Documentation should not be viewed as a burden, a hassle or distraction. Rather, documentation helps parties define and set expectations. Documentation is an opportunity to discuss various issues that may arise (given past experience with similar deals) and how the parties agree in advance to handle. In short, documentation is an opportunity for discussion of important issues, a means to allocate risk while building trust and removing uncertainty.
Any well negotiated understanding should be reflected in a well drafted document tailored to the situation at hand. The time to read documentation of course is before signing not after one side is citing provisions in a demand letter of some sort. In reviewing documentation, be mindful of the mistakes identified in the book—such as being too quick to concede, too vested in haggling, and too optimistic about the ability to meet obligations.
When business challenges arise, it can be tempting for a business to want to ignore contractual obligations or to cast dispersions on a counterparty insisting on compliance. Although possible for each side to retreat to corners and solidify arguments and positions, an approach that may be more mutually beneficial would explore negotiations around possible amendments or waivers to achieve common interests.
Expressions such as the following are a sure indication of trouble:
“The bank just needs to lend more money”
“The investor just needs to provide additional funding”
“The landlord needs to step back; cash flow is tight now”
“The buyer needs to complete diligence and get the deal done on our timeframe”
“The customer needs to close the deal now or the discount goes away”
“The vendor needs to ship now, on an expedited basis, or we will never order again”
“The licensor needs to rescind its termination – we need those rights back”
In each instance, the statement indicates that another party “needs” to take some specific action to further the interest of the affected business. In reality, those other parties need not take any action including lending, funding, leasing, buying, shipping, licensing, etc. other than as specifically set forth in a contract. If a party is to be persuaded to do more than legally obligated it will only be as the result of effective negotiation around common interests and not under a threat or demand. Indeed, even a party that is legally obligated may refrain from performing—choosing to put a counterparty to the test of forcing a court challenge with its attendant delay and expense, which clearly would not reflect a well-functioning relationship.
Some variation of the above statements have been uttered by numerous cash-strapped companies. Demanding actions from others while negotiating from a place of weakness is obviously ineffectual. Companies that find themselves in this position sometimes begin to think of changing their posture by seeking to avoid contractual obligations or obtain some other upper hand benefit through a restructuring in chapter 11. Yet, the administrative costs of commencing a court supervised restructuring under current law can be exorbitant. Further, a filing itself does not provide a solution beyond additional time and opportunity to have negotiations with key constituents about a solution. Although there are situations for which chapter 11 is a perfect tool, it in no way compensates for a failure to effectively negotiate with others. In short, there is no escaping the inevitability of negotiation. Parties can escape the burden of delay, expense and uncertainty by confronting issues proactively and well before cash flow dries up and court relief begins to look desirable.
This article has emphasized the critical role of effective relationships with third parties constructed with solid negotiating skills. Although Entrepreneurial Negotiation is focused on the importance of negotiating specifically in the entrepreneurial world, certain of the fundamental points apply more broadly as well.
Companies can and do fail for any number of reasons. Failure based on ineffective relationships due to poor communications and ineffective negotiation is completely avoidable. Well documented agreements should follow naturally from effective negotiations and then serve as a framework for parties in maintaining and growing their relationship in a mutually satisfactory manner.