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The Three Critical Negotiations in Any Contract (Technology Law Letter #7)

The Three Critical Negotiations in Any Contract

Any contract requires not one, but three, critical negotiations.

The first is the negotiation between the two parties to the contract.  Without the “main deal,” there can be no agreement.

The second and third negotiations are the internal negotiations within each party, or between each party and others (such as vendors and subcontractors), that are needed so that each party can sign the main deal.  Ignoring them can kill your deal, even if you’ve agreed to a term sheet.

You’ll see these negotiations most clearly in deals between large companies.  Large companies often use specialists and experts, both in-house and as independent contractors, in many fields, such as human resources, finance, procurement, marketing, sales, real estate, and legal.  These persons may even be focused in narrower sub-fields.  They may work within operating business units or corporate functional units.  They may be responsible across the entire company or for narrow geographic regions.

The key is that they generally have some voice in the negotiations, even if they are not sitting at the negotiating table.  Their voice may be expressed through policies (e.g., an information security policy) or processes (e.g., a contract approval process).  These policies or processes often reflect the outcome of a difficult and drawn out give-and-take between internal groups with varying power and influence.  They may be very inflexible, yet demand complete flexibility from the other party.  For instance, a party may request the other to comply with a policy that cannot be negotiated, but can change at any time.  Even requesting a change to such a policy can trigger internal negotiations within one party that are more painstaking than the main deal.

These issues can be solved in several ways:

1.  A party designates a person or group whose job is to “knock heads together” internally, guide the internal negotiations and present the results to the other party.  This is often the role of business development, legal or even sales groups.  The party may have “escalation” processes to speed up these internal negotiations, by raising issues of competing interests to senior executives for resolution.  This approach can be efficient, but be aware that keeping the internal negotiations behind the curtain can delay a deal, and create confusion and concern in the other party due to lack of transparency.

2.  The specialists and experts of each party may engage directly with one another.  For example, one party’s “tax person” negotiates directly with the other party’s “tax person,” The HR person speaks with the HR person, and so forth.  A business development or legal group coordinates the specialist negotiations.  This approach works best when the specialists and experts have authority to make decisions and the outcomes of their negotiations don’t impact other areas.

3.  Certain policies are “locked in concrete” and never negotiated as one-offs.  The policies and processes evolve over time as various third parties object to them and workarounds are found.  The speed of this evolution depends on the market power and attractiveness of the company as a deal partner.  Sometimes the policies can be dealt with by interpretation or by agreement that certain points of the policies don’t apply to the deal at hand, or will apply only if specified conditions occur.  Or, the contract may provide a means to terminate or renegotiate if the inflexible policies become too burdensome or costly.

You can make real progress in a deal, particularly a complicated one, if you spot these issues early and resolve them via one of these approaches especially an approach that is compatible with the parties’ corporate cultures.  It may be as simple as helping a party recognize and use resources, such as people and processes, that already exist.

The three critical negotiations also apply to negotiations between small companies or sole proprietors.   Compared to large companies, their internal decision making may be simple.  However, they are more vulnerable to third party limitations that they can’t control, such as those imposed by investors, licensors or vendors.  It’s critical to spot these limitations as early as possible.  If you catch them in the early formative stages of a deal before expectations are set, you may be able to restructure the transaction, or bring in a third party (such as an outsourcer) who can work around the limitation.  If you spot them later, your deal could be seriously delayed or lost.

In summary, the internal negotiations of each party, and the negotiations with outsiders such as investors and vendors, are as important as the negotiations between the two parties in their main deal.  Flagging and resolving these negotiations early will keep your main deal on track and help make it a success.