simplifying contract negotiations - swiss re · essential elements of our contract. rather than...
TRANSCRIPT
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: [email protected]
37
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