Risks in Negotiating a Business Contract
Contract risk often focuses on the allocation of risks that arise during performance of a contract. As noted in Chapter 3, an IACCM survey indicates that a list of the top contract terms of today—that is, the terms negotiated with greatest frequency— is dominated by clauses that focus on the consequences of failure, claims and disputes. While these terms are important, negotiators should not overlook even greater risks that can be far more costly and, as we will see later, can even bankrupt a company.
In this chapter, we focus on the three main categories of these larger "big picture” risks: legal risks in contract formation, risks relating to negotiation strategy, and risks arising from overemphasis on legal concerns to the detriment of business goals. We first examine legal risks that arise in contract formation. Ignoring these risks can result in lost opportunities when legal requirements are not met or in liability when one side makes an unintended contractual commitment.
Second, we explore strategies designed to minimize the risk that negotiators will overlook an opportunity to create greater value that benefits both sides. Related to this risk is the importance of adopting an implementation mindset during contract negotiations.1
Third, we review the risks that arise when too much emphasis is placed on creating a legally perfect contract. this risk is illustrated by a recent situation in the united States where a company negotiated the sale of a property to a buyer for around $30 million. Signing the contract was delayed when the buyer's law firm insisted on including a clause that immunized the client from a low-probability risk. in the meantime, the seller found another buyer who was willing to pay over $100 million. The law firm's desire for a perfect legal contract resulted in its client losing over $70 million in value! this chapter introduces lean contracting as a method that enables the development of contracts that are management as well as legal tools.
the chapter concludes with discussion of a management tool that is very useful when you are faced with negotiation decisions that are affected by risk and uncertainty.