Adapted from “When You Hold All the Cards,” by Guhan Subramanian (professor, Harvard Business School and Harvard Law School), first published in the Negotiation newsletter.
Being the more powerful party in a negotiation doesn’t guarantee a free ride. Specifically, legal rules may constrain your actions. In particular, the courts might read additional terms into the deal that favor your counterpart even if neither party considered these terms when signing the deal.
Consider the famous case of the Page brothers—let’s call them “Big Page” and “Little Page” for simplicity—who started a linen supply business in Santa Maria, Calif., in the late 1940s. Big Page was the brains of the operation; Little Page supplied equal capital but deferred to his older brother’s expertise. Business was slow for several years, and the partnership lost money. Then, an exciting announcement: the Vandenberg Air Force Base was going to be built near Santa Maria. Inevitably, this would be a boon for Page & Page’s linen services.
Just when they were about to hit it big, Big Page decided to dissolve the partnership and go it alone. While the resulting rift between the brothers was unfortunate, Big Page felt he had a right to walk away from the partnership. But a California trial court disagreed with his reading of the deal, instead ruling that an implied term in the partnership agreement prevented Big Page from dissolving the partnership until it had become profitable. The California Supreme Court reversed the trial court’s ruling but similarly held that Big Page’s right to dissolve the partnership was constrained by his fiduciary duty to his little brother.
One might argue that Big Page would never have formed the partnership in the first place if he didn’t have the right to walk away at a moment’s notice. But both the trial court and the California Supreme Court nevertheless saw fit to protect the weaker party from the one holding all the cards.
When negotiating a contract, keep in mind that the courts can deploy malleable concepts such as implied terms and fiduciary duties with substantial discretion. You can minimize this discretion by thinking through contingencies and by making concepts such as “walk away rights” explicit—as Big Page would have been wise to consider in his initial agreement with his brother.