simplifying contract negotiations - swiss re · essential elements of our contract. rather than...

Simplifying Contract

Negotiations

George J. Siedel

University of Michigan

Agenda

• Perspectives on Simplification

• Preparing for Negotiation: Power Analysis

• Business Negotiation: Specific Issues

• Contract Performance Negotiation:

Resolving Disputes

• Resources

2

Perspectives on Simplification:

The Contracting Process

1. Preparing for Negotiation: Power

Analysis

2. Business Negotiation: Specific Issues

3. Drafting and Signing the Contract

4. Contract Performance Negotiation:

Resolving Disputes

3

Lean Contracting

• Minimize legal complexity in

contracts

• Examine costs and benefits of

contract clauses

• Focus on business goals

Haapio and Siedel, A Short Guide to

Contract Risk (Gower 2013)4

Minimal Legal Terms

Scottish approach: Contracts should

emphasize free market economics rather

than legalities. Minimalist approach that

includes:

• Goods or services and their price

• Intellectual Property Rights (including

indemnification)

• Terms implied by law but not written into

the contract 5

“We have therefore agreed upon the

essential elements of our contract. Rather

than incur time and expense negotiating and

recording in writing other non-essential

terms and conditions or our contract, we

have agreed to allow the general law to

regulate such matters, implying such terms

as it may.”

Template - Pathclearer supply agreement (Clause 5)

http://ld.practicallaw.com/0-201-35766

Commercial Affinity

“[Commercial Affinity] is the attractive force

that keeps the parties together. It results

from the desire by each party to continue

doing business with the other because it is

economically sensible to do so…. [If they

can’t satisfy each other’s needs], they just

walk away from the relationship.”

Weatherley, 2005

7

“There is no minimum duration for this

agreement. We will simply continue to do

business with each other for so long as it

remains mutually beneficial to do so. …”

Template - Pathclearer supply agreement (Clause 4)

http://ld.practicallaw.com/0-201-3576

8

“Before...”

The Agreement:

23 pages

Exhibits A–H

Sample Supply Agreement for glass beverage containers between Rocky Mountain Bottle Company, L.L.C. and

Coors Brewing Company, contracts.onecle.com/coors/rocky-mountain.supply.2003.08.01.shtml9

“After...”

Pathclearer Supply Agreement, http://ld.practicallaw.com/0-201-3576

The Agreement:

1 page + 1 attachment

10

Lean Contracting:

End Product

Contracts that are: (1) short (?) and

clear

11

“There is no minimum duration for this

agreement. We will simply continue to do

business with each other for so long as it

remains mutually beneficial to do so. …”

Template - Pathclearer supply agreement (Clause 4)

http://ld.practicallaw.com/0-201-3576

12

Lean Contracting:

End Product

• Contracts that are: (1) short (?) and

clear

• Clarity especially important—and is

the focus of visualization

Can we use visualization to clarify pre-

and post-contract negotiations? That

is, can we use visualization beyond the

contract document? 13

Perspectives on Simplification

1. Preparing for Negotiation: Power

Analysis

2. Business Negotiation: Specific Issues

3. Drafting and Signing the Contract

4. Contract Performance Negotiation:

Resolving Disputes

14

Agenda

• Perspectives on Simplification

• Preparing for Negotiation: Power Analysis

• Business Negotiation: Specific Issues

• Contract Performance Negotiation:

Resolving Disputes

• Resources

15

Power Analysis: BATNA

• Your source of power = BATNA (“best

alternative to a negotiated

agreement”)

• Can you visualize your BATNA

analysis?

16

Visualizing Your Alternatives

Decide: You want to acquire Company A (21 million

expected net present value). Alternative is to

acquire Company B (15 million valuation). Price is

the same for A and B.

If A: 90% chance government will challenge and a 60%

chance government will win.

If government wins, ENPV drops to 14 million

(legal fees plus sell-off costs). If government

loses, ENPV drops to 19 million (legal fees)

If B: No government challenge17

Govt Challenge

No Govt Challenge

Acquire

Company A

Acquire Company B

Govt Loses

Govt Wins

Source: Victor, “Predicting the Costs of Litigation,” Planning Review.

18

.4

19

14

.6Govt Challenge

.9

.1

No Govt Challenge21 M

Acquire

Company A

Acquire Company B15 M

Govt Loses

Govt Wins

Source: Victor, “Predicting the Costs of Litigation,” Planning Review.

19

.4

19

14

.6Govt Challenge

.9

.1

16.5

No Govt Challenge21 M

Acquire

Company A

Acquire Company B15 M

16

Govt Loses

Govt Wins

Source: Victor, “Predicting the Costs of Litigation,” Planning Review.

20

Agenda

Perspectives

Preparing for Negotiation: Power Analysis

Business Negotiation: Specific Issues

Contract Performance Negotiation:

Resolving Disputes

Resources

21

You work for a large international company that

sells software and other products

You demand a 20M indemnity provision during

contract negotiations with customer

Customer resists and attempts to eliminate this

provision

Negotiations over this provision usually take an

additional 60-90 days (which cost 1M in lost or

delayed sales and transaction costs)

Past experience shows a 1% chance you will

invoke the indemnity.

Should you drop your demand for the indemnity

provision?22

Cost of Delay

In this case, $1 million cost of delay

In another case, Company A agrees to sell

property to Company B for $30 million.

B’s lawyers delay the contract signing,

insisting on a contract clause immunizing

B from a low-probability event.

Another buyer enters the picture and

agrees to buy the property for $100 million

23

You work for a large international company that

sells software and other products

You demand a 20M indemnity provision during

contract negotiations with customer

Customer resists and attempts to eliminate this

provision

Negotiations over this provision usually take an

additional 60-90 days (which cost 1M in lost or

delayed sales and transaction costs)

Past experience shows a 1% chance you will

invoke the indemnity.

Should you drop your demand for the indemnity

provision?24

No provision

Require indemnity provision

Indemnity unnecessary

Indemnity necessary

25

-20M

.99

.01

0

-1M

No provision

Require indemnity provision

Indemnity unnecessary

Indemnity necessary

26

-200K

.99

.01

0

-1M

No provision

Require indemnity provision

Indemnity unnecessary

Indemnity necessary

27

“Risk is about balancing

consequence and probability.

Here is an example where

consequence was managed

without regard to probability.”

Tim Cummins (writing about a company that

initially insisted on indemnity provisions)

28

Agenda

Perspectives on Simplification

Preparing for Negotiation: Power Analysis

Business Negotiation: Specific Issues

Contract Performance Negotiation:

Resolving Disputes

Resources

29

Dispute Resolution:

A Decision Tree Test

Your company has sued a supplier for 4.6 million. There is a 50-50 chance that your company will win. Future legal and other expenses to litigate the case total 400,000.

The supplier has offered to settle the case for 2 million. Should your company accept the offer?

30

Continue

Settle

Win

Lose

31

.5

.5

4.2 M

-400 K

2 M

Continue

Settle

Win

Lose

32

1.9 M

.5

.5

4.2 M

-400 K

2 M

Continue

Settle

Win

Lose

33

.2

.3

.4

.6

.7

.8

Package similar

EV = $1.8 M

Settle

Continue No Access

Invalid

Access

Package not similar

Copyright valid$6 M

$ - 300 K

$ - 300 K

$ - 300 K

$1.5 M

$4.7 M

$3.2 M

34

Agenda

• Perspectives on Simplification

• Preparing for Negotiation: Power Analysis

• Business Negotiation: Specific Issues

• Contract Performance Negotiation:

Resolving Disputes

• Resources

35

Resources

negotiationplanner.com (free)

• Negotiation Planning Checklist

• Negotiation Style Assessment

• Checklist of Psychological Tools

• Personal Negotiation Performance Review

• Company Negotiation Performance Review

Massive Open Online Courses (MOOCs = free)

• Successful Negotiation: Essential Strategies & Skills

• Contract Management: Build Relationships in Business

36

Other Resources—Beyond Visualizing

Contract Terms?

• Visualization of Incoterm decision when

preparing for negotiation:

http://incoterms.abh-ace.be/en/index.html

• Other?

Contact: gsiedel@umich.edu

37

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