Be Cautious When Tempted to Leverage Another into an Agreement

Sometimes, when business people can’t directly negotiate (or re-negotiate) favorable deal terms, they are tempted to withhold a payment or some other obligation in an effort to leverage the other party into an agreement it otherwise would not make.  In-house counsel should be wary of endorsing such conduct, as this could result in exposing their companies to liability going far beyond simply having to lose face and/or doing what they should have done in the first place.  Take, for example, the following scenario:

Acme engaged Alpha as its exclusive manufacturer for widgets and gidgets for two years.  Four months later, Acme tries to negotiate a similar deal with Beta to manufacture didgets, and, if consummated, such a deal would provide Acme with ten times the revenue that the Alpha contract was expected to provide.  While Beta expresses interest, it eventually makes clear that unless it also can manufacture gidgets, there will be no deal.  While Acme tries to buy out of the gidget portion of the Alpha contract so that Acme can give Beta what it wants, Alpha refuses.  Acme’s CEO realizes that the Beta deal is going to fall apart if something does not change quickly, so she tells her in-house counsel, “Alpha is sure to agree to a buy-out if we say that we will delay payments for products Alpha has already shipped.  After all, if those payments are delayed, Alpha will default on its bank loans.  Even if Alpha tries to sue, the worst that happens is that we may have to pay what we owe and maybe a little interest.”

Following through on such a strategy, however, could subject Acme to much greater liability than its CEO anticipates.  As an initial matter, Drucker v. Roland Wm. Jutras Assocs. tells us that conduct having “the effect of destroying or injuring the right of the other party to receive the fruits of the contract …” is a breach of the covenant of good faith and fair dealing. 

Even worse than this, under Massachusetts law, business conduct that is “in disregard of known contractual arrangements” and intended to secure benefits for the breaching party, also constitutes unfair acts or practices in violation of M.G.L. c. 93A.  Wang Laboratories, Inc. v. Business Incentives, Inc., 398 Mass. 854, 857 (1986)Further, not only does a violation of Chapter 93A require the offending party to pay legal fees, but the victim of a knowing or willful violation of Chapter 93A “is entitled to multiple damages (not more than treble and not less than double damages) ….”  Anthony’s Pier Four, Inc. v. HBC Assocs., 411 Mass. 451, 474 (1991)

While I am all for exercising leverage in order to resolve a dispute on terms favorable to your client, the ramifications can be costly if generating leverage amounts to commercial extortion.  Accordingly, in-house counsel should carefully evaluate the risk that generating leverage could be deemed deceptive or unfair, and consult with an experienced litigator if they remain unsure.