Contract Negotiations: Before You Sign on the Dotted Line

How to write a contract and contract negotiations in commercial transactions can be sources of strength in a relationship or a pivot upon which negotiated agreements fall apart - here is some negotiation advice for writing contracts and creating sustainable negotiated agreements

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contract negotiations before you sign on the dotted line

Contract Negotiation: Building Sustainable Negotiated Agreements

When times are tight, contracts are often broken. These days, parties on both sides of sales agreements are struggling to fulfill their promises, and contract workers are having trouble getting paid by their employers.

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The result? Damaged relationships, lost business, and lawsuits. When you do manage to find new business partners in this climate, it can be tempting to rush through the contract-drafting process, file the document away quickly, and roll up your sleeves.

Not so fast. In our era of broken promises, you cannot afford to sign a contract riddled with loopholes that could trip you up in court. By following the five steps outlined here, you will be well equipped to develop agreements that are thorough, clear, and fully enforceable.

Contract Negotiations: Negotiation Strategies for Building Sustainable Negotiated Agreements

1. Confirm your counterpart’s negotiating authority.

For many negotiators, it’s an all-too-familiar scenario: you reach an agreement with someone and then she says she has to “kick it upstairs” to her boss. Predictably, when she comes back to the table, she tells you her boss is insisting on new concessions.

You can head off this tired tactic by asking 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. Suppose the other side argues that its negotiator did not have the necessary authority to bind her organization to a deal. If a court agrees, your agreement could be invalidated.

For these reasons, you should not only check your counterpart’s authority with her organization but also carefully delineate negotiating authority in your own organization before getting down to business.

2. Build carrots and sticks into the contract.

Imagine that a home contractor insists his team will be able to finish renovating your kitchen within two months. You are skeptical of this claim, given that other contractors have said the work would take much longer.

How can you and the contractor manage your legitimate differences of opinion about the future?

In negotiation, our experts have advocated the value of resolving such impasses by writing a contingent contract into your deal.

By placing bets on your different predictions, you and the other side can effectively account for uncertainty. For example, you could ask the contractor to agree to a price reduction in the event that he doesn’t finish the work on time.

If he sincerely believes he will meet the deadline, he should be willing to put his money where his mouth is.

Before you craft a contingent contract, take time to consider whether the other side is better informed than you are about the issues at stake.

The contractor in our negotiation example, for instance, is likely to be better informed than you are about how long a kitchen renovation takes.

If the penalties you’re proposing for a missed deadline are not prohibitive, he may be willing to accept them, rendering the contingent contract virtually worthless.

The lesson?

When negotiating a contingent contract, factor in any information disadvantage you may face.

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3. Prepare for the possibility of noncompliance.

When drafting contracts or negotiated agreements, wise negotiators prepare for the possibility of a contract breach in several ways.

Contract Negotiations: How to Prepare for Noncompliance

First, you can agree in writing to meet at regular intervals to review your progress during the life of the contract, according to professor Lawrence Susskind of the Massachusetts Institute of Technology.

When you build regular meetings into your contract,you give yourselves 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. In the event of an alleged violation, this type of clause might require both sides to continue to meet their contractual obligations while a third party investigates the matter. Similarly,you can head off the costs of future litigation by including a clause that requires parties to engage in mediation or arbitration before filing any lawsuits.

Third, include liquidated damages clauses in your contracts that specify the amount to be paid if the contract is breached, says Harvard Business School and Harvard Law School professor Guhan Subramanian. Consider that if you sue the other side for breach of contract, you will typically be awarded monetary damages rather than the specific goods or services that you lost. Therefore, if you negotiate up front that supplier will pay you $1,000 for a missed shipment, for example, this liquidated damages clause will make any future court hearing much more straightforward.

4. Seek firm commitments.

In an ideal world, negotiators and their attorneys would have ample time to write and review contracts before they’re put into motion. But In the real world, where time and money are often in short supply, deals may be rushed through via fax, over the phone, or through a back-and-forth series of emails.

Even when agreements are signed, they may be non binding due to poor documentation. Take the case of a tenant who signed an apartment lease and then mailed it to her landlord for his signature. The landlord never returned a copy of the lease, a fact that the tenant noticed only when she had trouble collecting her security deposit after moving out a year later. Without a signed lease, the tenant’s lawyer had a hard time fighting her case in court. 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.

For this reason, whenever possible, you and your counterpart should both sign a formal, binding contract. When logistics make this impossible, eliminate ambiguity by taking thorough notes during phone calls and retaining as much documentation as possible.

And after the flurry of emails and phone 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 your lawyers.

After reaching a negotiated agreement, professionals often rely on their lawyers to draw up the official contract.

Unfortunately, miscommunication between negotiators and their lawyers often leads to costly mistakes. Contract Terms may not accurately represent the negotiated agreement, key deal terms could be missing, or clauses might contradict one another.

These mistakes, which can occur due to carelessness or lack of communication between lawyers and clients, can lead to misunderstandings during the implementation stage and problems later on.

To ensure that your contract accurately reflects both sides understanding of the deal, follow these negotiation guidelines from Harvard Professor 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, because you can’t be expected to grasp the subtleties of legalese, ask your lawyer to read the contract back to you in “plain English.” Ask follow-up “What if?”questions that probe the boundaries of ideal conditions to make sure you’ve covered all the bases.

Related Dealmaking Article: Types of Power in Negotiation: Chaos Theory and Bargaining Scenarios

Claim your FREE copy: Dealmaking

Discover how to boost your power at the bargaining table in this FREE special report, Dealmaking: Secrets of Successful Dealmaking in Business Negotiations, from Harvard Law School.

Originally published May 2014.

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