After engaging in the complex process of business negotiation, business negotiators are often happy to pass off the technicalities of deal drafting to their attorneys. Unfortunately, this handoff is prone to errors. Vague, contradictory, and missing deal terms are not uncommon, and they can lead to serious problems during the implementation stage, according to Harvard Business School and Harvard Law School professor Guhan Subramanian. To negotiate business contracts that stand the test of time, dealmakers must learn to avoid common mistakes.
How Not to Negotiate Business Contracts: A Case Study
To see what can go wrong when we negotiate business contracts without thinking the contract language through carefully, it can be helpful to analyze win-lose negotiation examples and other negotiation case studies. Consider, for example, what happened when managers of a Boston-area daycare center negotiated with their board of directors for a change in the center’s policy, as recounted by Subramanian.
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The center was experiencing high midcontract turnover, which caused classroom disruptions and significant costs. The center’s policy held parents liable for monthly tuition only until a replacement child was found. Specifically, the contract read, “Deposit: This amount will be held until the end of the contract period, and may be used toward the final month’s tuition if the child’s enrollment is to be terminated.” Because a replacement was usually found quickly, parents received their deposit ($1,500–$2,000) and exited the contract at no cost.
To compensate for the center’s replacement costs, management and the board agreed to require parents to forfeit their deposit if they left the center midcontract, even if a replacement child was found immediately. The center’s managers asked their lawyers, members of a respected Boston-area law firm, to implement this policy for the next year’s contract. The lawyers drafted the following, changing only the final words of the clause: “Deposit: This amount will be held until the end of the contract period, and may be used toward the final month’s tuition if the child completes the contract.”
Sure enough, in the next school year, a child left midcontract, triggering the revised clause. The parents pointed out that the new language said nothing about whether they should get their deposit back. The center’s managers were puzzled. Had they not been clear enough with their lawyers? Their intended interpretation required reading the “if” in the new clause as “only if.” But this reading couldn’t be correct, either, as it would imply, for example, that parents wouldn’t get their deposit back if the center closed midyear.
The center’s managers returned to the drawing board. With help from students at Harvard Law School, they came up with the following: “Deposit: If the family decides to terminate the contract before the end of the contract period, the deposit will not be refunded. If the family successfully completes the contract, the deposit may be used toward the final month’s tuition.” A year after the policy change, the center finally got contractual language that reflected its intention.
Common Deal-Drafting Mistakes
This story illustrates several errors that often occur when we attempt to negotiate business contracts:
- Overreliance on boilerplate language. Mistakes and oversights often arise when inexperienced lawyers start working from a prior contract from their files and fail to make sufficient changes to boilerplate language.
- Poor communication between client and lawyers. A lack of coordination between the daycare center and its lawyers kept the terms from accurately reflecting the understanding the center had reached with its board. Negotiators often fail to adequately communicate the motivations and intentions of their deal to their lawyers, resulting in misunderstandings and accusations of bad faith negotiation.
- A rushed process. Errors are all the more common when negotiators and their attorneys are under pressure to wrap up a deal quickly.
3 Tips to Negotiate Business Contracts that Last
Fortunately, there are at least three ways to avoid such mistakes and reach a mutually beneficial agreement that lasts, according to Subramanian:
- Talk to your lawyers. In corporate negotiation and other business settings, communicate the motivations behind your deal to your legal team. This step keeps your lawyers from having to guess your intentions and thus could save you time and money in the long run.
- Read the fine print. Resist the common tendency to merely glance over deal documents and file them away. Instead, read them through carefully—including drafts and memos—to determine whether they accurately reflect the negotiated terms as you understand them.
- Double-check contract language. Set up a time for your lawyers to read the deal back to you in plain English, free of legal jargon. Ask questions about any potential ambiguities, and “stress test” hypothetical scenarios that could arise.
What other advice would you offer those seeking to negotiate business contracts that are durable over time?