In this article, Rittika Chowdhary pursuing M.A, in Business Law from NUJS, Kolkata discusses Top Ten tips on Effective Negotiation of Contracts.

Introduction

We enter into multiple contracts everyday even without our explicit knowledge about the legal implications arising from our actions. Everywhere we are entering into contracts, whether we realize it or not, regardless of whether you are using an app-based cab or boarding a flight, one has a contract agreed to and entered in. The list of contracts will go into great detail if we start counting our day to day commercial transactions.

Essentials of a valid contract

• Proper offer and proper acceptance, meaning that there must be a party who is making the offer, and another party who is willing to take the offer.
• Intention to create a legal obligation, meaning that the parties entering into the contract are intending to create a binding obligation on either side that must be completed.
• Mutual consent of parties, meaning that there must be willingness on either side to make for a contract. In this context, consent taken in unlawful manner has been cited as a reason for making it invalid, or null and void.
• Lawful object, meaning that the contract must aim for lawful objective; simply put, signing a contract of two crore rupees for murdering a person does not make for a valid contract.
• Lawful consideration, meaning that what one receives in exchange of the goods or service must be legal, and tenable.
• Capacity to contract, meaning that the persons entering into the contract have the ability to enter the said contract. If we go by the legal terminology, it means that the person should have the signing authority to make the contract effective.

If we refer to the first point above on essentials of the valid contract, it calls for proper “offer” and proper “acceptance”. It calls for mutual agreement; that’s what is called as “striking a deal”! It calls for “negotiating” for reaching a consensus.

When we reach out for getting the groceries for our house, we always tend to make a price which we feel is right for the vegetables, but unless the vendor accepts our offer, there is no movement. We have to negotiate our way so as to reach to the desired result. The vendor will not sell at a loss to us, and we are always afraid of paying more than what we should have. The thin line between the offer and acceptance, is where most deals are either struck, or they never see the light of the day this “striking the deal” in common parlance is called as “negotiation”. To negotiate means to reach to an agreement, or reach agreeable terms.

Negotiation is an art. So much so, in corporate houses, there are special training sessions held for inculcating this nuance, or for enhancing this trait. And nothing can be a better character trait, than that of being an excellent negotiator. A good negotiator always finds his way through tough spots.

Negotiation is not really a skill, it is a personality trait. Some people have a knack of it, negotiating their way through a contract is a cake-walk. Whereas some people just do not have the tenacity, or the skill. So what makes for successful negotiation? We will try to analyze them in the coming sections.

Contract negotiation! No we are not talking about buying tomatoes for 70 rupees a kilo instead of 90 rupees asked by the mandiwala. We are talking about mega-deals… hundreds of millions of rupees being signed off for… iron and steel plants to be set up! Giving way to nation building and to top it up the new mantra for the business community making in India.

A famous English author and educational consultant, Tony Buzan, has made a very apt statement in his book: The Power of Social Intelligence: 10 ways to tap into your social genius: “True negotiation takes place when each side respects the other side, and their point of view, and enters into the discussion positively. If you are determined that your solution, and your particular solution only, is the correct one – to be imposed on the other side if necessary – that is not negotiation; it is dictatorship.”

For beginners, this can be called upon as the mantra for any negotiation – to listen to the other party and to respect their point of view as well.

Going forward, we will be talking about ten contract negotiation tips. As has been stressed upon, negotiation is an inherent quality, but this does not mean that one cannot learn it. With persistence, and based on the job role, one has to be equipped with all possible tricks up his sleeve. It is really no surprise that corporate houses are ready to shell out a huge sum of money for making a strong effective team as a “corporate communication team” or a “key manager” role, so that they can retain those individuals, who have this knack for having the last word in an agreement / conversation.

Negotiation of Contracts

Let us now see, what makes for effective contract negotiation.

Knowing the contract terms

The most critical thing in a negotiation is to get inside your opponent’s head and figure out what he wants. No matter how old one is in a business, it never hurts to have a thorough preparation for any contract / deal. It is always advisable to spend a considerable amount of time before every negotiation by preparing in advance, taking copious steps to understand the task that one has to approach. The first step is to understand the collective bargaining agreement, for which it is very helpful to have a legal background. One has to understand what is at stake, what is the terminology involved. While there is hardly any scope for negotiation when one is dealing in the public sector, there is always some scope while one has some opportunities in the private sector. Yet it is always necessary to know what all the deliverables, and the pre-requisites for the contract. A deal for setting up an iron and steel factory will be different from a spares order; it will still be a different ball game when one is dealing with a service order for maintenance of an iron and steel plant. One has to again have different mindset when one is trying to set up a green field project versus a brown field project. Small things like spares for the business are also handled differently even in case of green field project vis-a-vis a brown field project. These are tiny little things which one has to be well aware when dealing with such contracts, and they can be crucial negotiation tips. There shall always be effective and clear usage of words in the contract. There shall not be any chances for the ambiguity in the usage of words in the contract which may cause potential harm in the future. The contract shall be framed in such a way that it is aligned with all the necessary legislatures that is in place. There shall be no deviations from any of the applicable law of the land.

Know what product one wants to buy/sell. Be aware of what you want to buy

Very important parameter of any contract or even for the basic transaction for that matter is having clear idea about the product one had to buy or the service one had to avail. At the time of negotiation of the contract also this point holds equally good. The buyer has to judicially judge what are his needs and shall communicate the same to the party who wants to be the part of the contract. Important point to consider is that the contract is a binding obligation on both the parties who sign to it. Hence the principle of Let buyer be aware shall be strictly adhered with. Buyer has to strictly have an idea on the parameters of the product that he wishes to procure. He had to clearly explain and seek the opinion of other party on the parameters he requires for the product he wishes to buy. Let’s explain the same with an example. If the buyer wishes to build a steel plant he has to decide on the established capacity of the plant which is proposed to be build. He had to estimate the material that he wishes to introduce, speed at which the production take place and estimated net waste from production. This shall be communicated to the other party and his assent shall be obtained. The contract shall be mutually signed and it shall hold good as legal document.

Having an apt timing for negotiation, that is market conditions/macro topics

Time is another important criterion for any normal business transaction. Contract negotiation is also greatly influenced by the timing of its signing. Any contract shall fulfill the criteria of write timing factor. The buyer shall be judicious when to enter into a contract. For example during the time of recession of industry it’s not worth doing capital expenditure or spending on expansion plans. Contract shall be compared in terms of strategical factors as well. The person who enters into an agreement shall understand and have the clear idea about the government policies and the strategical issues as well. For example it’s really unscientific and impractical to enter into a contract with the party who belongs to a country where our government has strategical issues viz. Pakistan. Party to the contract shall have a general idea about the financial impact market conditions exposure to the other macro risk factors as well for the successful execution of the contract. There are some risks which are always inherent to the contract. Person who is entering into contract shall have a clear knowledge about anticipated risk and the ways to mitigate the risks. For example any export shipments may be subject to the risk of loss during transportation. And the same can be mitigated through insurance. As another example foreign transactions are subject to the risk of currency fluctuation and the person entering into such contract shall have reasonable idea about the financial markets and the currency hedging procedures.

Knowing the last price that can be offered – negotiation margin

This is perhaps one of the most interesting tips, and this is but of course the most difficult decision making point in terms of contract negotiation. This calls for rigorous calculations, and knowing the detail cost status, and having a quick idea if something is being added or deleted from the scope in contract. The mathematics has to be ready. One does not have to be hundred percent accurate in these things; the idea is to have a rough calculation of the deal in your brain ready. That is about contract pricing, the crucial factor of negotiation margin is yet a different story. It essentially is the leverage that one has on the cost price; the discounts that can be given to the customer. Contract pricing is an important criterion to decide the profitability and the execution portion of the contract. The pricing shall be win-win situation for both the parties. Based on the type of supply and the nature of the contract pricing shall be fixed. Time factor also shall be considered while deciding the pricing of the contract. If the contract lasts for more than a year the factor of inflation shall be considered for each product under the contract. Party who wishes to sell some goods or render service shall have the clear idea of its capacity to execute any activities. There shall be no promise or contractual agreement on the performance of any activity which is beyond its capacity. Failure to consider this point may cause severe legal liability in the future.

Effective communication skills

The communication is also deciding factor for the effectiveness of the completion of the contract. There has to be clear cut communication of all the requirements of the contract. The communication shall be very clear and shall not be subject to any ambiguity in place. The communication shall be professional in nature. At any given point of time person has to strictly adhere to the professionalism in terms of the communication that he shall make with other parties. Only constructive criticism and comments shall be allowed during the course of communication. There shall be mutual consent in the documented form before concluding any topic or subject matter of the proposed contract.

Good interpersonal skills and knowing the client tastes beforehand

It always helps to know in advance who we are dealing with. The importance of having and creating a rapport with the person on the other side of the table can play as a key decider as to whether or not one cracks the deal. This again is a very crucial point; one has to be practical and appreciate the fact that a million dollar deal is at stake, and any random person trying to sell his product cannot take away the trophy. One always tries to do business with parties with whom they have been associated in the past. Therefore it is always good to have one such person in the negotiation team who has excellent rapport with the customer. The rapport with the customer shall be positive in nature. Parties to the contract shall ensure that their interests are safeguarded before doing any contract finalization. There shall not be complete any compromise on interest of one’s organization to maintain the rapport with the customer.

Trade-offs

Trade-offs are used in all businesses at some point or the other. So much so, that even the accounting guidelines provide for a journal entry where one can set-off debtors and creditors! Trade-offs are the essence of the bargaining process. One can call it bargaining, negotiating, or horse-trading. One must understand the needs and goals of your client. Does he want security? Does he want to maximize the amount of dollars protected in case he fails to reach an expected level of performance? Or does he want flexibility, so if the market changes substantially in the first two or three years of his contract, he has the ability to renegotiate as a free agent? Tradeoffs are the integral portion and very critical points in the execution of any contract. There shall proper usage of the tradeoffs by the parties.

See how this agreement can make/break future deals

This is one important decision making trait that one has to imbibe while negotiating contracts. One has to understand that some contracts are strategic. All deals that one signs may not be profit making. He might have to sign-off a deal which is not much in his favor. Yet to keep the long term goals in mind, one has to sign them. It is also important to have an indication on how the existing contracts are running, and the customer should not be in a position to open a complain box and we risk losing out on the current opportunity. This has to be taken in long term thought. The vision shall be futuristic. Concentration shall be on the future business that we may derive from the party. However the view shall be strategic and scientific in nature to safeguard the interest of the parties in the contract.

Having a negotiation strategy

Having a strategy for going into a deal signing is of utmost importance. One should not left in a clueless kind of position, where the clients’ response / reaction has left us in a baffled state. One cannot be unprepared. There shall be effective level of negotiation before promising on any portion of the contract. There shall not be outright surrender in front of the customer on any points that may form a part of the contract.

Effective use of position to exert influence and achieve organizational goals

This again is an interpersonal skill, and having such a skill set is always a win-win situation. The importance of that one phone call from the power house of the organization, which will weigh in the result in your favor! During negotiation, it would be wise not to take anything personally. If you leave personalities out of it, you will be able to see the opportunities more objectively.

Why mastering the art of contract negotiation is necessary

John F. Kennedy had said once, “Let us never negotiate out of fear. But let us never fear to negotiate”. What we are looking at, as simple contract sign off, is actually the bread and butter of a business house. It is therefore important from an entrepreneur point of view as well, meaning that while negotiating, one has to think like a business owner. An entrepreneur seeks to achieve the following if he uses negotiation to his advantage:

• Maximize the effectiveness of negotiation in strategic, tactical, telephone and face-to-face contract issue based negotiation situations.
• Increase profits through well-planned and executed collaborative negotiations.
• Minimize conflict and deadlocks by using the skills necessary to handle win-win negotiations.
• Coordinate the process of negotiation and documentation within the organization.
• Enhance personal effectiveness as negotiators by integrating the skills with the client.
• Change the focus from negotiation tactics to planning and strategy while reinforcing key corporate values.
• Increase confidence of in using an established contract process.
• Become more secure as negotiators through successful practice and extensive feedback.
• Successfully enhance communications through the development of a common negotiation language.