What are business negotiators responsible for in contract negotiation? Many would say they’re in charge of building relationships and new business, crafting creative solutions, and fighting for the best deal possible. Few, however, would say they’re responsible for ensuring that the deal holds up well over time.
That’s unfortunate, because when business negotiators don’t devote enough attention to ensuring that they’re devising a sound long-term deal, broken contracts, damaged relationships, and lawsuits are a common outcome.
Don’t sign a contract riddled with loopholes. The following five contract negotiation tips will greatly enhance your business negotiation skills by ensuring that you develop agreements that are thorough, clear, and fully enforceable.
1. Confirm Your Counterpart’s Mandate to Negotiate.
Have you ever reached an agreement in a business negotiation, only to have the other party tell you they need to “kick it upstairs” to their boss? Not surprisingly, they often return with the news that their boss is insisting on new concessions.
To avoid this tired contract negotiation tactic, ask your counterpart before you negotiate to clarify her ability to make a commitment on behalf of her organization. Clarifying the other party’s negotiating authority could pay off if the deal ever ends up in court and if the other side argues that its negotiator did not have the necessary authority to bind her organization to a deal. You should also confirm your own mandate to negotiate in your organization before a contract negotiation begins.
2. Try a Contingent Contract.
Imagine you’re negotiating with a contractor over a building project. The contractor insists he can complete the project in six months, but you’re skeptical. How can you reach a deal without potentially being disappointed by a delay?
By writing a contingent contract into your deal—basically, a bet that’s based on your different predictions. For example, you could ask the contractor to accept a substantial discount if he doesn’t finish the work on time. If his time estimate is honest, he should be willing to take the bet.
Contingent contracts allow parties to reach agreement by managing uncertainty about the future. Just make sure that the penalties (or rewards) you propose are prohibitive (or enticing) enough that they’ll motivate the other party to stay on target.
3. Prepare for Possible Noncompliance.
During contract negotiation, wise negotiators prepare for the possibility of a contract breach. First, you might agree—in writing—to meet regularly to review your progress during the life of the contract, suggests professor Lawrence Susskind of the Massachusetts Institute of Technology. This could give you the opportunity to nip potential problems in the bud while also strengthening your relationship. Second, Susskind advises you to write dispute-resolution clauses into your contract. You might head off costly litigation by requiring parties to engage in mediation or arbitration before filing any lawsuits.
4. Seek Firm Commitments.
Judges seek to establish each side’s intent to be bound to a contract by examining the concreteness of deal terms and the extent to which important issues remain unresolved.
But these days, we often rush through contract negotiations via email, fax, text, and phone. Even when agreements are signed, they may be nonbinding due to poor documentation.
For this reason, whenever possible, you and your counterpart should both sign a formal, binding contract. Eliminate ambiguity by taking thorough notes during phone calls and meetings, and retaining as much documentation as possible. After the flurry of messages, meetings, and calls ends, ask your counterpart to confirm that you have indeed reached a deal that satisfies you both and to copy you on final versions of contracts and other documents.
5. Communicate Closely with Lawyers.
After a contract negotiation, professionals often rely on their lawyers to draw up the official contract. Unfortunately, miscommunication between negotiators and lawyers often leads to costly mistakes. Contract terms may not accurately represent the agreement; key deal terms could be missing; or clauses might be contradictory.
The best negotiators in business ensure that their contract accurately reflects both sides’ understanding of the deal. To do so, follow these guidelines from Harvard professor Guhan Subramanian.
First, share the motivations behind the deal with your lawyer. When a lawyer understands the purpose of your contract, mistakes are less likely.
Second, take time to read the completed contract yourself. Encourage your counterpart to read it carefully as well and then discuss any areas of confusion with your lawyers.
Third, ask your lawyer to read the contract back to you in “plain English.” Ask follow-up “What if?” questions that probe the boundaries of deal conditions to make sure you’ve covered all the bases.
What other tips do you have for effective contract negotiation?