Contract negotiations can be tough, whether or not you have a skilled corporate attorney to assist you with the process. In any case, here are some strategies that can help you whenever you’re negotiating an agreement, particularly if it’s critical to your business. Note that you can use this resource in conjunction with Nolo’s article Contract Negotiation: 11 Strategies, which also offers valuable tips on this subject.
Before negotiating an important or complex contract, you and the other party should ideally begin with a term sheet or letter of intent (LOI). These are typically short, non-binding agreements that reflect the parties’ principal understandings. While attorneys have a more formal methodology for drafting terms sheets and LOIs, you can put together your own document by reviewing Nolo’s How to Draft a Letter Agreement or an MOU. Your term sheet can even be something as simple as an email exchanged between the parties that lists all of the agreed-upon deal points.
Starting a complex negotiation with a term sheet or LOI has many benefits. You and the other party can usually work out the main business points of the transaction directly, with little or no lawyer input. This can save you the time and expense of prematurely involving your attorneys, who are incentivized to insert themselves in the process to generate fees. Also, as you and the counterparty haggle over the term sheet, you might reach the conclusion that you can’t agree on critical issues and ultimately decide to walk away from the transaction. Even this unfortunate result would have saved you the trouble of futilely diving into the main agreement. In any case, if the parties can sign a term sheet or LOI ahead of time, it can serve as an important roadmap for moving forward with the definitive agreement.
More than likely, your contract will not start from scratch. It will be based on an existing document that one party uses to prepare a first draft of the agreement. This party will then present the proposed draft to the other party. It’s a general rule of thumb that the person who insists on producing the initial draft of an agreement starts with a built-in advantage for the future negotiations. Having the right to prepare the preliminary draft of the agreement allows you to take control of the deal process in a number of ways.
You and your team can draft the document as favorable to your interests as possible. This places the burden on the counterparty to identify any contract term that they disagree with and then try to move you off of your position. From your perspective, any issues that the counterparty overlooks or fails to raise is an automatic win. Controlling the document also means that when you and the other party agree to a concept, whether verbally or in writing, you’ll have the right to construct the legal language of the contract in a way that is most satisfactory to you. Furthermore, having the ability to manage the agreement also means that you can manipulate the progress and timing of the transaction. When changes need to be made to the document, if you want to slow things down, you can delay circulating a revised version; if you want to speed things up, you can quickly distribute the updated document, which puts the ball back in their court and demonstrates urgency.
Note, however, that having the right to produce the initial draft of the contract does come with one primary risk. You should always remember that it’s often challenging to have the counterparty agree to concessions in your favor if you’ve failed to include those terms from the outset. As such, you should be conscientious about including all of your “deal breakers,” “must haves,” and “would-like-to-haves” in the first iteration of the document.
In the event that you aren’t using an attorney to prepare your contract, you can find form documents using numerous Nolo resources, including Legal Forms for Starting & Running a Small Business.
The negotiation process can last anywhere from hours, to weeks, to months, in some cases. Regardless, you should always be mindful of recognizing issues that you could reasonably argue as being deal necessities, but you privately care little or nothing about (mock concessions). You should keep a running list of these items so that you can use them as superficial bargaining chips when you want a compromise from the other party in return. You should hold on to these mock concessions for as long as possible and use them strategically. Obviously, the key is to not signal to the other party that you’re actually quite flexible or indifferent regarding these issues. If you’re not careful in your approach, you run the risk of showing your hand by seeming disingenuous or unreasonable.
Any valid contract will include one or more obligations that you must fulfill. With respect to each of these commitments, you should always consider whether you can limit or hedge your responsibilities by adding certain qualifiers. For instance, if the contract requires you to reimburse the other party for particular expenses, then it should stipulate that those expenses must be “reasonable” or “commercially reasonable.” Similarly, you can also qualify your obligations by stating that you’ll use your “best efforts” or “commercially reasonable best efforts” to satisfy them.
While these terms might seem a bit amorphous, their use incrementally increases the counterparty’s burden of proving that you’ve failed to perform (which, in turn, lessens your chances of breaching the contract). Furthermore, if you receive any pushback to reasonableness language, your best retort is to simply ask the other party whether or not they plan on being unreasonable.
For matters that you consider to be very important, or even deal breakers, you should calmly and earnestly explain your reasons why to the other party. Use real world examples of either how this issue has affected you in the past, or how you could see it affecting you in the future. The more you can illuminate and justify your concerns, the more likely they will see you as reasonable and be willing to relent to some degree.
Sometimes you find yourself extremely close to finalizing an agreement, and there are only a handful of open issues left. Negotiations have been lengthy and exhausting, and the parties just want to call it quits. However, one option you can implement to give both parties needed relief is to table the remaining handful of open issues. This means that the agreement will specifically describe the open issues and indicate that the parties will resolve them in good faith at a later date. These provisions of the contract can also specify any aspects of the open issues that are undisputed between the parties. The terms can further provide that once the open issues are resolved, the parties will either amend or supplement the definitive agreement accordingly (see How to Effectively Use Schedules, Exhibits, and Addendums in Your Contracts). This approach becomes especially palatable when the parties want to quit wrangling and simply get a final document signed so that they can retreat to their corners and begin performing under the contract.
You can negotiate through various means, whether it be in person, over the phone, via email, or any combination of the foregoing. Regardless, if your efforts are reaching an impasse, or are becoming too draining, often the best way to compel a conclusion is for each party to dedicate themselves to congregating in the same room (together with their legal counsel and all other essential parties) for as long as it takes to reach a final resolution. If both sides honor that commitment, it can be a powerful tool to get the agreement over the last hump and finished quickly. In situations like this, I would tell opposing counsel that, “If we have to, we’re just going to sit in this room and stare at each other all day until this thing gets done.” And it always did.