Negotiating an iron-clad contract

By on / Business Negotiations, Daily

Adapted from “Negotiating With a 900-Pound Gorilla,” by Lawrence Susskind (professor, Massachusetts Institute of Technology), first published in the Negotiation newsletter, February 2006.

Executives often leave the legal issues surrounding their deals to their attorneys. While this division of labor is often appropriate, negotiators can run into trouble without an awareness of the governing legal rules. Consider the following negotiation in which unfamiliarity with contract law led to major problems:

Jane was negotiating a multiyear supply agreement with Kevin, who eventually faxed a proposed contract to Jane. They discussed it over the phone and then Jane crossed out several provisions, signed it, and faxed it back to Kevin. After the fact, Kevin claimed he never agreed to Jane’s final edits and refused to deliver the goods on her terms. Did Kevin break the contract, or was there no contract to break?

Under basic principles of contract law, every deal must have an offer, an acceptance, and consideration (that is, each party must provide something of value to reach a deal). The mirror-image rule further states that the deal that the offeree accepts must be a mirror image of what the offeror has offered. Clearly, if Jane unilaterally edited terms and faxed the contract back to Kevin, no contract yet has been formed.

But Jane and Kevin discussed her proposed changes over the phone, and Jane made edits that she thought reflected their conversation. Can Kevin rightfully claim that he never agreed to the edits? Here the outcome is likely to be based on the evidence regarding their phone conversation. If Kevin and Jane both have notes indicating the same understanding of the modified terms and an “intent to be bound” to the contract, a court might decide that the faxed edits merely formalized a contract that already had been formed. But if written notes were ambiguous and if Kevin insists that Jane misunderstood their conversation, a court might find that there was no “meeting of the minds” and, therefore, no contract.

The implication for negotiators is that first, and most obviously, both parties should sign the contract to formally indicate their intention to be bound. When this can’t happen for logistical reasons, try to reduce ambiguity. At the end of their phone call, Jane might have said to Kevin: “We’ve got a deal, right? Let me change the contract to reflect our discussion and fax it back to you. Then your assistant can enter the changes, OK?” Without excellent documentation, you may be left without a deal.

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One Response to “Negotiating an iron-clad contract”

  1. miguel ortiz /

    What about the statute of frauds? In some jurisdictions certain agreements must be in writing to be enforcable even though the parties have verbally agreed to terms. Reply

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