What to Do Before the Deal Breaks Down

By — on / Dealmaking

Adapted from Renegotiating a Deal by Jeswald Salacuse for the August 2005 Negotiation newsletter.

1. Foster a Relationship with the Other Side

Whenever one side fails to meet its contractual obligations, renegotiation is more likely to succeed if the parties have a strong relationship. Ideally, the aggrieved party will value long-term relations more than potential gains from a claim for breach of contract. For example, a bank will be more willing to renegotiate a loan with a delinquent debtor when the prospect of future business with the debtor is likely. Bondholders of the same debtor, on the other hand, will generally be more resistant to renegotiation, as they tend to lack opportunities for a profitable future business relationship.

2. Take the Necessary Time

Experienced negotiators know that building a strong relationship takes time. While speedy dealmaking may seem efficient, remember that any time saved during contract negotiation may be more than offset by the time you’ll spend renegotiating the deal.

3. Provide for a Renegotiation Process

Traditionally, negotiators have dealt with the risk of change by writing a detailed contract that attempts to forestall all possible eventualities. Rather than viewing a long-term transaction as frozen in the detailed provisions of a lengthy document, try viewing the deal organically, as a continuing negotiation in which you seek to adjust your relationship with the other side to your rapidly changing work environment.

Accordingly, your long-term contract might provide that at specified times or upon specified events, you will renegotiate or at least review certain provisions. Through this approach, you will confront the problem of contract violations in advanced and establish a clear framework for renegotiation.

4. Consider a Role for Mediation in the Deal

Whether they’re called mediators, conciliators, or advisers, third parties can assist in renegotiation by building and preserving business relations and resolving disputes without the need for litigation. Consequently, negotiators should consider stipulating in their contract that parties must try mediation for a period of time before filing a lawsuit.

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