How to Negotiate Contract Terms (Part 1)
Notes on Negotiation Written by Marty Latz, Latz Negotiation Institute
The bread and butter of a corporate/transactional lawyer’s professional life involves negotiating contract terms and conditions (“Ts & Cs”). They spend hours every day drafting, analyzing, comparing, discussing, evaluating and then negotiating Ts & Cs.
Business professionals also negotiate contracts all the time with partners, investors, customers, consultants, employees, vendors, and the list goes on. Sometimes lawyers help. Other times not.
Yet relatively few professionals consistently negotiate contracts strategically based on the experts’ proven research. Most just do it intuitively or instinctively. They understand the substantive terms, but don’t spend the time and effort addressing the process.
This is not a criticism - it’s just reality.
So, for those interested in the fundamentals of negotiating contract terms, here are my 10 Keys (Part One now and Parts Two and Three shortly).
To start, keep in mind:
• these represent foundational building blocks – check out my first book Gain the Edge! Negotiating To Get What You Want for a comprehensive guide to these strategies and more; and
• this is also a checklist to strategically prepare for your contract negotiations.
Ok – here they are, which also apply in many other factual contexts.
1. Keep your long-term goals front-and-center
It’s easy to get caught up in the technical elements of contract terms like indemnity and wanting to “win” by using your preferred language. Of course, small language changes can make a huge difference (using “may” vs “shall” can be the difference between winning or losing future litigation over that contract).
But don’t get so focused on wordsmithing the details that you lose sight of your and/or your client’s long-term goals. You know the phrase “see the forest for the trees.” It’s especially crucial if you want a long-term working relationship between the parties.
Keep in mind, this doesn’t mean just giving in on the minor issues. It does mean, however, maintaining important perspective throughout the process. Also set specific, aggressive goals relating to: a) each particular term or condition, and b) the overall level of risk you want to take on in the agreement.
2. Find out the parties’ underlying interests for each term or condition
Why is your counterpart insisting that the dispute resolution clause specify litigation and not arbitration? I once had a large corporate client insist on this because they could litigate disputes at a low cost given their legal staff relative to their smaller and more cost-sensitive counterparts.
What is the rationale underlying the minimum automobile insurance limits in your counterpart’s standard agreement? There wasn’t one, as it applied to me, in a contract I recently signed. We thus deleted this provision once I asked why it was in there.
Bottom line – drill down to the parties’ core interests underlying each specific term or condition (why do they want it). This will empower you to explore the possible common ground on each.
Also prioritize your and their interests and consider quantifying and/or ranking them (evaluate how important is each relative to your and their other interests). This will help you decide how hard to push.
3. Pay attention to what they say and don’t say
A client once told me they were negotiating a limitation of liability clause and the seller’s lawyer was insisting on an unusually aggressive limitation. When my client asked why, several times, the seller’s lawyer basically refused to answer other than accurately stating that it had legally disclosed all of its liabilities.
This was potentially a very big issue. If my client (the buyer) accepted this clause as is, there was a significant risk that a future liability (like a later lawsuit or environmental problem) could completely change the deal’s financials.
My client ultimately walked away from this deal as the risk was just too great relating to the non-disclosure of future potential liabilities. My client later learned that the seller had a major future liability percolating that would have completely messed up the deal for it.
My point? Listen extremely carefully to what your counterpart says – and doesn’t say – concerning the true interests underlying each T and C.
Latz’s Lesson: When negotiating contract terms and conditions, identify what success looks like for each T & C while keeping your long-term goal in mind, drill down to the interests underlying each provision, and listen carefully to what they say and don’t say.
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Marty Latz is the founder of Latz Negotiation Institute, a national negotiation training and consulting company, and ExpertNegotiator, a Web-based software company that helps managers and negotiators more effectively negotiate and implement best practices based on the experts' proven research. He is also the author of Gain the Edge! Negotiating to Get What You Want (St. Martin’s Press 2004). He can be reached at 480-951-3222 or Latz@ExpertNegotiator.com
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