10 tips for successful contract negotiations

tear papers in halfSome of the following points touch upon negotiation techniques, but the main thrust of this article is about the process for conducting successful negotiations.  Being professional and having an efficient process can be just as important, if not more important than some of the softer skills of negotiations.  Regrettably, the process is sometimes dismissed as a bureaucratic detail by the impatient negotiator.

  1. If it doesn’t seem right, don’t do it. Over the years, IP Draughts hasfish come to trust his instincts: if the deal (or the other party) smells rotten, it probably is.  If people are asking for things that don’t make sense, or if they bluster when asked for information about their organisation or ultimate owners, there is probably a hidden agenda.  Sometimes, the client’s commercial leader is so keen to make the deal happen – so close to the action – that they don’t realise that there is a strong fishy smell.
  2. Keep it simple and conventional. Overly-creative deal structures are fraught with difficulties.  In IP Draughts’ experience, the parties who come up with them tend to believe that, through persistence and imagination they have found a win:win solution that heath robinsonaddresses everyone’s stated concerns and removes a difficult roadblock.  Yet the structures often require much more extensive legal drafting than the commercial parties realise when they dream up the structure.  IP Draughts recalls a joint venture and licensing structure that Elan Pharmaceuticals presented to one of his clients about a decade ago.  His summary of it took up about 6 pages of text, and involved colour coding different parts of the deal structure (loan, licensing, share ownership, control, etc) to make it comprehensible to his commercial colleagues.  IP Draughts much prefers to see simple, straightforward deals that everyone understands, even if they don’t achieve all the subtle advantages (eg tax or liability) that are obtained by more complex arrangements.
  3. Agree the main elements of the contract before drafting a written contract – work, price, etc.  But only the main elements – don’t get bogged down in details.  If you are using a term sheet, it should be no longer than 2-4 pages.  If it gets any longer, tear it up and start again, focussing only on key points.  If presented with a lengthy term sheet that has pages of IP-related definitions, push back and go for something much simpler, or go straight to drafting and negotiating the final agreement.
  4. Involve your lawyers. Successful contracts are a team effort.  Choose high quality, user-friendly lawyers and involve them at an early stage.  They bring useful skills, such as clear and accurate recording of the commercial terms of the deal, and they may have experience that will assist you in the negotiations. They are well-placed to fill in any gaps that you may have left in your commercial discussions, and to point out any issues, eg that the proposed terms do not comply with company policy or are illegal.  You may also need other professionals in the team (eg scientists, accountants) and similar comments could be made about effective use of their skills.
  5. Manage your lawyers. To get best value from your lawyers, and best value for money, you need to give them proper instructions and guidance.  Some lawyers, if left in a vacuum of instructions, will take every point, and push it to the nth degree until told to stop.  This may be counter-productive for the deal, and is almost certain to involve wasted abdicationexpenditure.  It may be tempting to “leave it to the lawyers”, particularly if they have more experience than you of the type of transaction.  But that is no excuse for abdicating responsibility.  Ultimately, the client takes the commercial decisions about what goes in the contract, not the lawyer.  This is a good and valuable division of labour.  You will get far more value out of your lawyers if you manage them effectively.
  6. Manage your colleagues. In some organisations, the commercial leader will seek input from colleagues in different departments, eg finance, sales, patents, tax.  This may result in a shopping list of terms that the organisation requires, which the commercial leader must propose in the negotiations.  That is fine as far as it goes, but someone – usually the commercial leader – will at some point need to bargain on some of the requested terms, and may need to make concessions.  There may be an internal negotiation on the terms, just as important as the external one with the other contracting party.  Separately, there may be an issue of the other contracting party seeking to “divide and rule” by having discussions with other people within the commercial leader’s organisation.  The commercial leader needs to ensure that the organisation speaks with one voice and can take rapid decisions.
  7. Think a few steps ahead. Some commercial leaders don’t plan ahead; others are very good at planning.  If you want to hold a negotiation meeting on a particular date, think backwards to how long before the meeting a draft agreement must be think aheadprepared, and whose approval or input will be needed for the draft. If you want to involve a particular lawyer in a meeting, make sure they are  available before booking flights for yourself to attend the meeting.  If you need to have the agreement signed by a particular date, think about whether there needs to be a Board meeting to approve the agreement and how much notice is required to hold a Board meeting.  None if this is rocket science, but mistakes of this kind happen sufficiently often to make it necessary to make these obvious points.
  8. Give yourself time and space to negotiate the final contract. Sometimes, a client’s commercial representative is so eager to get the deal done that they make concessions too early (assuming that the other party will reciprocate), or take other unwise decisions.  For example, he may have heard his opposite number agree with him that both parties want to get the deal done quickly and will work at full speed to make it happen.  But while, for the client, that means turning around drafts in 24 hours, for the other party it may mean turning around drafts in 2 weeks.  Turning a draft around in a very short space of time may be technically possible but can lead to mistakes or points being overlooked.  take it slowNor is it necessary to decide things instantly, except perhaps in the last rounds of negotiations when the issues have narrowed and been rehearsed internally.  On a similar theme, don’t call people up, unannounced, and expect them to negotiate the contract terms (or accept this from the other party), at least not if lawyers are to be involved.  This approach to negotiating may be fine for a certain kind of spontaneous free spirit, but for busy lawyers it can be immensely irritating, particularly if they aren’t prepared for the discussion.
  9. Try to understand the other party’s point of view. Try to work out what the other client wants from the negotiations.  Ask lots of questions.  Don’t assume they have the same objectives as your organisation.  One example is what working quickly means, as mentioned earlier. Another example that IP Draughts has encountered is  where the parties to a proposed collaboration have fundamental, and irreconcilable objectives in relation to IP ownership and use.  Because the parties didn’t spend time discussing these objectives, but moved straight to detailed drafting, these differences only became apparent after several rounds of drafting, with each party proposing subtle changes of language that did nothing to address the other’s fundamentally different point of view.
  10. Don’t lose focus when you think the deal is done.  There is an understandable tendency, when the last negotiating point has been discussed, agreed, and struck from the list, for parties to relax and start making assumptions about the contract process.  IP Draughts was involved in a contract recently where the client assumed, based on the other party’s comments about urgency, that the other party would sign the agreement and return it within 24 hours.  The commercial leader was away for a few days and was not pleased when she returned to the office to find that the contract was no further forward, and indeed the other party had found a number of further drafting points that they wished to discuss.  If it is important, try to discuss and agree everything, down to when the final version will be prepared for signature, who will be signing it and when.  Similarly, if you don’t intend to involve your lawyers in the signing of the agreement, you need to manage the signing process with the same attention to detail that the lawyers would bring.  Basic points like signing in the right place, filling in the signer’s name and job title, dating the agreement, etc, can and do get overlooked.

6 Comments

Filed under Commercial negotiation, Contract drafting

6 responses to “10 tips for successful contract negotiations

  1. Mark, this is a brilliant and cogent summing-up of what most of us deal lawyers want to tell our clients (and which we do tell them, but then they promptly forget). I only wish this blog had a “share to” function so I could trumpet it to an even broader audience!

    My one reservation is in point 2, not because it’s wrong but because it could look like a lawyer trying to make an easy life for himself. The problem with complex structures is not that they’re hard to draft, but that they’re hard to understand by the principals and therefore hard to implement on the ground. There’s a bit of “water will find its level” in transactions, so that all the complexity will resolve in practice to a much simpler structure that may involve actual violations of the written agreement or loss of those legerdemain tax advantages.

    • Thanks, Vance. I would have happily settled for brilliant or cogent, but both….!
      I completely agree with your other points. I can think of one client that we have advised in the past where, at an operational level, both parties to their contracts seemed to ignore the contract terms after the contract was signed. This made advising on existing contracts rather difficult. There is another blog article to be written on 10 tips for ensuring that contractual rights and remedies are not lost. But I suspect that would stand even less chance of being followed than the present article!

  2. Pam, indeed! Ultimately my preferences are neither here nor there. If clients want to devise ultra-sophisticated structures, and pay me to do the legal drafting, I am up for the ride. As long as they recognise that it is not the lawyers who are responsible for making things complicated!

  3. pchestek

    “even if they don’t achieve all the subtle advantages (eg tax or liability) that are obtained by more complex arrangements.” LOL, good luck with that!!

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