While hammering out an agreement during negotiation, a mid-level manager offered a customer a significant price discount. When the discount failed to materialize, the customer sued. In response, company representatives argued that the manager did not have the authority to offer the discount. Who is right?
Many negotiation experts, including Roger Fisher, William Ury, and Bruce Patton in their seminal book Getting to Yes: Negotiating Agreement Without Giving In (2nd ed., Penguin, 1991), recommend clarifying your counterpart’s authority to make a commitment before negotiating the substance of the deal.
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This strategy heads off a common tactic: your counterpart reveals at the end of talks that she needs approval from “upstairs” and then returns to demand additional concessions. Clarifying your counterpart’s authority makes good legal sense, too. Without necessary assurances, you may find yourself negotiating with someone who cannot “bind” the party she represents to a contract.
A court often will consider the authority that an organization has given to its agent as a key factor in determining whether the agent can bind the organization to the deal. Specifically, basic contract law states that an agent—for our purposes, someone who negotiates on behalf of an organization—is able to bind the organization to a contract when the organization actually bestowed such authority or if the subject matter of the deal is “incidental to transactions which the agent is authorized to conduct” and “the other party reasonably believes that the agent is authorized to do them.”
Suppose that Dan, manager of truck-stop marketing for a major U.S. oil company, agreed to provide the owners of a truck stop with a one-cent-per-gallon discount on the cost of gasoline in perpetuity and a $100,000 loan if they agreed to build a motel next to the truck stop. The owners received the loan and built the motel, but the gasoline discount never materialized. They sued the oil company, which claimed that Dan didn’t have authority to offer any type of discount.
The CEO or marketing VP of Dan’s company probably had the authority to offer the truck-stop owners the gasoline discount. Whether Dan could make such a deal is a closer call. (In the actual case, Nogales Service Center v. Atlantic Richfield, the question was dismissed on a procedural point.)
Clarifying your counterpart’s authority in advance not only makes you less susceptible to the “Let me get back to you” ploy, but also ensures you won’t reach a deal that your counterpart has no authority to make. There’s a further implication for organizations. Clearly delineating the authority of those in your organization, perhaps through their official titles, will help prevent “loose cannon” employees from negotiating contracts outside their purview.
Adapted from “Contracts 101: What Every Negotiator Should Know about Contract and Agency Law” by Guhan Subramanian (professor, Harvard Business School and Harvard Law School), first published in the Negotiation newsletter, February 2006.