This article has been written by Vaishnavi Krupakaran pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Zigishu Singh (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).
Contracts are very common in everyday business transactions between different businesses, businesses and consumers and between consumers as well. Contract negotiation is a process where two or more parties describe the terms of contract before signing the agreement and making it an official contract.
The main purpose of contract negotiation is for all parties to be aware of the rights and duties and feel comfortable with the details of the contract and to obtain the assent of all the parties before proceeding with the contract. Contract negotiation is the final and most important stage of a contract, of the contract as this is where the parties discuss achieving a uniform goal. It is vital for a business to “partner “with a vendor who would help the business to achieve its goal and objectives along with fulfilling its obligations.
Contract negotiation should be positively beneficial to both parties in every area to achieve an equitable and fair deal. A well negotiated contract lays down a solid foundation for a long term relationship between both the parties .
Problems faced because of improper contract negotiation
1. Developing countries face a lot of intricacies and challenges when it comes to large-scale projects , government transactions. A well negotiated contract is very important not only for the parties to fulfil the current obligations fully, it should be foreseen for a long duration .The contract should be well defined and regulated by establishing the essential parameters. This is the most important reason why the emerging markets in developing countries need fine-tuned negotiation.
2. Many developing and underdeveloped countries are exploited only because they lack the financial resources and expertise while negotiating with a developed country. Especially when it comes to transactions between the government of two or more countries is imperative for a well-negotiated contract, in most case the governments of developing countries fail to negotiate the proper terms of the contracts, which most of the time leads the developed countries to be dissatisfied as they did not receive the desired benefit from the project. Such services which involve the relationship between two or more countries not only affect the parties of the contract and the profits derived from such contract but also the stakes and the credibility of an entire nation on a global level .
3. Conflicts that arise out of contract leads to expensive arbitration or lawsuits, the costs involved in arbitration and litigation are huge. The arbitral awards could amount to crores of rupees which could totally disrupt the project and the business‘s financial stability and reputation. This is the main reason for failure of many start-ups in India.
4. It is very important for the attorneys to take the long term victory of a business into consideration and not focus on short-term goals. The attorneys who focus on immediate returns put the business at a huge risk.
5. In most of cases one of the parties has more bargaining power than the other. The weaker party struggles to reach on equal footing during negotiation. Which ultimately creates friction in the weaker party’s mind even before the start of the contract.
6. While negotiating the parties should take into account the rapid changes occurring in the outside world , which are also vital factors and these crucial details should not be missed.
Importance and benefits of negotiation of contracts
1. Structure and Planning – As planning is the most important stage of any project, the best way to discuss planning and mapping out the structure is through negotiation. A clear plan lays down a proper foundation for a successful project, avoids impromptu confusions and saves money. Therefore everything, from starting the project to receiving the outcome of the project needs to be clearly chalked out to obtain the best possible outcome.
2. Certainty –The chief intention of contract negotiation is to achieve certainty on quality, quantity, and the repercussions of unfulfilled objectives by either of the parties .
3. Clarity – Negotiation helps the parties to have a transparent view of each other’s mind and expectations.
4. Ambiguity- Goods and services which need to be provided should be clearly defined without any ambiguity.
5. Best deal- It is very important to see clarity and not conflict within the negotiation. It should achieve the best deal for both parties. It is very important for both the parties to negotiate and have an understanding which they both have agreed upon.
6. Achievement of an organisation’s objectives- the goal of every negotiation should be to achieve the desired result, even if it falls short of the original objective and it cannot be achieved a satisfactory advancement should be worth creating the contract.
7. Long-term relationship- Most of the cultures such as the Japanese place emphasis on the aspect of negotiation which creates long term relationships and it’s very important for the business to build allied partners and business relationship networks.
8. Avoiding Conflict – As the consequences of the conflict are time-consuming and expensive, it is vital to spend time and money during the negotiation stage to avoid further possible contracts.
9. It helps to avoid intercultural barriers – Every country has a different culture and style of working, through negotiation we can effectively meet the requirements of both the parties .
10. Finance – The root of most of the conflict is financed therefore it is important for the parties to mention all the finance in detail (e.g.: total cost, payment schedule, mode of payment).
11. Date and time– Both the parties should negotiate on the event of the fulfillment of transaction clearly. Proper estimation of dates is very important as date and time directly impacts the monetary aspect of both the business. Therefore, a clear definition of important dates like the date of commencement, date of termination or renewal of the contract is important .
12. Risks and Liabilities– It is at the stage of negotiation that both the parties can foresee and prepare themselves for future risks and liabilities .
13. Definition of goals –
- The parties need to jointly define goals for their business and effective ways to achieve the set goals.
- The goals are
- further divided into short term goals and long term goals both of which have to be clearly defined, the liability lies on the attorney to give preference to both the goals depending on the requirement of the type of goal.
- Profit- By effective negotiation the business will be able to sell at a larger price which will yield more profits which is the most important objective of the business therefore the negotiator and the business both can make good profit . A good negotiator is an invaluable asset to the organization and good negotiation directly impacts the growth of the business .
Steps for contract negotiation
As we have vividly looked into the problems and importance of negotiation of contract we shall discuss good negotiation steps and strategies to achieve a good negotiation outcome and to overcome the challenges of negotiation .
1. Goal of the contract – The ultimate motive behind the construction of the contract shall be to identify the goal of the contract negotiation (Eg : merger contract , real estate contract ).
2. Questions – negotiation is the best stage for the parties to address each other’s concerns and questions.
3. Geographical laws – It is very important to abide and comply with the regulations of the local laws for the success of a project.
4. Contract laws – As contract laws from one place to another absolute knowledge of contract laws is essential.
5. Research about the other party – A thorough research about the other party is very important to anticipate what they might bring up on the table while negotiating. A thorough research helps in anticipation and aligning of goals.
6. Assess risks – unexpected turns like change in government regulation, or change in either of the business can harm the project therefore immunities like insurance, additional costs during contingency should be anticipated and reserved.
7. Negotiation Strategies
1. Negotiate the contract into parts – The whole contract is very lengthy which leads to the possibility of missing out on a few parts therefore, every clause needs to be negotiated in small parts.
2. Separate personal emotions and business negotiations – often when people like the other party they tend to agree to all the terms of the party which in turn might result in a loss in the longer run. Therefore keeping emotional feelings and business discussions distinct, is vital.
3. List out priorities – when priorities are clearly listed out the negotiation discussion becomes a very easy and smooth process. Sometimes everything seems important but to reach a fair deal both the business needs to compromise hence listing out the most important priority is very important.
4. Good cop bad cop method – While negotiating it is great if one person shoots hard questions and other poses submissive questions. This gives a comfortable and strong approach to the other party .
Contraction negotiation being the last phase of the contract life cycle is one of the most expensive stages of the contract life cycle. Now – a – days contract negotiation starts in the drafting stage itself while the parties exchange their drafts to add essential clauses .
There are various mediums of contract negotiation unlike the traditional conversation like negotiation on video conference, normal call, emails etc. The parties proceed with the assumption that all these negotiations will be reflected in the final agreement. Drafting a final agreement with equitable benefit and full consent of both parties is easier said than done .
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