Exiting the Business Arrangement – Plan for the “Divorce”

One of my clients contacted me in a rather agitated state after I had not heard from him in some time. A party for whom he was performing services was not satisfied with the final work product and was seeking recompense. My client agreed that exiting the business arrangement was for the best, and had offered to return a major portion of his fee in the form of a refund. He started drafting a short “settlement agreement” himself, but realized that he could not complete an effective document on his own.  Exiting the business arrangement required the agreement of the parties on several thorny issues, and my client realized that they had to be addressed and the agreements written into the document clearly and with a lot of care.

Illustrative Elements of the “Divorce”

  1. The first task that my client recognized was dividing the intellectual property (IP).  Translating the simple bullet points my client prepared into words that adequately delineated each party’s IP was a daunting task. How, for example, do you separate “specific color combinations” from “look and feel” in a legal document? It took me and the client time and a lot of back-and-forth before we were satisfied that our IP descriptions were crystal clear and defensible.
  2. The next item to address was the refund. There was a purely legal consideration here, but I had to explain it to the client well enough that he would seek counsel. The point I made was that the refund could be referred to as “liquidated damages”. Those words, I thought, might change the money into a negotiated settlement that the other side would accept in lieu of any other damages or legal action. That is how the section ended up being drafted.
  3. Finally, I realized that once the document was signed and the liquidated damages paid, the other party had to be prevented from maligning my client’s work or company – a provision critical to my client’s future business. We successfully negotiated this term.

The Lesson to Be Learned

Have you guessed where I am headed? Both parties would have been better off if the terms of exiting the business arrangement had been considered in advance and the terms placed in the original contract.

  • Defining what IP was to be owned by whom at each step in the process should have been a part of the initial agreement as it should be in every service agreement.
  • My client’s exposure could have been capped at what the other party had paid to date well before any gulf developed between the parties.
  • Both parties’ legal remedies in case of a split should have been agreed to before the document was executed and before emotions clouded the issue.

Perhaps not all of the terms of exiting the business arrangement discussed in this blog could have been covered in advance, but most could have, and that would have prevented a lot of stress, arguments, bad feelings and needless fees when the time came.

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