During the course of complex contract negotiations, the last thing we want to think about is the possibility that a serious disagreement or contract breach will arise during the implementation stage. Yet we also know that such conflicts are common.
When involved in contract negotiations, we need to imagine a range of possible scenarios—including the possibility that a dispute may arise that could escalate into a lawsuit. Because no one wants to battle it out in court, there are a number of safeguards you can take to improve your odds of resolving disputes quickly and amicably.
In contract negotiations, the following five measures can help you ward off a dispute or lessen its ill effects:
1. Include a dispute-resolution clause.
In the event of an alleged contract violation, a dispute-resolution clause might require both sides to continue to meet their contractual obligations while a third party investigates the matter. Your dispute-resolution clause might also require parties to engage in alternative dispute resolution (ADR), such as mediation and/or arbitration, before filing any lawsuits.
When drafting a dispute-resolution agreement, consider stipulating that mediation should be used to attempt to resolve relatively straightforward misunderstandings. In mediation, a neutral third party help disputants come to consensus on their own. Rather than imposing a solution, a professional mediator works with the conflicting sides to explore the interests underlying their positions and encourages them air their grievances. Mediators try to help parties hammer out a resolution that is sustainable, voluntary, and nonbinding.
By contrast, you might agree to reserve arbitration for more serious contractual disputes. In arbitration, a neutral third party serves as a judge who is responsible for resolving the dispute. The arbitrator listens as each side argues its case and presents relevant evidence, then renders a binding decision. Arbitrators hand down decisions that are usually confidential and cannot be appealed.
2. Negotiate liquidated damages.
Include liquidated damages clauses in your contract that specify the amount to be paid if the contract is breached, advises 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 a supplier will pay you $1,000 for a missed shipment, for example, this liquidated damages clause will make any future dispute-resolution effort or court hearing much more straightforward.
3. Try a dispute prevention clause.
A negotiation tool known as dispute prevention can also help business partners deal with their differences more productively, writes Massachusetts Institute of Technology professor Lawrence Susskind in his book Good for You, Great for Me: Finding the Trading Zone and Winning at Win-Win Negotiation (PublicAffairs, 2014). Though such clauses are not yet used widely in business contracts, the construction industry has relied on dispute prevention for decades, writes Susskind. Because companies entering into construction contracts are eager to avoid delays, the project’s developer, financiers, architects, and any other interested parties typically sign an agreement in which they vow to meet and communicate regularly, monitor progress jointly, and consult with mediators to quickly resolve minor disagreements. Such carefully designed dispute-prevention systems have proven highly effective at warding off serious conflicts and delays—and can be quite useful in any long-term business relationship.
4. Consider a contingency agreement.
In contract negotiations, it’s common for parties to reach an impasse because they have different beliefs about the likelihood of future events. You might be convinced that your firm will deliver a project on time and under budget, for example, but the client may view your proposal as unrealistic. In such situations, a contingent agreement—negotiated “if, then” promises aimed at reducing risk about future uncertainty—offers a way for parties to agree to disagree while still moving forward. Contingent commitments often create incentives for compliance or penalties for noncompliance, writes Susskind. You might propose paying specified penalties for turning your project in late or agree to significantly lower your rates if you go over budget, for example.
To add a contingent agreement to your contract, begin by having both sides write out their own scenarios of how they expect the future to unfold. Then negotiate expectations and requirements that seem appropriate to each scenario. Finally, include both the scenarios and the negotiated repercussions and rewards in your contract.
5. Combine dispute prevention and a contingent agreement.
This combination approach can be an effective remedy, Susskind advises. For example, you might negotiate a provision to your contract that promises a financial bonus to the other side if they avoid litigation for the life of the contract. Such a clause could give both sides the incentives they need to stay in touch throughout the implementation stage and involve a mediator at the first sign of trouble.
When negotiating an agreement, raising the possibility of a future dispute can feel uncomfortable. But by including some or all of these dispute-resolution and prevention mechanisms in your contract, you can greatly increase your odds of sustaining a harmonious business relationship.
Have you ever had to agree to disagree? How has this affected your contract negotiations?