Friday, 2. December 2022

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Corporate Counsel: The Warning Voice on behalf of the Lord

The role of the lawyer in contract negotiations

Contracts usually involve two things: economic opportunities and legal risks.

While the management or sales department of the corporate client is often concerned with realizing the economic opportunities inherent in the conclusion of a contract (sales, profit), it is the lawyer’s task to identify the legal risks, to point these out to the client and to reduce the risks as far as possible through skillful negotiation.

I would like to briefly outline some of the observations and insights I have made and gained in the course of my 25 years of legal practice.

1. Recognizing risks requires experience and imagination

a) In order to recognize legal risks, one must know how things can go, which conflicts experience has shown to occur more frequently, and what the legal position of the client then looks like, also with regard to the evidence.

b) Example – skip to c) if you find this example boring

The client (contractor) submits a cost offer for a service to be provided by him. In doing so, he relies on the figures given by his customer (without obligation) in the course of the discussions regarding the expected scope of the order. However, the client’s draft contract does not contain any promise of a specific minimum volume.

In this case, there is a risk that the client/contractor assumes volumes in his price calculation that are much too high and therefore offers prices that are too low. Later on, halls are empty, workers are not needed and available capacities cannot be sufficiently utilized. The project ends in a financial fiasco.

The experienced lawyer knows this and therefore insists that the contract stipulate a binding minimum volume or a pricing structure that ensures full fixed cost coverage. Or a price adjustment if the volumes on which the calculation is based do not materialize. For this purpose, however, these calculated quantities must also be expressly stated in the contract and declared to be the basis of the calculation, ideally combined with a concrete price adjustment clause.

c) The lawyer must therefore think about which conflicts and constellations may arise and how his client is then legally positioned in this case.

The mental anticipation of potential conflicts sometimes requires a fair amount of imagination. To do this, it is not enough to simply read through a contract, but one must mentally “play through” the individual provisions again and again. What if …? And if this or that is added or does not occur as expected, what is the legal position of the client? Will he receive his remuneration? To what extent is he liable? What must and can he prove in each case? … Questions upon questions.

That is why the time required for a careful review of the contract is not limited to mere “reading time”.

2. Openly addressing potential conflicts is often unpopular

a) As a lawyer, one often experiences that neither the opponent – which is understandable – nor one’s own client likes it very much if you repeatedly point out possible dangers and thus “complicate” the conclusion of the contract.

After all, the business partners have been getting along very well for many years and, no, of course they have no bad intentions, they will certainly not take advantage of an unclear wording in the contract, they will not invoke a right granted “purely as a precaution”, and so on. “You have to trust us, it will work out as planned, and the risks that the lawyers always see, that is purely hypothetical, will never happen”, etc. etc. “We want to finally come to a conclusion, don’t we?”

b) As a lawyer, I can only warn strongly against this point of view. Contracts are made precisely for possible cases of conflict. As long as everything is going well, hardly anyone looks at the contract. However, the contract becomes relevant and important when the (unanticipated) risks materialize, when a (never intended) conflict arises. Then you very quickly hear from the contractual partner sentences like “But that’s what the contract says” or “Well, I personally would be accommodating, but unfortunately our management/shareholders/stockholders insist that we fully enforce our contractual rights.” And if your trusted negotiating partner on the other side is perhaps no longer active in the company, then you suddenly have a problem.

c) Therefore: Contracts are made for the case of conflict, which nobody wants and which everybody wants to avoid, but which can occur. Not always, but … sometimes it does. For this case of conflict you have to make arrangements now, when you don’t have an acute conflict yet and you understand each other well, openly and honestly. “What would you do if …”. “Who should bear the damage to what extent if …”. “Who should be able to terminate under what conditions”? – These questions must be openly addressed and answered in advance, as part of the contract negotiations.

Compromises and solutions are easier to find while everything is still hypothetical. It may be uncomfortable to bring up possible conflicts when you are just bathing in harmony, but it is necessary.

No one knows this better than the lawyer or notary who is supposed to draw up a marriage contract. Talking about the modalities and consequences of a later divorce in the love-drunk wedding frenzy? Is that even possible? – Yes, sometimes it has to be done, even if it may hurt.

d) By the way: When talking about the possible conflict, you sometimes learn a lot more about your (negotiating) partner than when you only talk about the great chances of a common golden future.

3. Good cop, bad cop – but don’t exaggerate

a) We know this negotiation tactic from crime movies: One police officer plays the tough guy who thinks the witness or defendant is an outright liar and gruffly “puts him through the wringer,” while his colleague signals understanding and compassion for the person so harshly accused, and then – as a friend, so to speak – gets an open and honest statement, sometimes even a confession, from him.

b) Of course, this does not work in the classic pure form in business negotiations. What does work, however, is that the lawyer constantly points out disadvantages and legal risks, while the client then generously announces that the concerns of his own lawyer will now – “between us” – be pushed aside in order to reach a generous commercial solution. The lawyer as the bad guy and the client as the good guy. Sometimes that works..

As a lawyer, you should not try to become the best friend of the negotiating opponent. The clients have to work together and get along in the future. As a lawyer, on the other hand, you ideally have nothing more to do with the opponent after the contract has been concluded. You should not expect anything more from the opponent than an appreciative handshake that you were a competent and fair negotiating partner. That’s OK. Business negotiations with lawyers are not about making friends for life.

c) A boundary is crossed when the lawyer poisons the negotiating climate by his over-aggressive manner and thereby torpedoes a (reasonable) contract. Of course, this must not happen. Too much of a “good thing” (tough lawyer) is bad.

d) A variation on this strategy is as follows: Have the contract drafted by a “tough guy” from your law firm who comes up with lots of nasty wording in your client’s favor and works it into the text. Then, however, send the nice colleague into the contract negotiations. The negotiating partner will trust this person more easily and may unconsciously assume that the nice colleague “certainly didn’t mean it in such an underhanded way” when she uses one or two nasty phrases. It is only when a dispute arises in the further course of the contractual relationship and the matter goes to court that the tough guy from your legal team is called upon again. – If you have the acting skills, you can of course play both roles yourself.

4. Interests and negotiating positions

a) Every negotiation should always and first and foremost consider the client’s interests.

Examples: What is better, a term of 3 years or 5 years? Remuneration according to scope of services and/or success or a fixed lump sum? – The answer to these questions depends on the interests of the client. This must be clarified in advance.

In order to be able to negotiate properly for the client, the lawyer must know what is important to the client, what he wants to achieve. In doing so, the lawyer should not blindly rely on the client’s information, but should ask for a description of the background of an intended contract. Perhaps the lawyer will think of an aspect that the client has not even thought of. This is quite often the case when drafting partnership agreements.

b) The negotiating position of the client can never be completely disregarded. The small subcontractor who wants to do business with a large DAX (Dow Jones) company (long-term supply relationship) will often have to accept worse conditions than would be the case in a contract between equally strong players. You can complain loudly about this, but contract negotiations are sometimes simply about power. Some contract partners are in such a comfortable position that they can say: This is our contract, take it or leave it. Unfortunately, it doesn’t help to argue that one or the other term or condition is unfair.

There are only two alternatives: this contract or no contract. – The second alternative can sometimes be the better alternative. It is better to have no contract than to be trapped for a long term in a contract where the legal and economic risks far outweigh the opportunities. It is the client who ultimately decides, to be sure. But in my view, it can’t hurt if the lawyer makes a clear recommendation on this. After all, this is the purpose for which he was called in by his client: to warn his client against making costly mistakes.

5. Special case: Negotiating with stronger parties

If you are not a lawyer in a large international law firm, but rather represent medium-sized business clients, you will more often find yourself in the position of dealing with a large corporation on the other side. Your medium-sized client is therefore structurally more likely to be in the position of the weaker negotiating partner. This situation often requires special skills.

Negotiation is effective, as we said above, when it achieves its purpose. The negotiation strategy must therefore be based on what you want to achieve. It is of little help to your client if you constantly and visibly “outsmart“ the CEO or managing director of the other party with your wits and demonstrate that you always have one more clever remark in store. After all, your ultimate goal is to conclude a contract that is favorable to your client, not to have everyone involved in the meeting admire you for your rhetorical brilliance and quick-wittedness.

So sometimes a certain restraint is not entirely inappropriate. Let the alpha type on the other side believe that he or she has dominated the conversation. As long as the result is right for your client, that’s fine with you.

6. The lawyer as a bridge builder (elements of mediation)

a) As already mentioned, the client is often the one who wants the contract to be concluded quickly, and the lawyer is the one who warns, admonishes and “puts the brakes on”.

However, this does not always have to be the case. It can also happen that the parties, as the ones personally affected, have become bogged down or entrenched and can no longer find a compatible solution on their own. In such cases, it is the lawyer’s task to propose workable compromises or to explore possible solutions that the parties have not even considered so far.

b) An approach familiar from mediation often helps here, namely: moving away from entrenched positions and toward the underlying interests. So ask: What are the negotiating parties actually interested in? What goals do they want to achieve with the contract?

A compromise does not necessarily have to look like splitting an orange down the middle, to take a well-known example. Sometimes the better solution can be that one party gets the juicy flesh and the other the peel, for example, if the latter needs the peel to bake a cake and has no use for the rest.

Here, therefore, two things are required of the lawyer: creativity and the ability to bring the disputants back together so that they can negotiate openly with each other.

7. Conclusion

Recognize and openly address risks, creatively find solutions that meet the interests of the parties and, if necessary, build bridges. In my experience, this is the “art of successful negotiation”.

Despite all the stress and conflict, this can also be fun.

Dr. Wolfgang Gottwald
Rechtsanwalt/Attorney at Law

DR. GOTTWALD
Rechtsanwalt
Attorney at Law

Leopoldstraße 51
80802 München

Tel.: 089/383 293-10
Fax: 089/383 293-13

w.gottwald@kanzlei-dr-gottwald.de