Basics of Contract Negotiation

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:

• Clients are protected by decreasing risks and increasing revenue.
• operate professionally to avoid malpractice lawsuits and to avoid disappointing customers (who can always find another lawyer)
• gain money (this final component creates the perverse incentive because the longer it takes to reach an agreement, the more money the attorney makes.) To put it another way, it is advantageous for one or both parties to stretch out the negotiation).

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”)

​Feel free to join our WhatsApp group if you want to know more aboutt his and more!