reviewed with anyone who is responsible for external communications.

Safety Requirements
Some contracts may require the parties to follow specific training protocol and or safety requirements as we saw in M&M Electrical Contractor. If the company has a training department, then counsel would need to work closely with this department to ensure that the safety requirements are met and where non-compliance should be corrected. If needed, the wording of the contract may need to be tweaked.

Distribution Agreement
When a distribution agreement gives a distributor a geographic area of responsibility, the company needs to keep track of the territory and ensure that lines are not overlapped with other agreements. Obviously, this would need to involve communication with other territory managers to ensure deconflictions of areas of responsibility.

Most Favored Customer Clause
Sometimes contracts contain a “Most Favored Customer” (MFC) clause, meaning that certain customers will be given the most advantageous price as anyone else the supplier does business with. For organizations with hundreds or even thousands of customers, someone would need to keep track of these agreements in order deconflict and ensure that prices are not offered that conflict with a negotiated MFC.

Creating Synergy

How a company chooses to handle these types of contract compliance issues depends on the structure of the company. In-house counsel should periodically review with the operational teams the status of longstanding contracts to ensure compliance, and it is beneficial for in-house counsel to be integrated into the corporate structure so they can be familiar with the organization, develop the relationships to effectively communicate the obligations that have been negotiated and push back on terms that are not operationally feasible.

The ideal legal department requires a synergy between legal and operations, making sure that lawyers are not just robotic rules analyzers but building the rapport and relationships to understand their client’s interest. This does not necessarily mean that lawyers need to be managing the operations of the company. But they should be consciously aware of where gaps may exist between contract terms and performance. Ultimately, contracts involve human performance and therefore as attorneys should not lose track of the human side of the contract review and compliance perspective.

NOTES

1. Kherani v. Patel, No. E202200983COAR3CV, 2023 WL 6307502, at *7 (Tenn. Ct. App. Sept. 28, 2023)
2. M & M Elec. Contractor Inc. v. Cumberland Elec. Membership Corp., 529 S.W.3d 413, 424 (Tenn. Ct. App. 2016)
3. Coy/Superior Team v. BNFL Inc., 174 F. App'x 901, 904 (6th Cir. 2006)

Alex Nicoll is general counsel and chief human resources officer for AESSEAL Inc. He previously served as associate general counsel at UCOR in Oak Ridge, contracts administration supervisor at Blue Cross Blue Shield of Tennessee, and also served active duty in the U.S. Marine Corps as a judge advocate (JAG). He is the current vice chair of TBA’s Corporate Counsel section. Nicholl is a graduate of Rhodes College and Louisiana State University Law School. He is licensed to practice law in Louisiana and is registered as in-house counsel in the state of Tennessee.