Negotiating a contract's business and legal terms
Risks and Revenues are at the heart of any negotiation
In a typical contract negotiation, each party makes certain concessions in order to obtain what it truly desires. Despite the fact that there are always a slew of minutiae to iron out, most contract discussions reduce down to two key considerations: risks and revenues
Here's an illustration. In a residential lease agreement, a landlord wants to get a good rental income (revenue) while simultaneously ensuring the right to evict the tenant quickly and protect the property if something goes wrong (risks). Sam, the landlord, understands that his risks are reduced if he rents to Camille, a qualified tenant with excellent references who has lasted at her prior rental for fourteen years. Camille's offer to sign a one-year lease for a lesser rental price is taken into consideration by Sam. Sam understands that a bad tenant might cost him months of missed income (not to mention lost time and legal fees). He accepts Camille's lower offer since the decreased danger she poses is worth a lower profit margin
The Legal vs. the Business Side of Negotiations
Typically, contract talks are divided into two stages: the essential commercial terms are negotiated first, followed by the legal requirements.
Let's return to the landlord-tenant scenario, where Sam agrees to rent his house to Camille. Camille negotiates a one-year lease for $1,500 per month during a walk-through at the rental home. She agrees to pay the first and last month's rent, as well as a security deposit, in advance. In a month, she will be able to move into the house. Sam and Camille exchange a handshake, with Sam promising to send Camille a "normal" lease agreement.
Camille receives the written lease a week later. It has all of the essential terms she and Sam agreed to at the house, but it also contains several items she finds offensive, such as an attorney fee provision and a demand that she seek insurance. She dials Sam's number, and the two of them discuss the situation. Sam eventually agrees to waive the attorney fee clause, and Camille agrees to purchase renter's insurance. Camille signs the lease after Sam revises it.
When Does a Contract Become Enforceable?
Is it when the parties have reached an agreement on business terms or when the legal terms have been finalized? There is no contract under contract law until all of the deal's material aspects have been negotiated and agreed upon. As a result, a legal dispute over whether or not a contract exists will reduce down to whether any of the unresolved legal questions are material to the transaction.
Let's return to Sam, the landlord, and Camille, the potential tenant. Let's say Sam refuses to budge on any of his regular lease requirements, but Camille has already given notice at her present apartment since she mistook her handshake with Sam for a contract. If the attorney fee and insurance clauses are material aspects of the arrangement, she has the legal right to compel Sam to follow through on the agreement or pay her damages.
If the parties have agreed on the deal's business parameters but want to go forward before working out the legal aspects, they can use an escrow account or condition the release of funds on the signing of a written agreement. This prevents the hassle of having to chase down money you put down if the purchase falls through. If the negotiations fail, everyone gets their money back and moves on.
Lawyers and Negotiation
You may have encountered the following scenario if you own or run a business. Your company feels it has reached an agreement on the business terms of a deal with another company. Both parties enlist the help of their lawyers to iron out the issues, but as soon as the lawyers are engaged, everything goes to hell. This could be due to the fact that when lawyers negotiate, they are dealing with three potentially opposing considerations. They want to do the following:
Although most lawyers concentrate on the first and second considerations, some lawyers are content to let talks drag on as long as the clock ticks. The client can influence this stage of the negotiation to some extent by discovering which issues are still in play, prioritizing the risks that matter, and guiding the attorney accordingly.
What Kind of Negotiator Are You?
There are many different bargaining styles, as you may have seen on TV series like The Apprentice. The two most popular styles are adversarial ("I will control you") and collaborative ("I will work together with you") ("Together we will prosper"). Of course, real individuals use the various negotiating approaches, bringing their temperaments, emotions, and personalities to the table along with their conditions. One negotiator may raise his voice and threaten to storm out of the room, while another speaks calmly and objectively.
Roger Fisher and William Ury, authors of the book Getting to Yes, pioneered the current approach to contract negotiation at Harvard University. According to these writers, a constructive negotiation with little emotional outbursts is most likely to yield the best results. Anger and other related emotions obscure judgment, generate competitiveness, impede mutually beneficial outcomes, and may lead to a vindictive approach to problem-solving.
Bargaining Position: The "Take It or Leave It" Situation
The respective bargaining positions of the parties are one factor that influences the result of contract negotiations. A side with vastly stronger bargaining power, such as a landlord dealing with a housing shortage or a company recruiting during a recession, is not required to negotiate. Instead, these heavy hitters typically offer the weaker side with a contract and instruct them to "take it or leave it." In the case of contracts of adhesion (non-negotiable form contracts), this can backfire because the less-favored party may later claim that a clause is unfair or unreasonable.
It is not always in your best interests to dictate all of the conditions if you are in a stronger bargaining position. According to J. Paul Getty's father, "You should never strive to make all of the money in a transaction. Allow the other person to profit as well, because if you have a reputation for constantly making the most money, you won't be able to get many transactions."
Yoel Molina, Esq. (AKA “Mo”)
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Yoel “Mo” Molina, I am a lifelong resident of Miami, Fl. I am a graduate of Miami Senior High, Class of 1992, Georgia Institute of Technology, B.S. 1997 and University of Maine School of Law, J.D. 2001. I have been practicing law in Miami Since 2001. I am a former training prosecutor in the Miami-Dade State Attorney’s Office. I have experience in jury trials, appeals, and administrative hearings. I have appeared before judges across the State. My experience ranges from civil litigation matters, collection matters, foreclosure, business and corporate, contracts, real estate, leases and employment matters..
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"My name is Anastasia Yecke Gude and I am the owner of Healing Hands Therapeutic Massage LLC. In the process of my company’s growth and expansion, I suddenly found myself a few weeks ago in need of a 1099 contractor agreement, and I needed it ASAP. As in, the very next day! I contacted the Law Office of Yoel Molina and his assistant put me in touch with Mo. I sent him what I had drafted up and he replied within a few hours with suggested revisions and clarifications, as well as a few insights I had not even considered. I was thoroughly impressed by the quality of work he provided, especially considering the time crunch I put him in (sorry, Mo!). I definitely recommend his services to anyone in need of a good contract attorney, and I will be calling him again for future work…hopefully in less of a rush next time!"