Dealmaking: What to Do After the Deal Breaks Down

By — on / Dealmaking

Adapted from Redoing the Deal by Jeswald Salacuse in the August 2005 issue of the Negotiation newsletter.

Even with these precautions in place, there will be times when one side demands renegotiation of a deal. Here are some guidelines on how to proceed.

1. Avoid Hostility

It’s tempting to respond to a demand for renegotiations with hostile, belligerent, or moralistic objections. Such responses are rarely effective, however, as the other side typically will have determined already that its vital interests require changes to the deal. Only by dealing with those interests can the parties resolve their conflict.

2. Weigh Your Claim Against the Value of the Relationship

Willingness to renegotiate a contract typically corresponds to the value one side attaches to a potential future relationship with the other side. If the relationship is worth more than your claim for breach of contract, you ordinarily will be willing to engage in renegotiation. If, on the other hand, you conclude that your claim is worth more than the benefits from a continuing relationship, you may insist on your contractual rights to the point of resorting to litigation.

You may not be able to accurately evaluate the worth of a claim or the value of a renegotiated contract without first engaging in discussions with the other side. Moreover, satisfaction of a claim through litigation is almost always a lengthy and expensive process, a further motivation for choosing to renegotiate.

3. Create Value in the Renegotiation

When your counterpart demands renegotiation, you may expect that any advantage he gains will guarantee a loss for you. An unwilling participant in a renegotiation is likely to be intransigent – to quibble over the smallest issues, to voice recriminations, and generally to block proposed changes. Naturally, such talks are unlikely to lead to joint gains. The challenge for both sides is to create an atmosphere in which problem solving can take place. Even if you feel forced into a corner, approach renegotiation as an opportunity to raise new issues that will benefit both sides.

4. Fully Evaluate the Costs of Failure

In many cases, the alternative to a successful renegotiation is litigation. As you approach the renegotiation process, you and your counterpart must carefully assess the risks of later facing each other as defendant and plaintiff. Doing so will allow you to accurately evaluate the worth of various proposals. Notably the side demanding renegotiation is likely to undervalue the risks and costs of litigation, while the party facing the demand probably will overvalue a lawsuit’s benefits. Therefore, it’s important for each side to ensure that the other has a realistic evaluation of alternatives to a successful renegotiation.

5. Involve All Necessary Parties

A successful renegotiation may require the participation of not only those who signed the original agreement but also of those who later gained an interest in the transaction, such as labor unions, creditors, suppliers, and government agencies. If you represent a bank that’s renegotiating with a troubled real estate developer over a loan for a partially completed office building, you’ll never reach a new agreement without input from the unpaid construction contractor whose lien on the property could block refinancing.

6. Design the Right Forum and Process

Renegotiations often emerge from a crisis suffused with threats and high emotion. Choosing the appropriate renegotiation process may help mollify injured parties.

Sometimes the terminology used to describe renegotiation may influence its success. Rather than using the label “renegotiation,” which conjures up negative images of a drastically rewritten contract, parties might call the process a review, restructuring, rescheduling, or contract clarification. Calling a renegotiation a “request for waiver” is yet another means of respecting the agreement while giving the burdened party relief, if only temporarily, from contractual obligations.

7. Consider Hiring a Mediator

Amid the stress and ill will often generated by a renegotiation, a mediator or other neutral third person may help the parties to overcome obstacles to a satisfactory renegotiated agreement. A mediator might contribute by designing and managing the process in a way that provides a maximum opportunity to create value, by assisting with communications in a way that facilitates positive results, and by suggesting substantive solutions to the problems that parties encounter during the course of their renegotiation.

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.

Related Article: Negotiation Design Dimensions

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