Contract negotiations on large multimillion dollar contracts especially between large companies can be difficult and protracted. Sometimes the negotiations are frustrating and emotionally exhausting. There are times when the parties believe the contract is at an end only to have a last minute issue raised by the other side at the 11th hour. Having negotiated the contract over several months, the last minute item is hardly going to be dismissed and more often than not the parties are dragged into further discussions on outstanding items. At this stage the pressure to close is often extreme.
Every contract negotiation has a life of its own. A beginning, a middle and (often but not always) an end the signed contract. Part of the negotiation process involves tactics. Many people will engage in these tactics in the hope of gaining an advantage over the other side.
The game is simple, a buyer will try to buy services from a seller on the most favourable terms at the lowest price. The seller will always try to preserve terms most favourable to it at the highest price. Ultimately, each party has an agenda that is opposite to that of the other, which in turn creates tension during contract negotiations.
There are a number of different tactics that the parties will engage in during a contract negotiation. Based on my experience the three most common are:
- Whose paper? The first big battle between the parties is to determine whose terms and conditions will apply to the deal. The party whose contract terms are used usually has the negotiating advantage. It is much more difficult to negotiate the other party's terms as they are obviously drafted to suit that party. Using another party's contract also adds time and cost as your lawyers have to review the terms of the contract as well as negotiate on the terms.
- Cut and Dice - This involves the buyer having discussions with various parties on the seller side. They will discuss commercial terms with the seller's commercial team, sales issues with the sales team and legal issues with the lawyers. Sometimes communication within the seller's negotiating team breaks down and this allows the buyer to negotiate more favourable terms. In certain circumstances the buyer is able to secure favourable positions with each section of the seller's team. When all the positions are totalled the seller may find they have been cut and dice.
- Arms and legs out of the suitcase - There are some negotiations which continue past the point when all parties believe the matter is closed. This typically occurs when the commercial teams lawyers are allowed to take control of not only the legal drafting but all other negotiations. Lawyers typically love to negotiate and redraft clauses to ensure that every single possibility is covered from every angle. If not managed carefully a contract that should only take 4 months to negotiate can take up to 12 months. A strong commercial team is essential to avoid this type of issue.
Ultimately a contract negotiation should produce a win-win outcome for both parties. So next time you are negotiating a contract make sure:
- your negotiating team works as a team, with each member communicating the results of negotiations with the entire team as the contract discussions progress
- you engage the commercial owner of the transaction rather than their lawyers throughout the transaction you negotiate your terms and conditions if possible
Frieda Grant is the General Counsel for ADP accounting service
ADP Employer Services business service is the worlds largest provider of payroll and HR solutions for SME's. The product - 'Payline' services organizations ranging from 4 - 150 Employees. Services include; payment of employees, payment of PAYG Withholding Tax, payslips, payment summaries etc