Negotiating international contracts can be tricky, and unstable, especially when governments are parties in the negotiation. ENCO is a Texas-based power company that has begun to move aggressively into emerging markets. The Indian government has approached ENCO to build an electrical generating plant to increase the power supply to Maharashtra State, one of India’s most economically developed states. ENCO is willing to undertake the project if it can be assured of a credible, long-term purchaser that will buy the electricity t a price profitable to ENCO. Toward this end, ENCO has negotiated but not yet signed a long-term “Power Purchase Agreement” (PPA) with the Maharashtra State Electricity Board, a state enterprise that distributes electricity to consumers.
Since the negotiation of the PPA, however, developments in Maharashtra State have raised some concern. Communal rioting has begun and the local media has changed the ENCO project with corruption and foreign exploitation. Elections are scheduled for next year and the Congress Party, which controls the Maharashtra State Government and negotiated the PPA, might lose. Political change is a prime cause of contractual instability, and so standard contracting practices may not apply. This requires negotiators to develop long term adaptive strategies. Major lessons of this simulation include:
- Contract enforcement mechanisms (such as international arbitration) can be important, but at best they are alternatives that strengthen a party’s position.
- Because international deals involve continuing negotiations, parties need to develop strategies to help cope with change even after a contract is signed.
- The legal and political context of a deal can influence its stability.
- When the net benefits to one party of not having a contract become greater than maintaining the contract, one can expect that party to reject or seek to re-negotiate the contract.
- Standard contracting practices in one country may not work effectively in other countries.
This 2 hour simulation from the Teaching Negotiation Resource Center (TNRC), can be used to teach international negotiation, contract negotiation, as well as cross-cultural negotiation. Download a Teacher’s Package today!
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