Contract Negotiation: Everything You Need to Know
Contract negotiation is a necessary part of drafting a legal agreement. 7 min read
Contract negotiation is a necessary part of drafting a legal agreement. Negotiating contract terms before a legal writing if no pre-existing terms or conditions have been established is a complex and difficult process. Contract agreements can be drawn up by attorneys or simply by way of email exchange between two business partners. If you work as a freelancer, chances are that you have negotiated terms before signing a contract. If legal writing of a contract is daunting, the art of negotiation itself is a learned skill that requires much practice. Once learned, the expert negotiator is a sought-after person, indeed.
Negotiation Comes Down to Risks and Revenues
Compromises between parties are common when forming a contract. If the parties to a contract make concessions, it is a way of ironing out differences with the details. Risks and revenues are the two main negotiating points to any business agreement.
The Business Side vs. the Legal Side of Negotiations
There are two distinct stages to contract negotiation: 1) business terms, followed by 2) legal terms.
When Is There an Enforceable Contract?
Under United States federal contract law, there is no contract until all material elements of the deal have been agreed upon. Negotiation enables the contract parties to reach agreement over the material details to include in the final contract. The outcome to a legal dispute will often depend on if any material elements of the deal persist.
Lawyers and Negotiation
Lawyers negotiate to resolve three potentially conflicting factors:
- Protection of clients by minimizing risks and maximizing revenue;
- Perform with duty to a reasonable standard of professional care, a contract rule element that in turn protects themselves from malpractice claims that would otherwise result from negligence;
- Retainer and other monetary incentives that are the rationale to client representation.
What's Your Negotiating Style?
The two most common styles are 1) Adversarial ("I dominate") or 2) Collaborative ("Together we prosper"). Expert negotiators depend on a collaborative negotiation focused on problem solving and mutually beneficial outcomes, sans emotional interactions, to achieve optimum results.
Bargaining Position: The "Take It or Leave It" Situation
The relative bargaining positions of the parties before, during, and after a contract negotiation are critical to both short-term and long-term impact. Unfair or unconscionable negotiations, where one party has more leverage, can often result in a demand for contract re-negotiation later.
Dominion is not the most effective or efficient method of creating the circumstance for win-win scenarios during contract formation. Certainty should not be clouded by chauvinism or unreasoned valuation of performance. Measures of market or legal limits allow for a logical negotiation based on quantifiable value rather than mysticism. The most productive negotiations may even include a walk-away period for thorough consideration of all terms laid on the bargaining table by both sides.
The Getting to Yes Approach
Arriving at an agreement or the "Getting to Yes" approach places emphasis on distance from conflicting issues so that consensus can be reached. Propose options and establish an ethically sound problem-solving environment.
Taking control of the meeting location, topics, timing, and pace of a negotiation can create advantages for whoever is leading the agenda.
Don’t rush it
The work behind a commitment is essential for extracting value from the relationship. Rushing negotiations is generally a mistake. The value that may emerge from thorough attention to detail is the payoff in the end. A stepwise approach to contract formation offers a method for guiding the negotiation process so that the discussion does not deviate from the targeted interests too often.
Prioritize, prioritize, prioritize
Revenue and risks are the two main priorities during business and legal contract negotiations. Of those two criteria, some risks and revenue generating sources are more of a priority than others. Avoid getting locked into negotiations that go nowhere in terms of profitable opportunities or legal solutions to problems.
Communicate with care and guard your emotions
Reinforcing an opponent during a negotiation is one of the strongest tactics for a win-win solution to a disagreement. A wise choice of words goes a long way. Poker faced with a good attitude is the style most used by expert negotiators. Tough but fair will inevitably pay off under even the most rigorous demands. Holding your own often entails a friendly smile, the facts, and clear vision of positive, possible outcomes.
Keep it professional
Lawyers and executive business negotiators are generally known for their composure during negotiations. Focusing on the “we” factor in speech rather than “I” places the collaborative relationship at the center of the table, rather than one-sided beliefs. Professional negotiators know how to make progress and reach agreement with a tone that is conducive to relaxed interaction: conversational, calm, and polite.
Break the negotiation into parts
Big projects require modular solutions. Similarly, a negotiation is somewhat like a team work strategy, negotiations must categorically discuss issues to create a constructive dialogue that will lead to diplomatic agreement. Negotiations disintegrate when parties take an "all or nothing" approach. Compartmentalizing challenges promotes reaching an agreement that is well-thought through and less likely to demand modification in the future.
The "offer-concession" strategy
Offering value-added concessions leaves the other party feeling they have won. Smart business executives offer concessions that are of no extra cost to their company. Packaging this “offer-concession” strategy in a value bundle appears like a gift, rather than something owed in a bargained for exchange where money is an object.
Question rather than demand
When difficult demands are solicited by a negotiator, it is time for their counterpart to ask questions. Buffer yourself against stubborn negotiators who insist that the bargain is exclusively a win-lose scenario.
Do your research
Attorney negotiators perform discovery research on a case in preparation for trial. Litigation discovery is similar to contract negotiation, in that the party with the most convincing material evidence wins the case. A written, rank-order list of priorities will provide a springboard from which to commence negotiation of your terms to the deal. In the business world, they say that “your walkaway price (or terms) should be your reservation price.” It is the target price that should be held out for.
Structuring deals takes knowledge
The art of negotiation is perhaps only exceeded in expertise by the art of structuring the deal. An attorney experienced at structuring contracts is probably the best source for information about structuring a negotiation into a workable agreement. Business executives practiced at both negotiation and contract formation are also well-educated professionals trained to gain from each opportunity, no matter how challenging the foray to contract.
Unconventional deal-structuring arrangements are of course some of the most challenging. Bridging the gap between what the offeror wants and what the offeree is willing to afford. Here we have the essence of contract: a bargained for exchange between parties (offeror, offeree) who mutually assent to performance on contract.
Do your research on the client
Review adverse case histories and former contracts of a client before signing an agreement. It is important to know the party you are negotiating with. Insights into a contracting partner’s former business and its structure, will inform the negotiation prior to contract.
Search for previous similar contracts
Prior art or similar contracts can assist in understanding the scope of the one in formation. Contribute to the construction of a contract undergoing negotiation wherever the attorney or preparer confirms that those ideas may be construed within the legal framework of the agreement.
The term “reasonable” is a legal element in contract law and tort law, and specifically the negligence rule, which is the basis to malpractice laws. Duty to a reasonable standard of professional care is essential for lawyers and financiers. Not surprisingly, reasonability is the foundation to negotiation, and more generally the precept to trust. A reasoned strategy is one that can be met through due diligence, implementation, and execution.
Negotiate from the position of a reasoned attorney, protecting your own interests, while adhering to rules of law, propriety, and established business practice. Staying open to unconventional solutions does not make a negotiator unreasonable.
Don’t be afraid to negotiate
The biggest mistake people make in negotiating is not negotiating.
Deadlines and other factors can be negotiated upfront — or after a contract is underway if both partners have assented to the discussion. Be open minded to details which are the substance of many agreements.
Always start with a term sheet
Term sheets are an overview of the negotiation agenda, and they serve to frame the contract.
Not every contract needs to be signed
Some business negotiations are not worth the time or potential loss. Know when to close and walk away to better options.
Set the precedent
Bargaining skill sets the pace for an esteemed interaction. Do not doubt the positive reinforcement that setting precedent as a good faith negotiation partner might have on the confidence of a partner and their loyalty to you in the shared formation of a contract.
Know when you need a signed piece of paper… and when you don’t.
Signatures make an agreement a vital document for the life of the contract or as defined by the terms and conditions laid forth during a negotiation. Oral agreements are legally binding contracts, but they are far more difficult to enforce. Modifications are perhaps easier by word of mouth, yet they require mutual assent and are obviously more reliable in writing.
Back up your claims
A portfolio of previous clients, prior work, or data reporting of results demonstrates that a negotiator has the moxie that performance on contract will demand. Confidence in skill, or adequate resource, is the surest method of backing up claims.
Don’t hesitate to pick up the phone
If communication seems to be faltering, take direct action by addressing the issue before negotiation breaks down. Pick up the phone to sustain some distance from a counterpart during a negotiation period, yet do not be afraid to walk away completely if the situation continues to deteriorate.
It’s not about winning or losing
Contract negotiation is about arriving at an agreement. Mutual assent implies trust. Once the negotiation is over and the contract begins, it is about performance. Stay true to your commitment, and be flexible if modifications prove to be necessary.
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