5 traps in contract negotiations

Know them all and beware!

Negotiations are an integral part of conducting business. The terms ultimately written into the contract and the nature of the collaboration depend on them. I support my clients during negotiation meetings, often representing them directly. We have specific goals established, and I know how to achieve them. Sometimes, clients come to me with signed contracts, asking for support in renegotiating the terms. I must admit, these are difficult and stressful assignments for my clients. I always ask what happened that they want to renegotiate or terminate the collaboration. Most often, five reasons arise, which I will describe below.

The first reason is a lack of flexibility regarding changing economic conditions. Recent times have shown us that even longstanding businesses can lose everything due to reasons beyond their control. Global pandemics or wars in neighboring countries are evidence of this. An example can be seen in transportation costs, which have been skyrocketing, reaching astronomical amounts. Calculations show that it is no longer profitable to purchase a particular product because the transportation cost exceeds its value, and the margin suddenly becomes negative, leading to financial problems in the longer term. Fluctuating fuel prices, inadequate availability of maritime containers, or air transports are very common challenges nowadays. This also affects the prices of raw materials, semi-finished products, and finished goods. If a contract between companies is concluded, for example, for a year, and the prices of goods are predetermined and not subject to change, it can lead to a very disadvantageous situation for at least one of the parties.

During negotiations, therefore, remember to include a margin for any changes due to independent factors. Such a provision can be negotiated in several ways, for example, by specifying a specific price variable, taking into account the inflation of a particular country or fuel prices.

Another trap in contract negotiations is the lack of consideration for the benefits of the other party. Representatives prepare for negotiations considering only their expectations and what they themselves want to achieve. They do not thoroughly analyze what the other party can gain from the collaboration. Sometimes, the differences in expectations are so significant that no agreement is reached, which I consider a very good move because it avoids many unpleasantnesses in the future. It sometimes happens that a representative or representatives of one of the parties are very familiar with negotiation techniques, and even manipulative ones, and an agreement is reached that is very unfavorable for the other party. Fulfilling its conditions is difficult or even unprofitable, leading to frustration for the owners of that particular business.

The above situation leads to another trap, namely, the lack of a win-win situation, where both sides benefit equally from the collaboration. Companies stick to their assumptions and are not willing to make any concessions. Negotiations are difficult, and the side that has greater persuasive power or market position wins. It happens that clients tell me that at the meeting deciding on the collaboration, they were significantly outnumbered compared to the other side. Of course, it’s their mistake because they didn’t establish beforehand how many people would participate, or they didn’t ask to reschedule the meeting. As a result, they signed an agreement that has nothing to do with a win-win situation.

Another point worth paying attention to is the amounts specified in contractual penalties. The contractual penalty should be reserved in a specific amount, i.e., in money. However, it is not necessary to determine the amount of the contractual penalty directly by a specified sum of money, so during negotiations, this point should be crucial. Often, parties focus only on the benefits and profits they can gain from the collaboration. They vigorously negotiate the prices of goods, services, delivery terms, and leave contractual penalties until the very end. They enter amounts without calculation, without analysis, and the consequences of this can be irreversible. An example is a construction company from Wrocław, which, after imposing contractual penalties, had to contribute to the investment. This case was widely publicized in the media, but there are many such cases, most of which will not be read about in the press.

The time spent on a thorough risk analysis is invaluable. I recommend using the services of financial analysts at this point, who show several possible solutions in the event of one of the parties not fulfilling the contract. I realize that without risk, a business cannot be built. However, it is worth having everything calculated, and the amount of contractual penalties should be primarily realistic and commensurate with the losses incurred.

The last trap I want to draw attention to in this article is the lack of legal assistance. Parties meet, draft an agreement on forms downloaded for free from the Internet. Such documents can only serve as a plan or initial template for negotiation. Each situation is different and requires an individual approach. After the negotiations are completed, the agreement is drawn up by a lawyer, usually of one of the parties, and it must be reviewed by the lawyer of the other party. After acceptance, such an agreement can be signed. Without legal support, a company exposes itself to huge risks and losses, which can even lead to bankruptcy. Legal assistance is therefore essential when signing any contracts.

There are many traps in contract negotiations, so it is essential to prepare for meetings in the right way. How the parties negotiate and what they ultimately agree on affects their collaboration and relationships. In the event of any misunderstandings, the agreement is the document reached for in the first instance. It is worth ensuring that the points contained and negotiated in it are thoroughly considered and analyzed.

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