Negotiating commercial agreements: key points

Negotiation is art and science working together but should never be left to luck, explains Christopher Parr

The art of negotiation comes with practice. It’s possible to learn the skills needed for influencing others; identifying the issues to present and articulating ideas and proposals to draw a good response.

The science of negotiation exists within the global research and study that has been done in the field. The Harvard Law School is a notable player in this area; and, is where I was fortunate, some years ago, to attend their short Programme on Negotiation.

Luck in negotiation can play a part. It’s possible to be in the right place, at the right time. However, relying on luck is a haphazard approach that I do not advocate. As teachers are prone to say: fail to prepare and prepare to fail.

Preliminary points

Language: lawyers often talk about the parties to a transaction. In some negotiations eg dispute mediations, parties is thought to be too legalistic and the preferred term is ‘participant(s).’ Generally, I prefer to avoid using the term side(s) because it is confrontational.

When planning your negotiation, give some thought to language issues. They can make a difference. And, if you are negotiating across languages, be even more careful and respect the obvious challenges involved in translations, even UK English and American English can throw up confusions, look at the way ‘table an idea’ is understood.

Culture: I’ve negotiated around the world and have never, knowingly crossed any red lines or insulted anyone. However, sometimes, the process of negotiations can lead to frustration and misunderstanding; so be prepared.

In addition, I am a strong advocate of the ‘When in Rome’ approach to documents and business structures. For example, when negotiating in Japan, I tried to use documents that accepted the traditional Japanese preference for short forms. My American employer struggled, but eventually they accepted that shortening documents respected the culture and helped the other party’s translation efforts.

The Deal: there is a difference between one-off deals and those in which a relationship is to be established. In the former, there is less need to care about how you are perceived by the other party. Yet being difficult to deal with might lead to less than optimum outcomes, over the long term. In addition, do not underestimate the ‘retaliatory’ principle: if H squeezes the last drops out of the deal with P; P might spend the performance period trying to claw back whatever P thinks it ‘lost’ because of H’s aggression.

Negotiating

Most likely, the answer to the question ‘who are you negotiating with?’ is not ‘just the person across the table in the negotiation meeting’. Consider the following four groups.

·        The other party: the person directly opposite you is important, as is their organisation. All those in a hierarchical organisation are likely to have some influence on the negotiations (accounting, legal, manufacturing, logistics, purchasing, etc.) and might be in the mix when it comes to the final terms.

I have only once negotiated directly with a genuine ‘one-man band.’ He turned up on his Harley Davidson and proceeded to extract a great deal (in every sense) from our much larger team of negotiators. He had no one to answer to and took a very hard line whenever he was asked for concessions. He got everything he wanted.

·        Your team: the same principles apply. Unless you are accountable to no-one, you will have to take account of others when negotiating. Whoever it is, you might have to do some pre-negotiating before going out with proposals to the other party; and, as the deal unfolds in the direct negotiations, you might have to go back ‘inside’ to get agreement – sometimes, it’s like 3D chess.

·        Third parties: the deal might need financing, so you must factor the bank into the process. There might be a need for regulatory approval, so that timing, cost and activity must be built into the project. Insurance requirements can cause the deal to move in unexpected directions.

·        Yourself: do you say/think things like: ‘they’ll never agree to that’; ‘I’d never accept that’; or ‘that’s not very fair, I can’t ask for it?’ If you do, then you are allowing your inner monologue to dictate the other party’s reactions. Asked in the right way, there is almost nothing that cannot be proposed. For example: ‘I was thinking in terms of …..’; or, ‘It occurs to me that you might be able to….’. These are non-threatening, non-aggressive enquiries. What’s the worst that can happen?

The other party can come back with a flat rejection – probably in calm terms: ‘That’s not possible, sorry’; or a simple ‘no.’ However, at least you asked; you tried; you let the other party deny the request rather than cutting it off before it had time to air.

The key point is that you need to open your mind to the whole picture of the negotiation before you go into it. If you fail to take account of some critical, existential aspect of the transaction, it is likely to derail your negotiations in some way.

Furthermore, time creates its own pressure. I have seen many deals done just so that the closing can happen by 31 December – the end of a financial year! In one deal, we learned, after the fact, that the lead negotiator for the other party earned a significantly larger bonus for closing in the then-current year, rather than the next year ie 31/12 rather than 01/01. That was why things got urgent and stressful in December.

What do people want?

This is a particularly interesting area in the understanding of negotiations and how they are conducted. I think there are some inbuilt concepts that get in the way of good negotiations.

Fear of missing out

Many people enter negotiations expecting to get more than they want or need, because that will prove that they are a great negotiator.

If we consider the price issue, there is a difference. Clearly, I do not want to over-pay for my desired goods and services, while the seller does not want to under-charge or miss out on a higher price than the one they thought could be obtained. Therefore, the ‘dance’ around the price is likely to be more nuanced.

However, in these enlightened times, it’s quite easy for everyone to get a reasonable view on the most likely price range available; and, if there are competing deals open, you could be under-cut and lose the whole opportunity.

So, you might be kidding yourself if you think you can get a bargain by asking for a low price; or, can make a killing by pitching the sale price overly high. It’s not a good start to go in looking ridiculous and the other party may mark you down as a ‘chancer’ who is not really serious in their approach. Neither is particularly helpful.

I also take you back to the ‘inner monologue’ point made above – do not talk yourself out of a good/better deal. The other party is not you and may have hidden agendas that will push them into places you cannot know about. In the Harvard Negotiation Programme, one exercise involves the parties being given ‘common knowledge’ and ‘secret knowledge’ and it’s the latter that, in effect, controls the quality of the outcome of the deal.

Lastly, on this point: some negotiators refuse to say what they really want. They want the other party to dance around, offering this, that, or the other until they get it right. That’s an odd approach – why leave the other party to guess? What is to be achieved by that behaviour?

Why? This is an underappreciated question in negotiations. Ask yourself: why do I want X, Y and/or Z? Ask the other party: why is A, B and/or C important to you? The answers might open the door to deeper understanding and the opportunity to ‘grow the pie.’

The answer to the ‘Why?’ question might also help to explain what otherwise appears to be an irrational stance adopted by a negotiator. As already noted, if the negotiator gets a bonus for closing the deal by 31 December rather than on 2 January of the next year, you need look no further for an explanation as to why they want to move really fast in December.

Or, there might be a need to free space in the warehouse, or bring in cash – both pieces of understanding could help the deal – early delivery and/or faster payment might create space for a reduced-price agreement under the ‘value-in-for-value-out’ principle.

Of course, the negotiator might not admit their motive. However, if they cannot, or will not answer the ‘Why?’ question, perhaps they are still telling you something that might help.

In this context, a former colleague of mine used to say: ‘Please help me to understand why you want …..’ That’s a clever construction. Who can resist the urge to help understanding? It’s also non-threatening, so there is little room for anyone to take offence.

Win or lose

I think many people enter negotiations thinking they must win and the other party must lose. I think that’s wrong-headed and likely to lead to poor outcomes.

The Harvard Law School approach was there’s no harm in everyone getting what they want. That might feel uncomfortable and go against every principle of negotiation you ever held dear. But, if you get 100 per cent of what you want, why can’t the other party get 100 per cent of what they want? There is no rule that says one party must get less - in terms of total objectives - than the other: the win-lose approach.

Indeed, there is something liberating about opening negotiations with: I really want to be able to give you exactly what you want. Of course, there is a second part of the statement: So, all we need to do is work out how I can do that while also getting exactly what I want.

This brings us neatly to the question: what do we want?

We’ve already touched on over-asking, just for the sake of it. Now, I want to develop some other ideas.

Specificity

Do you want 100 units or 10 lots of 10 units? There might be a huge difference in the supplier’s ability to meet one or other demand. Therefore, try to be as clear as possible: ‘I want 100 units. I could take them in one delivery; but 10 lots of 10, over a three-month period would be optimum.’

This opens the door to a better quality of discussion about the transaction. The supplier might be able to meet the optimum (10x10) requirement; or, it might be best for them to deliver 2x50. In any event, the parties are now talking, constructively about how they can meet each other’s needs to the greatest degree. That’s good negotiation.

Positions vs options

In WWI (in particular), ‘trench warfare’ was the norm. Each side ‘dug in’ and set their positions; and much blood was shed trying to dislodge everyone. The point is that ‘positions’ tend to carry the underlying ideas of: ‘entrenched,’ ‘fixed’ and ‘immovable.’ None of those things is good in the context of negotiations. It’s far better to think in more open terms and ‘options’ give you that ability.

In any negotiation, it’s possible to go in with something like: ‘I want 100 units, no more, no less.’ That’s positional talk; the speaker is digging in and showing that they are intent on holding their ground. In simple terms, negotiation is closed.

On the other hand, it’s also possible to go in with something like: ‘I want 100 units. However, how that number is delivered over the next three months is open to debate.’ In that case, the 100 units element is a fact rather than a position; there’s no point in asking for 150 or only 50 when 100 are needed and the balance of the statement creates space for discussion of the ‘delivery options.’

Opening the discussion to cover possible options, for the parties leads to the possibility that a better deal can be reached than the parties thought possible when they started the negotiation process. That leads to the ‘beyond winning’ concept that the Harvard Law School team turned into a well-respected book on the subject of negotiation..

I wonder how many people enter negotiations even thinking about the possibility that they could get a better deal than they hoped for, or expected? But that’s quite an exciting thought! If you enter with an open mind about the outcome - avoiding entrenched positions – and with some options and ideas to offer the other party, you never know where you’ll end up.

Making concessions

Concessions and their bed-fellows, compromises are typical ‘tools of the trade’ in discussions about negotiations. Look at media reports on discussions between governments and unions, or in the diplomatic arena and there is always someone suggesting that ‘everyone will need to make concessions’ and/or ‘everyone will need to make compromises.’ However, is that right? In some ways yes, it is; but, rushing to give concessions and/or to compromise is not the best practice.

In my Harvard Law School course, I remember a professor stopping the room with a statement: ‘compromise is the art of no-one getting what they want.’ I think none of us had ever thought of ‘compromise’ in those terms; but when faced with the bluntness of the statement, we all nodded in agreement; and it put ‘compromise’ into a different light. Why would anyone rush to reach a conclusion that satisfies neither party? A classic compromise might have me paying less for less than I want. How is that a good outcome?

Compromise might be the way to close the deal, when the hard bargaining has been done and the parties are down to the last issues. There might be a compromise that, ultimately gets them through the last points. Similarly, there might be a concession that helps the deal over the line. However, if a party gives easy concessions, from the start, the other party might just keep asking for more and more.

Giving concessions too readily implies that the giver of the concessions has over-asked and was just trying to get more than they think/know is reasonable. If the other party realises that, they might be offended – and thus moved to resent the other party, which will tend to sour the deal – or they might decide to play the same game back. In which case, the parties might not end up with the best possible deal – which, in effect, is a failure of the negotiations.

That leads us to ‘fall-back planning’ and the concept of BATNA (the Best Alternative to a Negotiated Agreement).

Fall-back planning is full of issues we have already touched on: over-asking, to allow for falling back into realism; compromising; perhaps 75 units is better than none, even if I genuinely want 100 units; concessions – perhaps £/$ X more per unit is acceptable.

First, the negotiator needs to consider their BATNA. Is this the only deal available? If so, things might be stacked against them.

If you are in the desert and thirsty, a traveller who turns up with spare water is probably onto a good deal. If the thirsty party is a billionaire, they might be inclined to over-pay for a few bottles to see them through and the fortunate traveller has hit a lucky streak.

In the modern world, where the ‘market’ is wide, it might be increasingly rare to find yourself in a position such that you have to ‘take it, or leave it,’ with no other options available. However, even in that position, all might not be lost.

Does the other party know that they are the only deal in town? It might be obvious in the desert – I see no one else with water! – but in the real world, the other party might think you have other options available. In addition, you do not know what’s motivating the other party – they might be desperate to off-load what you want, because other opportunities are coming their way; or, because they have no other options.

It's a well-known fact that it’s what you don’t know that tends to catch you out!

Planning and fallback planning should be used to open a wide range of options and should allow for thinking that could take the parties beyond the simple ‘win-win’ and into the world of better than expected. In that world, everyone gets more than they initially thought possible. That must be a good thing, surely?

In this context, more is a relative term. As already discussed, if I want 100 but get 150, I might be no better off – where do I put the additional 50 and what do I do with them? Therefore, 150 rather than 100 might not be within the realms of ‘better.’ However, a deal that gives me the 100 I need – 10 lots of 10 over the next three months – and an additional option on a further 50, at the same price, in the next-following three months might be better than I had hoped for.

On the other side, I might have regarded the supply of 100 units in one go as a compromise – because I wanted to supply 10 lots of 10 – and I might not have anticipated securing a potential sale of an additional 50 units. It’s at least win-win and, in my view, actually better than that.

Heads of Agreement

Heads of Agreement (HoA) mark an advance in the negotiations. ‘Heads’ refers to the fact that the parties have come to an understanding on some or all key principles. The use of agreement adds to that idea: ‘these are the key principles of the agreement that we are working towards.’

HoA are normally non-binding, except for that parts that are – see above for comments on confidentiality, jurisdiction and ‘no deal, until there’s an agreement.’

The HoA can be seen as a contents list for the main agreement. Typically, the HoA do not address boiler plate clauses such as force majeure and notices – and it can be helpful to use a standard form agreement index to remind the negotiators of the things they should address as they dance their way towards the full text of their agreement.

However, because the HoA are not binding, they can evolve over time and so should not be seen as blocks to further and better agreement in the future. Yet it’s regarded as seriously bad form for a party to introduce a key new issue after a full HoA has been settled. Such things are not necessarily fatal to the transaction and, properly explained they might just form part of the flow of the deal.

However, if the HoA says that ‘deliveries will be made from [place P] to [place D] in packages of 100 units’, it would be bad form for the seller to change ‘place P’ to place ‘place T’ and the ‘100 units’ to ‘500 units.’

Letters of intent

A letter of intent (LoI) can be problematic. Generally, as with HoAs and subject to the same exceptions, LoIs are non-binding and not enforceable as a contract. However, the word ‘intent’ opens the door to the concept of commitment. If I express an ‘intention’ to do something, what happens if I do not complete the task? For this reason, the LoI must be drafted with more than usual care and attention. It must be clear that, while there is an intention to do something there is no legally binding commitment to do those things.

Note that it’s possible to create hybrid positions such that, while there is no complete agreement on every aspect of the deal, a party will commit to do one or more things. For example, a supplier might agree to deliver a preliminary design for a product, provided that the customer agrees to pay a fee for that work. This is less than a commitment to complete the full contract but, none-the-less, is a contract to take the agreed step.

The main agreement

The main agreement needs little or no further comment. It should reflect the last HoA and should not contain any new negative provisions. It’s OK for a party to put bonus items in for the benefit of the other party, but as noted it’s bad form for a party to move the goal posts at the last minute.

There is often a debate about who makes the first draft. Personally, I have never found it too troublesome to allow the other party to deliver their preferred text. It discloses their hand and tells me what they see as the key issues; they might be strong on the liability provisions, which tells me that they see risk in the deal. They might be strong on the representations and warranties that they want from us. Both approaches tell me something about how the drafter sees the deal. That’s helpful to me.

In light of previous comments about ‘bad form,’ we should take a look at the broader concept of ‘good faith’ in negotiations. Some jurisdictions eg France come with a built in obligation on parties to deal with each other in good faith. Others like the UK have toyed with the concept, but have stopped short of imposing a general obligation in that regard.

When ‘good faith’ is a legal requirement (eg when negotiating with a French party), it’s necessary to take additional care in certain areas. Playing one party off against another is an obvious case here - it is dangerous for a buyer to set up two or more potential sellers and then try to use one as the stalking horse for the other(s).

At bottom, in ‘good faith’ jurisdictions, there is a risk that a party found guilty of acting in bad faith might be liable for the costs incurred by another party as a result of that bad faith behaviour. In simple terms, the law is saying that if your lead someone up the garden path, you might have to pay for it.

In the UK, such practices would not be so dangerous, from a legal perspective and with possible exceptions – the garden path is open to all, free! However, if a party acts ‘badly’ in the negotiations, the other party might well take offence and leave the field. Or, as already noted, they might perform the agreement in such a way as to extract maximum retribution. Either way, it’s not the best way to run things.

Christopher Parr is director at The Legal Director thelegaldirector.co.uk

This article was originally published in the International In-House Counsel Journal, the Solicitors Journal's twin publication iicj.net