(203) 713-8877
·
Email Us
·
Mon - Fri 9:00am - 5:00pm - Other hours by appointment

How to Deal with an Unreasonable Contract Party

Bad things occasionally happen to good contract parties. Let’s assume you’ve done everything right in the negotiation process. You’ve been transparent about risk; honest about your capabilities; and pellucid in setting your terms. Indeed, your contract documents cause veteran lawyers to gasp at their thoroughness and shrewdness. You have planned for every contingency except the one factor you cannot contract around: sheer unreasonableness by the other party.

There are two basic ways your reasonable expectations can be thwarted by an unreasonable counter-party (hereafter, “UCP”). First, the UCP can make extra-contractual demands. In such an instance, the UCP decides that he will not accept the terms he agreed to and, instead, insists on different terms. Alternatively, the UCP nominally adheres to the letter of the contract, but acts in such a way as to frustrate its purpose. Happily, the law anticipates both situations. Let’s take each in turn.

INSISTING ON DIFFERENT TERMS – “REPUDIATION”

Let’s say the contract in question clearly calls for payment on delivery of 100 standard widgets. The UCP informs you that he will now only accept and pay for customized widgets. The customization will increase your manufacturing cost. The UCP offers no premium. Worse, the UCP informs you that he has the opportunity to make a million-dollar profit on the resale of the widgets in question. He threatens to sue you for his full expectancy damages if you do not meet his new, extra-contractual expectations.

By insisting on extra-contractual performance, i.e., by insisting that you perform more than is required of you under the contract, the UCP may have repudiated the contract as a matter of law. The law, sensibly, does not require a party threatened with breach simply to stand by and wait for it to happen. Rather, a statement of intent from the UCP that is inconsistent with an intent to honor your contract is deemed a repudiation of the contract. Under those circumstances, you can treat the contract as breached by the UCP. By accepting the repudiation as such, in writing, you may avoid being pegged with the extra-contractual burden and you may sue for any damages caused by the UCP’s attempt to change the contract terms. Of course, you also have the option of accepting the new terms because it may, after all, be profitable to proceed even on the altered terms.

One note of caution: The legal doctrine of repudiation can only be triggered by a communication that represents a clear departure from the contracted terms. Mumbles, grumbles, or arguable points – even an invitation to renegotiate – will not sustain a repudiation. In other words, anything less than a clear communication will not be construed as a breach. In that event, you may be the party charged with repudiating. It’s a brave businessperson who will make such calls without the advice of counsel.

ABUSE OF DISCRETION — “BREACH OF GOOD FAITH AND FAIR DEALING”

The second way in which an unreasonable counter-party (“UCP”) can make your business life miserable is in the exercise of contractual discretion. The law implies a covenant of good faith and fair dealing in every contract. Contractually-delegated discretion must be exercised reasonably.

A good example of this doctrine in action comes out of Hollywood. Sandra Locke was an actor and a director. She had also been romantically involved with Clint Eastwood. That relationship ended in acrimonious litigation. Locke then obtained a contract with Warner Brothers, which paid her a fixed amount for a right of first refusal in connection with movie projects she proposed. Warner Brothers had the discretion to accept or reject each project. An acceptance would result in

additional payments to Locke, as well as a boost to her career as a director. Warner Brothers turned down every project Locke pitched, though she was paid her fixed amount. Locke contended that Warner Brothers rejected her proposals, not based on the quality of her projects, but out of fear of offending Clint Eastwood.

The court looking at the case held that Locke was entitled to Warner Brothers’ honest judgment of the merits of her proposals, even though the contract never specified as much and even though she was paid the baseline amount. Even subjective dissatisfaction must be honestly held dissatisfaction. This is a condition that is implied in every contract. Hence, the fact that it was not written into the contract of the parties in this specific case had no bearing on the court’s decision.

As a practical matter, contractual discretion may involve “satisfaction,” but it may also involve a range of choices relating to dates, pricing, cooperation, changing conditions, even breaches of the spirit, but not the letter, of the contract. The test used by the courts is this: Did the UPC abuse his discretion in such a manner as to deprive you of the benefit of the contract? In such a case, you may call him out, even if he can plausibly claim he is not technically in breach.

THEREFORE …

If your contracting counter-party is unreasonable enough, he is likely to breach the contract with inconsistent demands or conduct, or breach the covenant of good faith by abusing his contractual discretion. Either way, you are not at the UPC’s mercy. A well-reasoned warning to that effect may even avert litigation.

Be a Better Business Negotiator

The prospect of negotiating a business deal can make even the most confident among us nervous. You want to make the best deal for the company, but you don’t like confrontation, and you worry that the other side will get the better of you. Sleepless nights are not uncommon. If this sounds familiar, take comfort in the fact that it doesn’t have to be this way. Following are some practical tips you can rely on to help you achieve a successful outcome to any business negotiation.

BEFORE NEGOTIATIONS BEGIN

Value your time.

Make sure the person/company you are talking with is actually serious about making a deal. Are they ready to do business, or are they just pumping you for information, with the goal of getting a better deal from another vendor/supplier? One way to gauge the interest of a prospective negotiating counterpart is to apply some gentle pressure, right at the outset. For example, you could ask:

  • “Let’s meet in person. Are you free for lunch next week?”
  • “How soon would you need ____? What is your timetable for getting started?”
  • “Please confirm that this email accurately reflects our conversation.”

If you ask for a modicum of effort, and the other party is vague or noncommittal or unresponsive, take note. You may be dealing with a window shopper, not a buyer.

Team up.

Negotiate as part of a team, if at all possible. Negotiating in pairs (or as a team of three or four), often is a better option than trying to negotiate solo. Negotiating teams can bring diverse perspectives and approaches to the process. Each team member should have a different function in the negotiation, but all must be on the same page as to objectives. Ideally, each team member should represent a different part of the business: procurement/spend management; the user group or business unit that is the subject of or affected by the negotiation; and a legal and/or risk advisor.

Know your objective(s).

What do you want out of this negotiation? If you have more than one goal, make a list, in order of priority (e.g., price, service, support, collaboration, etc.). Try to distinguish what you want from what you need. In other words, identify the deal breakers – the things you must have from the other party in order to close the deal. One note of caution: You don’t need everything. If nothing is negotiable, then what’s the point of talking?

Establish a bottom line.

As you outline your objectives, think carefully about this factor: What is your absolute bottom line – the point at which you will walk away from the deal? Is it a price point; a particular term of service; a deadline or delivery schedule? Whatever it is, don’t reveal your bottom line to the other side, but be prepared to act on it should the negotiations reach that point.

Do your homework.

This is critical. The more you know and the more facts you have at your disposal, the more confident you will be in devising a negotiation strategy and implementing that strategy once talks begin.

  • Know the industry. What is the standard rate for XYZ service or goods or parts? What is the standard delivery time? How might current industry trends impact the business you will be negotiating with? How might those trends impact your business?
  • Research the company with whom you are negotiating. Spend some time on the company website; review press releases; read articles written about the business and by the business’ leadership; learn all you can about prior business deals the company has made. Who is their competition? What are the strengths/weaknesses of this company relative to the competition?
  • Understand the current relationship between your business and the business with whom you are negotiating. Who has the power? Who has leverage? In this context, consider time and money. Does one or both of these factors make you or your counterpart needier or more desperate for a deal than the other?
  • Research the company representative who will be sitting across from you at the negotiating table. What does the company website say about this individual? Google his or her name; review his or her Linkedin profile; check social media. Can you find common ground that might help to break the ice at the outset of the negotiations? Can you glean any information about prior deals he or she has negotiated that might help you in this negotiation?
  • Understand the role of the person with whom you are negotiating. If he or she is not the final decision-maker, then one of your goals should be to build rapport with this individual because he or she will be your voice inside the company. He or she will be relaying information to the ultimate decision-maker, and you want that information to be positive. You want an ally on the inside. Be prepared to answer questions and make available any requested information, to the extent you can.

Have a Plan A and a Plan B.

You know your bottom line. You know what you need, as opposed to what you want. You have a Plan A – an ideal way you want the negotiations to go. Now come up with a very good Plan B. When you put all your eggs in one basket (or all your hope on this one deal), it weakens your position. Be open-minded, especially at the outset of the negotiation process. For example, if you want to make a deal to supply widgets, seek out more than one potential buyer. If you want to make a deal for widget parts, seek out multiple bids. Having a good alternative (or two) in your back-pocket gives you power, flexibility and peace of mind as the negotiations pick up steam.

Practice.

Review your pitch (your opening salvo) with a trusted colleague, or even a friend or your spouse—someone who understands what is at stake in the negotiations and can role-play the back-and-forth with you.

DURING NEGOTIATIONS

Demonstrate that you take the negotiations seriously.

Dress appropriately (business casual or more formal, as needed). Be on time or, even better, be early.

Project confidence.

You’re not a trained negotiator. So what? You know your business; you’ve done your homework. Take confidence in your preparation, and set an assertive, but positive, tone from the outset.

Look to collaborate, rather than to compete.

Negotiation does not have to be about “besting” the other party. Often, a better tactic is to approach the negotiations with an eye toward building a business relationship (or nurturing an existing relationship), rather than closing this one deal. One way to begin building a business relationship during negotiations is to share something about your business values. Are you a family-owned business? How did you get started in the business and why? What motivates you when you come to work every day? Ask the same questions of your negotiation counterpart, and see if you can find common ground or a common purpose.

Listen more than you talk.

One of the most important tools in negotiating is listening. You cannot respond appropriately and move the negotiations forward if you are thinking about your next move, rather than listening to your counterpart. What questions is he or she asking? This will signal what is really important to him or her. Pay attention to non-verbal cues as well — body language and posture, tone of voice, eye contact (or lack thereof).

Think twice before you play hardball.

If you employ a scorched earth, my-way-is-the-only-way approach, you are likely to be met with defensiveness, at best, or an equally hard-line position from your negotiating counterpart. You might make a deal, but you are unlikely to build a long-lasting, productive business relationship.

Don’t be afraid to take a break.

If talks reach an impasse, take a break. Come back to the negotiations with fresh eyes. Caution: Don’t let too much time pass. If the deal has momentum, you want to build on that. As time passes, enthusiasm for the deal may wane, and you may find that you cannot revive the stalled negotiations.

Don’t accept their first offer.

The first offer on the table always includes some wiggle room, with the expectation that you will negotiate – i.e., that both sides will give a little and you will meet somewhere near the middle.

Don’t negotiate with yourself.

If you make an offer, don’t make another “move” until the other party responds, specifically, with a counteroffer. Consider these two examples:

The wrong way:

You: We will sell you these widgets for $10/lb.

Counterpart: No. That’s too high. I know that’s higher than some of your competitors. We will never pay you $10/lb.

You: Our price is higher because we use higher quality materials than our competitors, but if that is too high for you, we could go a little lower. How about $9/lb.?

The right way:

You: We will sell you these widgets for $10/lb.

Counterpart: No. That’s too high. I know that’s higher than some of your

competitors. We will never pay you $10/lb.

You: Our price is higher because we use higher quality materials than our

competitors, and our widgets last longer. $10/lb. is a fair price.

That’s it. Stop talking and wait for a response. There is power in this pause. Keep the scales balanced.

Try to keep the negotiation scales balanced. When you give up something of value, make sure you get something of value in return. For example, maybe you will agree to pay more per unit, but only if the seller agrees to pay for shipping. Maybe you will agree to a strict holiday delivery schedule, but only if the buyer agrees to a flexible delivery schedule for the remainder of the year.

AFTER THE NEGOTIATIONS

Get it in writing ASAP.

Once you have reached a verbal agreement, memorialize it in writing as soon as possible. Every day that passes is an opportunity for something unexpected or out of your control to derail the deal. Get it in writing; get it signed; and get to work.

Source:

James Publishing

All rights reserved, except that you may use

these materials to promote your own legal practice

Author Kara Prior may be contacted at:

kprior@jamespublishing.com

714-434-5926

James Publishing may be contacted at:

Customer-Service@jamespublishing.com