Contract Negotiation – Art or Science?
by Suki Purewal
Group Commercial & Operations Director
Contract negotiations are an everyday occurrence, but are they an art or is there a science behind successfully completing them?
When negotiating a contract, risk averse parties may have difficulty reaching an agreement because they are generally more concerned about potential risks and losses than potential gains.
However, there are a number of strategies that can help risk averse parties reach agreements in contract negotiation and one way to achieve this is by identifying and prioritising risks. This will help both parties understand each other’s concerns and work towards addressing them.
Finding a compromise that works for both parties is often the key to success. Tactics for facilitating compromise include identifying common goals, being willing to listen, offering alternatives, prioritising issues, finding creative solutions, building relationships, and being flexible. By utilising these tactics, negotiators can create a productive environment that fosters compromise and helps both parties reach a mutually beneficial agreement.
Risks
Contractual risks generally fall into four principal areas – financial, legal, brand and security risks.
Financial
Financial risks are essential when negotiating a contract as you need to ensure that the contract is financially feasible and profitable. A contract with unfavourable financial terms can lead to significant financial losses for the organisation. It is essential that contract negotiators carefully review the pricing and payment terms and ensure that they are tenable.
Legal
Contracts are legally binding documents, therefore, it is crucial to ensure that the terms and conditions are legally sound. Any loopholes or ambiguities in the contract can lead to subsequent legal disputes and costly litigation. To mitigate this risk, parties may need to seek the advice of a legal expert and ensure that the contract complies with all relevant laws and regulations.
Brand
Brand risks are also a principal factor to take into account. An organisation’s brand is usually one of its most valuable assets, and any contract that could damage the brand’s reputation should be carefully considered. For example, partnering with a company that has a poor reputation or engaging in practices that are unethical or controversial could harm the brand’s reputation. Therefore, careful due diligence is essential together with careful consideration of any clauses that could negatively impact the brand’s reputation.
Security
Security (especially IT security) is another important risk, as cyberattacks are becoming more of a threat for brands online. Brands should consider security risks when negotiating a contract. The contract should include appropriate security measures to protect your organisation’s data and systems. Careful consideration of any potential security risks associated with the other party, such as their data protection policies and procedures are essential.
Once the risks have been identified, both parties can work together to develop strategies to mitigate those risks. This may involve adding clauses to the contract that allocate risks or create contingency plans in the event that certain risks materialise.
After mitigating the risks there may be trade-offs that can be made between risk and reward. By considering these trade-offs, both parties can work towards a mutually beneficial agreement that addresses the risks while also providing benefits to both parties.
Sometimes, it may be helpful to bring in a neutral third party, such as a mediator or arbitrator, to help facilitate the negotiation process although this is unusual except in very high value transactions. A neutral third party can help both parties identify and prioritise risks, develop strategies to mitigate risks, and find mutually beneficial trade-offs.
Overall, by focusing on risk management and finding mutually beneficial trade-offs, risk averse parties can reach agreements in contract negotiation that address their concerns while also providing benefits to both parties.
Compromise
There are multiple ways parties compromise in contract negotiation and one strategy used is by exploring new ideas and options. Instead of focusing on a single solution, both parties can explore different options and alternatives that address the risks. By considering different options, they may be able to find a compromise that addresses the concerns of both parties.
- One approach to exploring new ideas and options is to involve a diverse group of stakeholders in the negotiation process. This can include representatives from different departments within each organisation, as well as external consultants or subject matter experts who can bring fresh perspectives and insights. By including a wider range of voices in the negotiation, parties can generate new ideas and consider alternative solutions that may not have been previously considered.
A second strategy is where parties identify areas that they have in common, similar interests and goals. By focusing on these areas, they can find solutions that are mutually beneficial and address the risks. One of the main strategies is where both parties agree to overcome shared challenges or obstacles. For example, both parties may be experiencing pressure from competitors or regulatory changes. By acknowledging these shared challenges, parties can work together to find solutions that address these issues and improve their competitive position. Parties can also identify opportunities for collaboration in addressing these challenges, such as sharing resources or expertise.
A third way both parties compromise in contract negotiation is by assessing the risks and by developing solutions that are more manageable and less risky. The process of developing solutions involves analysing alternative scenarios, developing contingency plans, as well as negotiating terms that address the potential risks. Parties may also agree on performance metrics that ensure that both parties are meeting their obligations or agree to a dispute resolution process that minimises the risk of legal action. The goal is to identify solutions that provide a reasonable balance between the level of risk and the potential rewards. It is also essential to limit the size of any liquidated damages wherever possible.
Benchmarking can help avoid one party feeling they are being taken advantage of and not getting a fair deal. A willingness to compromise is essential to negotiating a fair contract. Both parties must be prepared to make concessions to reach an agreement that meets their needs. This may involve making trade-offs on issues that are less important to one party in exchange for concessions on issues that are more important to the other party. By being flexible and open to compromise, parties can create an agreement that maximizes the value of the contract for both parties.
In conclusion, the art of contract negotiation is a complex and critical skillset that requires a combination of preparation, strategy, communication, identifying and solving risks and interpersonal skills.
Effective negotiation involves identifying and prioritising interests, understanding the other party’s perspective, and finding common ground to achieve a mutually beneficial agreement.
When negotiating a contract, it is essential to approach negotiations with a clear understanding of what your party aims to get out of the contract, what both parties expect will happen, as well as understanding the limitations and alternatives. Successful negotiators also recognise the importance of building trust, managing emotions, and using effective communication techniques such as active listening, questioning, and framing.
With practice and perseverance, anyone can develop their negotiation skills and become a more effective and successful negotiator.