Contract negotiation is the process of agreeing on a set of legally enforceable terms (in this case, between two businesses). When two businesses negotiate, they both seek beneficial terms and to reduce financial, legal, and operational risk.
When negotiating contracts with vendors, for instance, your business may push for the opportunity to pay on a monthly basis rather than annually (or vice versa). Payments, like many other challenges, do not have a “right” solution; rather, they have the solution that makes the most sense for your business. The purpose of contract negotiation in business is to guarantee that your agreements position your businesses for long-term success.
In this article, how to negotiate contracts, we take a look at these issues in more depth.
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The importance of contract negotiation
Negotiating contracts is a critical component of contract management. Delays generating a contract or execution, for example, may impede a business, but they are unlikely to have a major effect on the bottom line. On the other hand, an improperly executed negotiation might bind a business for years to onerous legal liabilities.
In typical negotiations — for example, those involving a software licence — the focus is on issues such as governing law, customer data processing, information security, and price. Company A may say to Company B, “We are happy to purchase at this price if you add our company’s normal commitments for system availability, but you will need to reduce the price if you wish to use your company’s wording.”
This back and forth can take place in real time (during a phone call or in-person meeting) or over email, but email is more prevalent, and the dynamics are identical in both cases. Both parties make compromises and, in the process, add, delete, or amend contract terms – the contract’s building blocks — until the two parties reach an agreement. While there are undoubtedly excellent practises for contract negotiation, the sheer amount of collaboration required during the process creates logistical difficulties for all teams. Consider the task of reconciling contract input received from a variety of internal stakeholders (think Finance or Operations) and counterparties across several email threads. Additionally, consider performing this task simultaneously for many contracts.
The keys to contract negotiation are knowledge management and process management: without knowledge of the history and status of each of your contract negotiations, you cannot be certain that you are reaching the optimal outcome for your firm. Without a centralised contract tracking and negotiating system, legal teams frequently spend the majority of their time piecing together contract revisions and tracking down the most recent versions of contracts. For organisations with quarterly sales cycles, the issue is considerably worse.
The business importance, operational complexity and uneven volume of contracts make contract negotiation a thorny challenge for legal teams and contract technologies.
How to negotiate a contract
Begin with a rough draft
Prior to drafting a formal contract to negotiate, ensure that you and the other party agree on the contract’s fundamental terms. Use an uncomplicated term sheet. If the situation becomes too convoluted at this point, return to the beginning and begin on fresh terms.
Break the negotiation into smaller parts
Some negotiations fail because the parties adopt an “all or nothing” stance, requiring the other side to agree to all of their requirements in order to proceed. A smart strategy for overcoming this type of barrier is to segment the negotiations (“compartmentalise”) and gain agreement on each segment individually. This gives the impression that you are resolving a variety of problems – and making progress – rather than being involved in one single large battle.
Keep your introductory terms straightforward.
Complex contracts with extensive information and nuance will exacerbate the difficulty of negotiating. Begin with straightforward and simple language that everyone will understand, even if this eliminates some of the more nuanced benefits of sophisticated contracts.
Negotiating in line with industry best practice.
This strategy stresses the fact that one party’s requests are merely consistent with industry standards or current market rates. This method absolves you of the need to justify your terms or to spend time negotiating for them. If you emphasise that you are merely seeking normal contract terms, the onus shifts to the other party to convince you that an exception should be made in this instance (and to make that exception worth your while by offering concessions elsewhere).
Why are you going into business with the other party in the first place?
Recognize why you wish to do business with the opposing party. Strive to work collaboratively rather than with a competitive or aggressive mindset focused on maximising the value of the contract. How might this partnership be mutually beneficial?
Assume control of the negotiations
Setting the venue, timing, subject matter, and tempo of the negotiation (often referred to as “controlling the agenda”) may provide an edge. For instance, lawyers frequently feel that the solicitor who prepares the agreement is in control of the deal. Similarly, by exercising control over the negotiations, you gain the ability to determine which topics and in what order they are discussed. Occasionally, parties will employ a passive strategy to seize control — for example, by appearing to function as the moderator of the negotiations or by offering to “summarise” the current state of affairs (in a letter or brief statement at the start of a negotiating session). Whatever method is used to grasp the reins, the party that outlines the concerns often has a greater degree of control over how those issues are ultimately resolved.
Prioritize your primary goals.
Enter the contract negotiating process with a clear knowledge of your primary objectives from the arrangement, as well as how secondary risks or rewards rank after your primary objectives are satisfied.
Ask questions and gain an understanding of your counterparty’s motivations.
Before beginning a contract negotiation, learn as much as possible about the opposing party’s interests and objectives. By gaining a deeper grasp of the business’s motivations and requirements, you may better match your negotiations with actions that benefit your company while also benefiting the other party.
Make concessions during negotiations
Ascertain that the opposite party leaves the negotiation with the impression that they obtained a good bargain. Always give enough wriggle room in your offerings to make acceptable concessions to the other side. This also implies that you should refrain from initiating talks by disclosing your absolute bottom line. Instead, if you give yourself leeway to bargain, you’ll give the other party a sense of victory — and you could be shocked to discover that the other side is willing to give more than you were willing to take.
Prepare for the negotiation by researching thoroughly
Support your claims with suitable evidence or testimonials from similar clients
Avoid allowing emotions to get in the way of a win-win situation.
Negotiations in business are precisely that – negotiations. Avoid adding a layer of complexity to the process by bringing in personal feelings.
Adopt an optimistic attitude.
Demonstrate respect for the other party and the contributions they make. Agree on some issues. Establish the tone for a contract negotiating process that is beneficial to both sides.
Dealing with ultimatums
If the opposing party uses threats (“Agree to these terms or there will be no agreement”) or drags out the negotiations, you’ll have to assess how much the underlying transaction is actually worth to you. If the eventual prize is significant enough that you are willing to accept the other party’s ultimatum or endure interminable bargaining, that is acceptable. Similarly, if the other party wields absolute power (for example, it is the sole known buyer of your product), you may have to grin and bear it for a time. If not, the best course of action is frequently to withdraw from the negotiations. If the opposing party truly requires your assistance, it may reconsider its tactics and return to the negotiating table. If not, you might proceed to more fruitful negotiations with another party.
Do not rush the process.
Take your time in the lead-up to, during, and following the negotiations. Prepare for meetings and discussions by conducting research and compiling required documents well in advance. Avoid hasty decisions during the process. Following the conclusion of negotiations, follow up on any outstanding issues or deliverables.
How we can help
We have a proven track-record of helping clients negotiate contracts. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
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It is important for you to be well informed about the issues and obstacles you are facing. However, expert legal support is crucial in terms of saving you money and ensuring you achieve a positive outcome.
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Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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