Practical Solutions to Business Puzzles

So many times one sees the parties use the contract negotiations to win wars.  They beat each other up during the negotiation and, after the negotiation is done, they insist on strict compliance with the contract terms. 

It seems to me that contract negotiations should be conducted to help organizations achieve their business objectives.  In order to do so, negotiators need to understand the parties’ expectations (the so-called “psychological contracts”) and what the parties are trying to accomplish.  

Boilerplate

There may be a lot of boilerplate language in a contract.  In many cases, the parties spend a lot of time and resources negotiating this wording.  Is this appropraite? 

When we look at a typical contract, we have lots of wording about indemnification, insurance, warranties, and representations.  These terms are important from a legal perspective. 

From a business perspective, one hopes that the issues never become relevant.   These provisions only become important if a problem has arisen between the parties or involving the products and and services.

Heart of the Contract

The heart of any agreement should be the business terms, not the legal ones. 

Clients, whether suppliers or customers, care about issues like:

1. What is to be provided
2. How much the items will costs
3. What benefits the items will provide
4. Where the items will be provided
5. To whom the items will be provided
6. How success will be measured
7. How their risk can be managed

Each of these questions can have a boilerplate wording component.  Most people care a lot more about managing these issues from a business perspective, rather than managing them from a boilerplate perspective. 

Negotiator’s Role

 

The role of a negotiator is to help the parties work through the who, what, when, where, why, and how they will fulfill their obligations. 

Negotiators have to include the legal provisions, of course.  The business terms are what set the parties up for success.  A case in point relates to governing law, jurisdiction, and venue.

Governing Law, Jurisdiction, and Venue 

Over the years, I’ve seen a lot of resources spent negotiating governing law, jurisdiction, and venue.  Do clients care about whether Texas, California, or New York law controls?  Does it matter where the lawsuit occurs, in terms of court or county/district?

Clients are concerned with these issues, but the only time these issues become important is when a problem has already arisen.  It seems to me like clients would often be better served if negotiators focus on avoiding the problems in the first place.

So what can be done to avoid the problems in the first place?   

Preventing Problems

It seems to me that we can do a variety of very simple things.  Here are a few common sense steps that negotiators can take to prevent problems:  

1. Understand what the clients need.  Focus on their interests, rather than merely on their position.  A position could be that the client needs 500 widgets at $1/widget.  The interests could be satisfying an underlying contract in a cost effective manner, retaining a customer, growing the business, or fulfilling a commitment.  The best approach is simply to ask questions of the client. 
2. Communicate with the other party.  Talk about how the contract will be fulfilled.  This allows problems to be spotted before they arise in the real world.  Success on a relationship means that both parties achieve their business objectives.  What are the parties’ respective business objectives. 
3. Be clear about expectations and action items in the communications and the documentation.  What are the parties’ respective responsibilities?  What standards apply to each party’s performance?  Ambiguity often leads to doubt, distrust, frustration, and, ultimately, litigation. 
4. Consider how the contract supports the business objectives.  Think about whether the terms will help the parties achieve their goals. 
5. Plan for the implementation.  The contract may be the greatest document ever written.  If the agreement cannot be implemented, the effort has been wasted.  A walkthrough of the agreement can be very helpful.
6. Issues do arise in contracts.  Think aboug the risks that are likely to occur and how they can be dealt with.  Most of the time, clients don’t want contractual penalties.  They just want the other party to deliver what was promised.   When we write the contracts with an eye to encouragin the parties to do what they’ve promised, clients are likely to have a much better working relationship with the other parties. 
7. Allow the other party to make a profit.  Without profit, why would the other party care about our deal or our relationship? 

revised 9/26/2006