The importance of trust in commercial negotiations

How important is it to trust the party that you are negotiating with?  Commercial agreements can be reached with little or no trust on either side, if the parties’ interests (or senior management) favour the deal.  The personal opinions of the negotiators may not count for much when it comes to pursuing, or not pursuing, the deal.

There is a point of view that, if you sell your business to someone, you need not care whether you ever speak to the buyer again once the deal is done; what matter are the contract terms, and whether they allocate risk in an appropriate way.  And whether the price is paid on time.  In fact, it may be better not to care about whether the other party misleads or lies to you in negotiations, or proves to be unreliable or inconsistent in what they say or do.  Keep your eye on the ball, get the deal terms right, and once the deal is signed, move on.

This approach can be successful in some types of commercial transaction, but in many types of IP transaction it is flawed.

Many IP-related transactions involve a long-term relationship, eg a research collaboration or an IP licence agreement.  Some level of trust is essential in such a relationship.

Deciding to enter into an IP transaction usually involves some individuals within an organisation having confidence that the transaction will further their interests.  The objective value of the IP assets may be uncertain (leaving aside examples such as buying the back catalogue of the Beatles, where the value of the IP asset has been clearly established), so a subjective element of confidence in the assets that are protected by the IP may be required.  This confidence can easily be damaged if the other party is perceived to be untrustworthy or unreliable.

An alternative viewpoint is to say, if the other party breaches the contract, you can sue them.  You don’t need to trust them.  But this approach assumes that it is easy to determine whether a party has breached the contract.  Well-drafted contract clauses will help, but in long-term relationships there is sometimes a history of fault (or failure to comply strictly with contractual procedures) on both sides, and it is not always easy to disentangle each party’s responsibility when things go wrong.  Where the IP assets have an uncertain value (eg where they related to technology in development that has yet to be commercially successful), it may be difficult to determine whether the costs of litigation are justified.

Here are some points that can decrease trust during contract negotiations:

  1. Agreeing a point then later denying you have agreed it.
  2. Declaring a point to be a deal-breaker, then later accepting it.
  3. Using bullying or browbeating tactics to win your point, rather than using good arguments or acknowledging openly that a point is simply a must-have point for your organisation, whether or not it is logical.
  4. Highlighting some, but not all, of your changes when you send a revised contract draft to the other party.
  5. Showing a lack of respect for individuals in the other party’s negotiating team.
  6. Being unreliable or inconsistent in what you say or do.
  7. Non-disclosure of material facts, eg that you have granted someone else a right of first refusal over the assets that are the subject of the present negotiations.

Of course, this is just our list.  Others may have a completely different list, and if the parties are not starting with the same basic values, trust may be difficult to earn.

2 Comments

Filed under Commercial negotiation

2 responses to “The importance of trust in commercial negotiations

  1. Chuck Till

    Agreed, and trust comes in (at least) two forms: direct interpersonal trust between individuals who are putting the deal together, and what I’d call intercorporate trust established through prior successful engagements — or perhaps as mandated by a dominant common customer (a more subtle form of mutual assured destruction).

    Interpersonal trust can be a great asset to get a deal done and to resolve any problems early on, but eventually one person or the other who negotiated the deal will move on. Intercorporate trust, on the other hand, can be a long-run factor — especially in some parts of the world.

    Of course, woe to he who relies exclusively on trust to the detriment of contract language. As the widely quoted Russian proverb puts it, “trust but verify” (Доверяй, но проверяй).

  2. Douglas Robertson

    Great list. Trust is essential but it is only part of acting with a strict code of ethics in negotiation. I would add don’t take short term advantage when you are building a long term relationship. trust is also easier if the other mantra “keep things simple if at all possible is followed”. Over-complexity leads to confusion which leads to mis-understanding which results in unintended breakdown of trust.

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