Volume XIV, Issue III
May/June 2000

Tips for Negotiating Contracts

by Joseph Rockne

For the past four years I have been in-house counsel for a petroleum distributorship. A good percentage of my daily work involves the negotiation, interpretation and enforcement of contracts. While I enjoy all of the work, I have found that I get the most pleasure out of successfully negotiating contracts that are mutually beneficial to all the parties involved. Because the contracts form the basis for an ongoing relationship, I feel that it is imperative that much thought and planning go into the negotiation and execution of a contract. For these reasons, I would like to share with the readers of De Novo some of the practices that I have developed over the past few years.

Your Negotiation Team
Before the first negotiation session, it is important to identify all of the individuals that may be necessary or helpful in creating a completed agreement. Attorneys, accountants, owners, managers and, sometimes, employees can all have a role to play in a successful negotiation. While the role of attorneys and accountants is somewhat obvious, less obvious may be the use of managers and employees. However, these individuals may have information about products, services or operations that could be of significance in the final contract. Because of this, some concern should be given to creating a negotiation team.

Preparation
All the members of a negotiation team should spend a significant amount of time preparing prior to the first meeting between the prospective parties. Any proposed contracts should be reviewed by all of the team members. Additional information about the other side may be gleaned from financial statements, court filings, and interviews with other customers or vendors. I have also found that that the Internet can be a rich source of background information.

While this initial preparation need not be overly exhaustive, information may be uncovered that alerts you to potential problems before the negotiations begin. This could result in terminating the negotiations before they have commenced, saving you significant time and money.

A meeting or meetings between all of the team members will help keep the team on track and should avoid duplication of efforts. It should be the team’s goal during this preparation phase to create a list of key issues.

The Key Issues
The careful identification of the key issues will play a vital role in the ultimate success or failure in reaching an agreement with the other party. Because the issues will vary from situation to situation, there is no boilerplate "list" which covers all the key issues that might arise in a given transaction. That is why it is imperative that each team member play an active role in identifying those issues that will be vital to the successful completion of the negotiation process.

Once the issues have been identified, some thought should be given to the order in which the issues should be raised with the other party and any negotiation strategies that may be employed. In developing strategies it is often helpful to role-play and put yourself and your team members in the other side’s shoes.

Meeting the Other Side
While completed agreements are rarely reached at the first negotiation session, the tone set at the first meeting can be crucial in the ultimate success or failure of the process. Because of the importance of the first meeting, several "rules" should be followed.

First, the parties’ respective negotiating teams should all be present. If the transaction is large enough, the parties may wish to meet informally the night before the actual negotiations begin. Because the principal negotiators do not always hold the keys to success, an informal dinner may allow the respective team members to form bonds, which will help smooth out the negotiation process.

The first meeting should be limited to the key issues already identified by the team members. The other side should be advised that your goal in approaching this first meeting is to determine whether further discussion of any "minor" issues is warranted. Neither side is served by undergoing a lengthy and difficult negotiation process only to see it eventually fail because a key issue was not raised early in the proceedings.

During the meeting, attempts to anticipate and discuss the needs of the other party and propose ways to address those needs and concerns while simultaneously meeting your own needs should be made. This will let the other side know that you recognize their issues and that you hope to be able to work toward a mutually beneficial conclusion.

Finally, the parties should take the time and effort to reach at least a conceptual agreement on the main issues before concluding the first meeting. In order to meet this goal, each of the team members should make sure that they have cleared their calendars in order to allow them to be present for the entire meeting. If the meeting is out of town, travel and accommodations should be arranged so that no one feels pressured because of flight departures or lodging restrictions.

The Site of the Negotiations
Prior to the first negotiation session, it is imperative that one party or the other takes responsibility for arranging appropriate facilities. While some negotiators may push to have the negotiations take place on a "home field" this should not be a major concern. Of concern should be the respective size of the negotiating teams and their representatives (attorneys, accountants etc.) and whether the facility is large enough to handle the members. Similarly, some principal players may not be able to travel or their schedules may be so busy that a location close to their office may allow them to be present for more of the negotiating session. Some concern should be made regarding meals and lodging if the negotiations may be lengthy. Will lunch be catered? Are there restaurants nearby?

Reaching a Conclusion IS Forming a Relationship
In addition to an adequate and thorough preparation, a successful result is more likely if all the participants keep in mind that the resulting contract between the parties will create an ongoing relationship. Because the relationship will be ongoing, the parties should, throughout the negotiation process, work to achieve clear and realistic expectations of what the other side will bring to and derive from the relationship.

Difficult and Sensitive Issues
Difficult and sensitive issues should be raised and discussed throughout the negotiation process. This will enable all the parties to form realistic expectations about how the proposed relationship will work. Unrealistic expectations often result in unsatisfactory relationships. Unsatisfactory relationships often result in disappointment and legal disputes.

Avoid Premature Position Taking
Before taking a particular position, it is often better to discuss each side’s respective needs and interests. By adopting a discussion mindset as opposed to a position mindset the parties will become joint problem solvers rather than entrenched advisories. It is especially important to avoid ultimatums. Ultimatums such as, "Unless you concede on that issue, we will terminate negotiations immediately" should be avoided. If an ultimatum is to be given, it should only be done so after all team members have had an opportunity to review and discuss it. Furthermore, the team must be prepared to back up its ultimatum.

Remain Flexible
Creativity will overcome many obstacles to reaching a successful conclusion. Remember that all the parties involved in the negotiation process have devoted much time, energy, effort and money in the hopes of reaching a satisfactory conclusion. Hopefully all of the parties will work together in an attempt to understand each side’s respective concerns and reach solutions to those concerns. Rigid and inflexible positions will hinder discussion and squelch creativity.

Maintain Composure
Negotiations are often complex and frustrating. It is not uncommon for parties to have "highs" and "lows" during the negotiation process. It is important for all team members to recognize this fact and to remain composed, unemotional and in control at all times. Sarcastic or offhand remarks, sometimes made during tense periods, can slip out and do considerable harm to the negotiation process. Similarly, personal attacks or remarks about character should also be avoided. In addition to disrupting, and perhaps even sabotaging the negotiations, sarcastic comments and personal attacks can resurface even after successful negotiations and taint the ongoing relationship.

Remember Your Strength
Entering into negotiations does not bind two parties together. Either party can, theoretically, walk away at any time. While this "negotiation leverage" is held by both parties, it is important to not give it away at any time during the negotiation process. Be especially wary of offhand remarks that may alert the other side to a vulnerability or weakness relationship or business in your position.

Closing the Deal
Negotiations of major importance appropriately take a considerable amount of time. After the initial meeting, there may be several phone calls, letters, conversations and, hopefully, the discussion of proposed contracts. At some point, however, it will become important for one side or the other (or both) to either execute a final agreement or terminate the deal. Often times there may be two or three major issues left unresolved. To reach a resolution of these issues it is often wise to arrange another face to face meeting between all the team members. This time, however, the ground rules will be more strict in that each side should commit to remain together until (1) all of the remaining issues are resolved and the agreement is finalized for execution or (2) it is determined that an agreement cannot be reached and the negotiations should then be terminated.

Conclusion
While it may feel like it, a final contract is not a conclusion. A contract merely marks the beginning of a formal relationship that may last for many years. By following the suggestions of this article, the relationship should begin in an open, honest and mutually beneficial way.

Joseph Rockne is operations manager and general counsel of Davis Industries, Inc., a petroleum marketer and distributor located in Lynnwood, Washington.

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