Dear Negotiation Coach: What Happens When a Business Contract Falls Apart?

What should you do if a signed business contract falls apart? Find out if legal action or renegotiation is a better choice.

By — on / Business Negotiations

business contract

We recently received a question from a reader regarding a business contract conflict. Robert Mnookin, Williston Professor of Law at Harvard Law School, chair of the Program on Negotiation, and author of Bargaining with the Devil: When to Negotiate, When to Fight (Simon & Schuster, 2010), explains that you may have more options than it might initially seem.

Claim your FREE copy: Business Negotiation Strategies: How to Negotiate Better Business Deals

Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.

Q: I own a venture-financed high-tech firm. We are facing a serious business contract conflict with one of our partners, a much larger Swiss company that distributes, in Europe, a product based on our patented technology. Our five-year license agreement gives us a flat royalty rate of 20% of its sales and gives the Swiss company exclusive European rights to our technology. Two years into our contract, they now claim that the 20% rate is “much too high” and that they can license a competing technology for a 10% fee. They want me to come to Geneva to renegotiate. I’m furious! A deal’s a deal, right?

What to do when a signed business contract looks like it may fall apart

A: Situations such as this provoke strong emotions that can hinder clear thinking. You’re angry, and part of you probably wants to end the relationship and sue. But you may also be fearful of how this conflict will affect your company, and that fear could drive you toward an unwise compromise.

Rather than letting your emotions guide the decision, systematically think through the benefits and costs of alternative courses of action. When considering business contract negotiations with a devil—a partner who has betrayed you—you will need to explore your alternatives to negotiating, your interests and those of your adversary, the potential negotiated outcomes, the costs of negotiating (financial and otherwise), and implementation challenges.

Focusing here on alternatives, your exploration has two dimensions: a legal one and a business one.

1. The legal dimension: Opportunities and risks. If you and the Swiss company go to court, what are the opportunities and risks for both parties? To answer this question, you need to explore with a good lawyer the potential benefits and costs of litigation.

Here are just a few questions to consider: If the Swiss company stops distributing your product, can you sue for damages? Can you stop distribution of the substitute product? Under your license agreement, what rights, if any, does the Swiss company have to terminate your business contract and distribute competing products? What are your chances of prevailing in court? Where would be the best place to sue? What would be the range of costs, both in terms of dollars and time?

What you learn from your lawyer would be highly relevant to an assessment of your adversary’s legal alternatives as well. Indeed, one advantage of negotiating is that you would have the chance to persuade the other side (and its lawyer) that it faces a substantial legal risk if you end up suing.

2. The business dimension: Your alternatives and theirs. The business dimension involves exploring a question that an outside lawyer typically cannot answer: If the joint venture ends, how can you distribute your product in Europe? What other firms could do the job? Could you develop your own sales force? As part of your preparation, you should explore and, if possible, improve these alternatives.

Also consider the business dimensions of the Swiss company’s alternatives. Is there really another product that would be a good substitute for your product? If so, would it infringe on your intellectual-property rights? Would the license fee really be less than yours? Through negotiation, you may learn important new information about the nature of this competing product and its pricing.

After this type of analysis, my hunch is that you will choose to negotiate a new business contract rather than go to court, especially if it appears that any number of negotiated deals involving some modification of the license agreement would better serve both parties’ interests than litigation. For example, a new deal might involve tiered license fees with a percentage that declines as sales increase. Even if your negotiation doesn’t succeed, litigation remains an alternative.

Have you encountered similar situations where you had to reassess a standing business contract?

The Program on Negotiation at Harvard Law School
501 Pound Hall
1563 Massachusetts Avenue
Cambridge, Massachusetts 02138
tel 1-800-391-8629
tel (if calling from outside the U.S.) +1-301-528-2676
fax 617-495-7818