By Bushra F. Khan
Assistant County Attorney in Montgomery County
“My client will never agree to this provision!” roars a vendor’s in-house counsel during yet another tediously prolonged and animated procurement negotiation. I inwardly debate whether I should question opposing counsel or my life choices, and I decide that the former might elicit a more satisfactory and faster response. So, with a deep and resigned intake of breath, I proceed to ask why said client would never agree and how I might reassure all concerned that this provision is actually quite necessary.
I have found that such protests are more common from vendors or other contracting parties who are generally used to dealing with private entities as opposed to government bodies. So, in addition to investing in noise-reducing earbuds, below are a few contract negotiation tips for my fellow civil practitioners to tackle some predictable arguments.
Pre-negotiation stage
Whether a contract involves purchase of goods and services from a private entity or is an interlocal agreement (ILA) memorializing an exchange of governmental functions and services, it is critical to understand the goals of our own departmental client. Generally, in counties where the governing body has designated a purchasing agent, the Purchasing department acts as central hub for processing other departments’ procurement matters. Essentially then, for potential procurement contracts, the concerned clients are often both Purchasing and the initiating department, e.g., a precinct, risk management, IT, etc., making it a necessity to understand the need and limitations of both. With ILAs, the particular department that desires a contractual relationship with another government entity will typically be the point of contact for operational and fiscal details in the contract (as governmental functions are concerned). However, because an ILA will eventually need approval of the political subdivision’s governing body, from an advisory standpoint, an awareness of that body’s broader policy inclinations is highly recommended.
To that end, a contract received from another entity should be read to confirm its factual relevance to current circumstances and aims before embarking on its full legal review,[1] as it may not actually reflect what our clients want to achieve. It might employ inapplicable or incorrect boilerplate terms, e.g., sale terms when our clients are seeking lease terms, or it might have been drafted for an entirely different purpose and sent over in a hurry without addressing present needs. In such an event, you might wish to discuss this preliminary issue with the other party to get a corrected or redrafted document sent over as soon as possible. Or, if the problematic areas are minimal and in the interest of efficiency, you might adjust and redline the agreement yourself to address both current aims and all legal concerns, then send it back for the vendor’s review.
For certain routine service-related agreements, such as engineering, architectural, and professional services, and for ILAs that are significantly detailed, it might be beneficial to draft the agreement in its entirety simply to better articulate the desired terms and to minimize back and forth between you and the vendor or other government entity. In the process of this back and forth, to the extent opposing counsel’s changes are reasonable and compliant with the client’s needs as well as state law, it is often preferable to accept such changes without argument. There is really no need to die on an unnecessary (or absurd) hill.
When you respond to proposed changes that you feel cannot be accepted, explaining the exact legal or factual rationale for your rejection (via comments on the side) is usually very helpful. Half the battle in contractual negotiations is communicating each other’s point of view and clarifying to the other party why a certain provision is acceptable, or otherwise. “Because I said so,” although highly tempting to throw back, may not be effective.
From a documentary exchange standpoint, unless the agreement or its attachments require special encryption or other authentication-related steps by law prior to sending, it is generally appreciated by all concerned that the document is sent over in a fully accessible format. A Word document that allows insertion of comments and tracked changes is ideal, but in a time crunch, an editable PDF or Google Docs file may also be workable, depending on the type of software options available to you and your clients. A password-locked file or any cumbersome format that hides comments or—worse—entirely disallows changes or comments can be quite irksome and often creates unnecessary angst prior to a negotiation. If you are on the receiving end of such documents, you should request an unlocked file or the ability to insert your desired and attached terms.
Assuming that both sides have peacefully gone through one or more rounds of redlined changes, each accepting and rejecting the other’s proposed terms, a documentary impasse may eventually be reached, and at that point, the first negotiation meeting or conference call has to be arranged. Quick accommodation of all reasonable scheduling requests from the other entity and one’s own clients, who might desire to be present for the meeting, can go a long way toward setting the foundation for a productive discussion. I have found the post-lunch lull to be an ideal time to schedule meetings, as even the feistiest of attorneys is likely to be more accommodating on a full stomach. Sometimes clients wish to be a part of every negotiation, especially when a contract has a high-dollar value or is technical in nature, and at others times, they would rather you handled all aspects of the deal. Based primarily on your client’s express direction, which should be confirmed in advance, you can determine the list of individuals who are necessary to include in the meeting invitation.
Negotiation stage
If an agreement has reached the negotiation stage, it is a promising development—but at the same time, it also means that the uphill battle has just begun. It is therefore imperative that one enters the meeting with an open mind and a complete grasp of every item that is to be discussed.
A negotiation may take place in person but in the current climate, it’s more likely to happen via video call or conference call. If the items to be discussed are relatively few and straightforward, a conference call may suffice, but if there are numerous contentious issues (or the discussed changes are potentially complex with regard to phrasing), a video call with shared screen to view the contract is preferable. In all instances, going line by line over the redlined changes in the last disputed draft, as opposed to a generalized discussion, is usually my preferred approach as it ensures that all items of concern are adequately discussed. It also allows for an exchange of ideas in relation to each such item, sometimes revealing additional issues or options not previously considered by either party. If both sides cannot immediately come to a consensus on a certain term, it is best to move on to the next redlined change with the caveat that you’ll return to the previously discussed term later in the meeting. Perhaps further into the meeting the parties might appreciate perspectives not considered earlier.
With private entities or vendors especially, some frequently encountered areas of conflict that evade initial resolution through track changes, and necessitate discussion, involve:
• termination clauses (for cause and for convenience),
• recourse options for non-performance or deficient performance, including damages for breach,
• interest calculation,
• available days for payment,
• the vendor’s ability to assign an agreement,
• confidentiality of documents, and
• the non-appropriation clause.
Termination clauses. These are disputed, of course, because vendors (and even other government entities when ILAs are involved) do not typically desire a mid-term termination, while our client might want the ability to terminate both for cause (for example, because goods or services were not delivered according to the agreement’s provisions) or for convenience (for example, when a change in the governing body triggers a change in policy). It is important to bear in mind that if federal grant money is intended to be used at any point to fund a procurement or to fund arrangements under an interlocal agreement, whether in whole or in part, these termination clauses are mandatory. Appendix II to 2 CFR Part 200 of the Code of Federal Regulations[2] requires that all federal grant-funded contracts in excess of $10,000 address termination for cause and for convenience by the non-federal entity, including the manner by which such will be effected and the basis for settlement. Many governmental procurements and ILAs end up utilizing federal grant monies, sometimes initially and sometimes midway through the term of an agreement, so this issue may need to be argued with opposing counsel at the outset with statutory backing.
On a separate note, if our client is the entity directly in receipt of grant monies from a state or federal agency, the other contracting entity may be required to agree to all applicable terms of that grant as part of the agreement.
Recourse options. In vendor-drafted agreements, a government entity’s recourse options for non-performance or deficient performance are often limited and occasionally missing altogether. More often, a troubling provision is included that restricts the ability of a government client to terminate for cause or limits the amount of damages for which the vendor could be held liable in the event of a breach. This issue, if applicable to a negotiation, should be discussed in detail with our client prior to laying out the desired terms to opposing counsel. Potentially, our client might wish to retain the option to terminate the agreement or terminate along with a specified amount of liquidated damages only if adverse consequences of a breach cannot be easily quantified. If the aim is to reach an amenable resolution to such a debated contractual term, imposition of onerous amounts of damages on a vendor may not achieve such resolution and should be avoided, but at a bare minimum, the ability to terminate for cause ought to be retained.
Interest rates and days for payment. Privately drafted agreements often include high or varied interest rates for overdue payments, and a potential way to tackle them is to replace such terms with a provision whereby the calculation of interest is compliant with Chapter 2251 of the Texas Government Code. This curtails or avoids an argument over an exact interest rate at the time of negotiation.
Chapter 2251 also mandates the “net 30” payment term, as opposed to a lesser duration frequently found in private entity agreements. A 30-day allowance to pay is critical because local government bodies typically meet no more than two to three times each month. That, combined with mailing time for the check, may exceed a shorter-than-30-days’ allowance, so a “net 30” term in the agreement is preferable.
Assignments. Private vendor agreements often contain a blanket provision that a vendor’s performance can be assigned to another entity without restriction. This unrestricted assignment may be countered with state and federal debarment and restricting regulations that would prohibit agreements with certain companies which cannot be contracted with by law and/or have been expressly suspended or debarred under lists maintained by the State Comptroller and under federal compliance and procurement rules. A contract couldn’t be sustained if such an entity were to take over as the assignee of the agreement. Therefore, notice and approval requirements need to be negotiated into any assignment terms, along with a requirement for a future amendment, should an approved assignment eventually take place.
Confidentiality of contract documents. I have found that it is frequently important to vendors to protect the whole agreement, its pricing attachments, and its trade-sensitive attachments from public disclosure. In such instances, it is helpful to evaluate with opposing counsel the exact items the vendor or private entity wants to be kept confidential and whether it is even practically possible, for example, because certain terms are already part of a Request for Proposal or a Texas DIR (Department of Information Resources) cooperative contract and previously made public. Because of our client’s potential obligations under Chapter 552 of the Government Code, “to the extent allowed by the Texas Public Information Act and associated regulations” is a useful compromise to offer when the argument gets heated.
Non-appropriation clause. Surprisingly, this is perhaps the most argued provision by vendors’ counsel. The idea that the governing body of a city or county[3] can fail to appropriate funds in the budget of any upcoming fiscal year (when an agreement term exceeds a year) and can terminate the agreement without incurring a breach is still incomprehensible to many private entities who are unfamiliar with government clients. Frequently, such vendors attempt to insert penalties and damages within a non-appropriation clause, essentially treating it as a breach. We must strongly argue against a deviation from legal requirements because the very basis of this clause and its mandatory inclusion is constitutional authority and statute. Art. XI §7 of the Texas Constitution requires the parties to “lawfully and reasonably contemplate when the contract is made that the obligation will be satisfied out of current revenues for the year, or out of some fund then within the immediate control of the governmental unit.”[4] Moreover, “A contract which violates these constitutional provisions is void.”[5]
In my view, the non-appropriation clause may need the most attention in a negotiation and could be the pivotal issue where you take a firm stand. Having said that, in the interest of reaching a deal, a possible olive branch to offer is a longer notice period preceding a termination for non-appropriation, perhaps the maximum period you feel the budget process allows for each year prior to the end of the government entity’s fiscal year. This may afford the vendor a reasonable opportunity to find another (replacement) client before the contract terminates. Eventually, most vendors see reason and accept the term, but in the event there is some lingering resistance, I have found that reluctantly offering a (client pre-approved) incentive to the vendor in another, perhaps less impactful, aspect of the contract just might be enough to sweeten and seal the deal.
Post-negotiation stage
If opposing counsel is even halfway reasonable, after learning the rationale behind our arguments, a livable compromise can generally be reached by both parties. At this point you or opposing counsel may offer to memorialize the discussed changes, leaving only the final review to be completed by both sides. Of course, if the other side refuses all reasonable requests and completely disregards statutory arguments, it would be prudent to advise our client of these developments, as well as the legality or otherwise of the contractual documents currently at hand, and await further direction.
Conclusion
Negotiations are rarely simple, but negotiation of government contracts requires knowledge of governing state and federal laws in relation to each contended provision—and a supremely calm mindset throughout.
Maybe, if all goes well, opposing counsel will eventually roar (or squeak): “My client will agree to this provision.”
Endnotes
[1] Tips on legal review of contractual terms are discussed further in “The civil approach to confronting a government contract,” by Amy Davidson and Bushra F. Khan, published in The Texas Prosecutor, January–February 2023 issue, available at www.tdcaa.com/journal/the-civil-approach-to-confronting-a-government-contract.
[2] 2 CFR Part 200 of the Code of Federal Regulations is also referred to as Uniform Guidance for Federal Awards.
[3] See Art. XI §7 of the Texas Constitution and Texas Local Gov’t Code §271.903.
[4] McNeill v. City of Waco, 33 S.W. 322, 324 (Tex. 1895), as cited in Tex. Att’y Gen. Op. No. GA-0652 (2008).
[5] City-County Solid Waste Control Bd. v. Capital City Leasing, Inc., 813 S.W.2d 705, 707 (Tex. App.—Austin 1991, writ denied), as cited in Tex. Att’y Gen. Op. No. GA-0652 (2008).