Legal Matters | Archive

Contract negotiation: Focus on Interests

by J. David Faulders
for Virginia Business
May 2006

EDITOR'S NOTE: This month begins a new column, Legal Matters, by the members of the statewide law firm Executive Counsel PLC. Most of the firm's members formerly served as general counsel at large corporations. They will rotate turns as columnists, discussing a variety of legal issues facing Virginia businesses.

What's the most important thing to keep in mind when you are negotiating a contract for your company? If you focus on your company's business interests and understand the other party's interests, many of the legal issues and sticking points will melt away.

Of course, we have all seen the standard-form contracts presented to us that give the impression that the terms are set in stone. Too often, that's exactly what people think, and they end up with contracts that don't complement their business strategies. Despite their appearance, the vast majority of standard-form contracts are, indeed, negotiable, and the key to negotiating them is to focus on the parties' interests.

You might have heard the story of the two sisters who each grabbed the last orange at the same time. Each argued that she should have the orange. Their mother could have settled the argument by splitting the orange down the middle and giving each sister only half. Instead, she asked each sister why they wanted the orange. One sister said that she wanted the fruit to eat; the other sister said she wanted the rind for baking. When the mother determined her daughters' interests, she was able to split the orange in a manner to give each sister a great deal more than if they merely had split the orange in half.

You can use the same approach as the mother in negotiating contract provisions - focus on each party's interest. Here are a few ways to do so and develop more favorable contracts:

If you don't understand a term, ask what it means. If a term is vague or unclear, make sure it is revised in simple language so that its meaning is clear. There's a classic contracts case in which a seller agreed to sell chickens to a buyer. The seller thought "chicken" meant chicken of any age. The buyer assumed "chicken" meant tender young chickens suitable for frying. The seller shipped old tough chickens, and the buyer sued for breach. To avoid similar misunderstandings, be clear describing your intent.

Cover all options, consequence, and possibilities. Failure to anticipate problems, while at the same time keeping your company's objectives in mind, can lead to big losses. Before you sign a contract, consider what could go wrong or what could make performance of your obligations difficult or expensive. Some common questions to ask include: "What happens under the contract if my company: …dissolves? …gets acquired or merges? …grows rapidly? …needs more flexibility? …encounters unanticipated obstacles?"

Don't leave anything out. Accurately cover all aspects of your understanding with the other party. Any oral agreement during the negotiation should be put in writing in the contract. If the other party, for example, casually says it will review pricing at the end of six months, insist that it be put in the written document, even if the other party says, "We don't need to put that in writing."

Make sure you are comfortable with your obligations. If any term makes you uneasy make a counter-offer or, like the mother of the sisters, explore alternatives. Never assume that the other party will excuse your performance and do not rely on the other party's oral assurances that it will not insist on strict performance.

If you approach negotiating contracts like the mother of the sisters - probing to understand both parties' interests - the negotiations will be more productive, less confrontational and lead to a better contract for both parties.