Negotiating business contracts can be complicated, time-consuming and, at times, intimidating. Many factors come into play when negotiating a contract, including:
- the size, risk appetite and bargaining power of the respective parties;
- whether they have an existing relationship; and
- the importance of the transaction.
There are typically legal and commercial considerations to evaluate when entering into negotiations. Although contract negotiations can be tiresome, they are critical to mitigating risk. This article explores key ways to negotiate contracts successfully.
1. Narrow the Issues
Although it may be tempting to immediately meet with the other side when you receive their contract, it is more prudent to review it from legal and commercial perspectives first. During the review, you and your solicitors can flag any clauses you would like to negotiate. In our experience, doing one or two rounds of negotiations 'on the paper' (i.e. by sending an amended contract between the parties) can help to reduce the number of contested items. In addition, this process allows the parties to understand one another's perspectives and concerns.
When proposing amendments to a contract, it is essential to provide reasons to support your requested amendments, or the other side may reject them. Providing reasons helps the other side to understand the rationale behind the change and either accept it or propose a middle ground.
2. Preparation is Everything
Much of the work in negotiating a contract is done in the lead-up to the negotiations. It is critical to:
- understand how important the deal is to your business;
- consider your business' risk profile. For example, whether the nature of the transaction is likely to expose your business to commercial risks; and
- learn about the other party (their size, reputation in the market and who will be attending the negotiation).
It is also essential to familiarise yourself with the contract and to know your business' position on any outstanding items.
For example, for each outstanding item, you should ideally have a best position, a first fall-back position and a final fall-back position. This allows you to understand how far you can negotiate on specific issues and when to 'park' an issue and take it offline for further internal discussions.
3. Find Your Style
Everyone has a different style when negotiating contacts. Some prefer a domineering or combative approach, while others may be more subdued and happy to lead the negotiation. There is no right or wrong approach, and finding the style that works for you is important. Sometimes, you might need to be adaptive and adjust your style, particularly if you have leverage on a transaction.
Our recommendations, regardless of your style, are to:
- open the negotiation with some friendly small talk to warm the room. Do not be afraid to smile and be friendly. Often being friendly initially can facilitate a more productive and cooperative negotiation;
- be firm but respectful. There can be a tendency for people to think being friendly means being viewed as a pushover in a negotiation. That is not the case. It is good to be friendly but to hold your ground on key items, be firm yet respectful in presenting your views on certain items; and
- listen and search for common ground. Actively listen to the other side's reasons for their position instead of simply being defensive. This can often allow you to find a middle ground. It is a good idea to let the other side know you have heard and understood their position and then to respond with your concerns.
Key Takeaways
Negotiating business contracts successfully takes preparation and experience. It is essential to try to resolve as many issues as possible before having a formal negotiation in person or via teleconference to save everyone's time. Once you are ready to meet with the other side, it is critical to be prepared, open and willing to hear the other side's view. Importantly, aim to find ways to compromise.
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