On Second ThoughtYou cut a bad deal. Now what?
Remember that big sales contract you negotiated last fall, the one that got you a fat year-end bonus? Well, your boss has just told you that the customer will have to pay more because raw material costs have nearly doubled. And that contract to renovate your kitchen? The contractor now wants to start work next year, not next Monday.
Whenever you negotiate a deal, there’s a chance you’ll have to renegotiate it. Sometimes you want to make the best of what has turned out to be a bad situation. Sometimes the other side wants to claim a benefit that you thought was yours. Renegotiation is so commonplace that it’s best to think about the possibility before it happens and then be ready to handle it when it does.
First of all, before you agree to anything, take the time to talk through the details and to build a strong relationship with the other party. Recognize that while speedy deal making may seem efficient, the time you save may be more than offset by the time you’ll spend redoing a bad deal. You should also remember that any future renegotiation is more likely to succeed if both sides have a relationship that they want to preserve. In appropriate cases, try to obtain the right to renegotiate important terms.
Traditionally, people attempt to come up with a contract that foresees all possible eventualities. Sometimes it’s a better idea to view a long-term deal more as a continuing negotiation, one in which you constantly adjust your relationship as conditions change. Accordingly, your contract might state that at specified times or upon specified events, you will at least review certain provisions.
Later, if the deal breaks down, you’ll want to avoid hostility and focus dispassionately on your interests. One key factor to consider will be how much you value a future relationship with the other party. Are your contractual rights worth more to you than that relationship and its potential benefits? In that case, you may end up thinking about litigation. But even if the relationship means a lot to you, you’ll want to keep legal issues in mind. As you approach the renegotiation process, each side needs to ensure that the other has a realistic understanding of the alternatives to success, particularly the risks of facing each other in court.
It’s also important to choose the right process, place, and time for renegotiation. Sometimes even terminology can make a difference, especially if it mollifies the other side. The word “renegotiation” can conjure up images of a drastically rewritten contract. You might instead call what you’re doing a “review,” a “restructuring,” a “rescheduling,” or merely a “contract clarification.” Or you could call it a “request for waiver”; that way you show your respect for the agreement while granting one party relief, if only temporarily, from contractual obligations.
Bear in mind, too, that a successful renegotiation may depend on input from parties besides those who signed the original agreement—parties who later gained an interest in the deal, such as labor unions, creditors, suppliers, and government agencies. For example, say a troubled real estate developer is renegotiating the terms of a bank loan for a partially completed office building. The parties will never reach a sound new agreement without the approval of the unpaid contractor whose lien on the property could block refinancing.
You might want to enlist the help of a mediator or other neutral third person as well. Such a person may not only facilitate communications and suggest solutions to problems; he or she can also manage the renegotiation in a way that creates valuable new opportunities for both parties.
The idea of renegotiation as an opportunity is not to be forgotten. When someone with whom we’ve made a deal demands renegotiation, our immediate reaction is to anticipate a loss. Think of renegotiation as a chance to raise issues you weren’t aware of the first time around, and to find new ways to make everything work better for both sides.
Even if it doesn’t, it need not be a crisis. You can indeed renegotiate the pricing of that sales contract without losing the entire deal. You may even persuade the contractor to show up for work on the kitchen next month, if not next Monday. Renegotiation is just part of business as usual—and if you think of it that way, you’re more likely to benefit from it.
JESWALD W. SALACUSE is the Henry J. Braker Professor of Law and former dean of the Fletcher School of Law and Diplomacy. His latest book is Leading Leaders: How to Manage Smart, Talented, Rich, and Powerful People (AMACOM).