Chapter 3

Preparing to do the deal

Making a deal

Negotiating a contract is the synthesis of skill, bluff, artistry and theatrics always with an eye on what the law allows you to do.

Great contract negotiators combine all these elements in a perfect balance. Because of this ability they can often do remarkable deals.

The gift of being able to portray oneself selectively as the dominant, compassionate, powerful, yet reasonable party during the course of a negotiation is a rare skill.

As I mentioned, it is not the purpose of this book to teach those skills. The purpose is, however, to flag a number of legal issues that negotiating parties should consider prior to commencing discussion of any proposed commercial arrangements.

Addressed below are various matters that should be given close and detailed consideration when preparing for the negotiation. At no stage is it necessary to disclose any of these matters to the other side. In fact, on 99 occasions out of 100 it would be to your commercial disadvantage to do so. Often negotiations move very quickly and decisions need to be made as to commercial terms without the opportunity for much contemplation or consideration.

Like almost anything in life, preparation is key. The steps you take in preparation for a negotiation are instrumental. Having an advanced, and if possible, concluded position on each of the matters set out below will allow you to enter the negotiation on an extremely solid foundation.

Further, if your counterparty has not given consideration to these issues in the same way, you are at a significant strategic and tactical advantage. You are in a position to decisively address the matters discussed during the negotiation without the need for further thought or contemplation. You can, depending on the personal dynamics and all the circumstances of the negotiation, tend to develop a ‘hothouse’ atmosphere on the other side where you can keep them under pressure to do a deal that may be to your commercial advantage and, as a corollary, less than perfect for them.

Know what you want

This sounds trite. You may understandably ask yourself — who goes into a negotiation not having a clue about what they want? The short answer to that is, a bad negotiator.

However, otherwise good negotiators may go in knowing in general or conceptual terms what they want out of the deal. This does not arm them with the necessary information they must have so as to properly and fully advance their commercial interests.

To tell a sophisticated commercial negotiator going into a contract to ‘know what you want’ sounds offensive. It is not intended this way. There are different levels of knowing what you want in a commercial contract. The more precision you have the better you will be positioned to negotiate a contract that is commercially advantageous and meets all your requirements.

Knowing what you want involves the following three broad elements:

There are distinct and separate matters parties need to decide upon prior to going into contract negotiations. These are not simply to ‘do the best commercial deal’. You should make sure the elements have been identified, considered and later, fully negotiated so they can be articulated in a written agreement. The more that can be included in the agreement, the better the position you are generally in.

A negotiator should be properly suspicious of a party on the other side who thinks the ‘less is more’ theory of contractual expression is the way to go. They may present themselves as wanting an economy of fuss and to keep things simple. The probable reality is that they may also be seeking to increase their flexibility under the contract so they can deliver goods or services in different terms from those you think you are buying. This allows them to ensure they maximise their profitability, prospectively at your expense.

As we all know, there is an army of deceptive negotiators in business out to advantage themselves at the expense of counterparties.

Beware of a negotiator who tries to create a situation where their obligations under the agreement are set out in very general and unspecific terms. This will allow them to perform their obligations to the lowest letter of the agreement. This may be contrary to your assumption or understanding of how the agreement is to be performed.

Returning to the dragline example and looking at it from the mining company’s position, the following are the sorts of matters that it would be appropriate to give detailed and close consideration prior to the negotiation:

• What are the precise applications the dragline is to be used for?
• What is the reasonable period of time the company expects to have the dragline in operation?
• Over what period of time should the dragline operate without the necessity for overhaul or substantial maintenance?
• What is the dragline’s production capacity?
• When must the dragline be delivered?
• If the dragline is delivered late, does it give rise to a right of termination? Are there damages clauses where the manufacturer must pay the company a specified sum identified as being its damage. In this context the damages estimate must be reasonable and neither extravagant nor unconscionable
• Who will install the dragline?
• What warranties or performance guarantees will the company require for the dragline?
• What is the dragline worth (based on market value and how much moveability there is in price)?
• What service is the manufacturer obliged to undertake, if any?
• If the manufacturer is not obliged to service the dragline, must it give a warranty and undertaking to cooperate to the fullest extent possible with the entity or company with whom service and maintenance contracts are entered into?
• What is the policy and pricing structure of the manufacturer on spare parts?
• Will licences and intellectual property rights be given to the company? They may be important for emergency repairs. Intellectual property in relation to the design of the dragline may need to be given to the company so it knows the internal workings of the dragline so as to fix it promptly in an emergency. If this is the case, is this at an additional cost?

This is only a shortlist of commercial considerations in relation to the contract. In reality there will be many more matters at play.

These issues should all come up sooner or later; however, the more concluded the position of the coal mining company is at the start in relation to what it wants and needs, the better the position it is in to stipulate these requirements in the negotiation on its own terms. Once these requirements have been clearly identified and set out, it is a short hop to incorporating them in the written agreement. It is hoped that during the course of the negotiation both parties can reach a point where they are at agreement on these and other material issues.

It would be regrettable if questions were unasked and issues not raised at the outset. The negotiations are the time to clearly and unambiguously address these matters and the result of the negotiations should be fully explained and incorporated in the agreement.

Many a party has rued a lack of preparation in negotiating an agreement. Lack of preparation means things are missed. It is a regular refrain of a contracting party that ‘I thought it was in there’ or ‘I wish we had thought of this at the time’.

Often there is no great mystery, magic or novelty in these points. It only requires a party sitting down at the outset and considering closely what it needs out of the deal on a macro level (such as delivery time and price) and a micro level (such as warranties and intellectual property rights).

The negotiating position for the dragline manufacturer would be necessarily different. It would need to consider issues such as:

• Do they have any products that are currently fit for purpose? In the light of the requirements of the coal mining company, can they sell a product currently in their range? Does it need customising in any way? If so, how? What will this cost?
• What is the delivery time to be?
• Can the products be manufactured profitably without cutting corners or skimping during the course of manufacturing that ultimately impairs the dragline’s ability to operate?
• Does there need to be a set price agreed for the core elements of the dragline and the other components be agreed on a variations or additions basis?
• Can the dragline manufacturer meet the service requirements we want? Can the dragline manufacturer provide spare parts at a commercially satisfactory price as sought by the coal mine company?
• Is there to be a penalty clause in the agreement if we build the dragline and the contract is terminated by the coal mine company for any reason at all?
• To what extent will we need to make an investment in people or plant and equipment in order to honour the contract? If this is significant, a term should be incorporated in the liquidated damages clause that if the coal company terminates the agreement prior to it being performed fully and completely by both parties, damage is expressly admitted by the coal company.

As you will note from a comparison of the above, many of the issues are common to both parties.

They will have different perspectives on them but they will need to reach positions of agreement.

It has been my experience in participating in negotiations of this type that the more prepared a party is, the better the commercial deal they can do.

Often a matter is cleverly and strategically raised by a party that is well prepared and has given full consideration to the issues. Preparation means you will be more able to assess the timing of hitting the other side with a big point for maximum effect in your interest.

Take for instance the warranties that the coal mining company would seek from the dragline manufacturer in our example. If it had completely and fully considered what it wanted from the manufacturer, and the manufacturer had not given the same level of consideration to the warranties it may offer, it may be that the coal mining company can extract a better suite of warranties than the manufacturer should give. This is because in their eagerness to do the deal and with their core level of confidence in the nature of the product they provide, they will make warranties that are excessive or beyond what the equipment can reasonably deliver. This will arm the coal mining company with a significant commercial advantage. A breach of a warranty in this sense gives rise to a right to damages. If the manufacturer has been excessively confident in the warranties it has given, and the machine does not live up to them, it may be that there is a damages claim by the coal mining company in relation to the breach of the warranty.

This could be a significant sum of money.

This is an example of how a more prepared party can obtain a commercial advantage without being deceptive, dishonest or unethical. It is merely preparation and a more detailed and comprehensive consideration of all the commercial issues in relation to the negotiation considered earlier that has given them the upper hand.

Allied to this may be a sense of time pressure that the coal mining company seeks to place on the dragline manufacturer. Subject to the dragline manufacturer’s susceptibility to this tactic, it may cause it to concede on matters that appear innocuous (like general warranties) but actually have an important and legal contractual context and consequence.

As a general rule, no amount of detail is too much in this context. The greater the detail you add in, the more obligations you impose on your counterparty to do what you want them to do. Leave them as little discretion as possible as to these issues.

A regular feature of disputes is the assumptions that develop in the respective parties. The contract sets out the terms and conditions. It may be general or specific. The more general the contract is, the more likelihood there is for unhappiness to develop by one party or the other as to the way they ‘assumed’ the contract would be performed.

The Fixin’ Management Consultants example is relevant here. The mining company may have formed a view with its own management team as to the role the management consultants will play, what they would deliver and when they would deliver it. On the other hand, Fixin’ may form a view that they were to do the minimum possible (and therefore charge a relatively modest amount) given the scope of the job was not definitive.

Neither party is being dishonourable. On one hand the mining company’s assumption is that it will get a comprehensive review of the structures and the form of its business. On the other hand Fixin’ are keen not to be seen as overchargers and opportunistically doing work that has not been requested. They want to keep their bill as modest as possible in an attempt to maintain the goodwill of the mining company and perform their professional obligations within ethical bounds.

The absence of a clear explanation as to the contractual terms has lead to a potential dispute. Both parties are unhappy. Litigation is threatened. Possibly even more importantly, a budding commercial relationship that could have been to the mutual benefit of both parties into the future has been, to all intents, destroyed.

It is all about knowing what you want.

Setting out what you want from the contracting party precisely and deliberately is a fundamental first step in contractual negotiations. This should be done before the talks start. It has three main benefits:

Here a dispute developed solely due to the lack of clear scope. The property development company knew what it wanted; however, it didn’t go to the second stage of identifying precisely what it wanted, when it would want it and the general circumstances of its demands.

The more precise the scope of work under a contract, the better position the company buying the goods or services will be in if it is breached by the counterparty.

A contract that clearly sets out what the other party is to do allows for easy reference as to whether it is breached or not. It is sometimes hard to discern whether a breach has occurred in a contract. It allows for performance in possibly many and varied ways. You need to know the terms before you can work out if it is breached. General and ambiguous terms mean it can be hard to work out which terms, if any, have been breached.

Know what you don’t want

This is the flipside of knowing what you want. It is sometimes useful in contracts to have negative stipulation. That is, to tell the other side the goods and services you will not need from them. This is more important in service contracts than for goods or products.

Expressly carving out what you don’t want helps in that it:

• stops you wasting time negotiating on a service they want to provide but you don’t want from them
• narrows the scope of the work
• assists you in disproving dishonest claims for payment for goods or services you did not buy.

Take the example above of Deep Land and the accountants. If they purported to provide tax advice gratuitously and outside the scope of the agreement, and more importantly it was never requested from them, the recipient may not have to pay for any advice received. This is because the company did not enter into a contract for a service of that kind. No-one had asked the accountants to do this work. They had made an assumption that it would be necessary. However, that assumption does not give rise to a contractually enforceable right.

As you will appreciate, there may be an uncertainty about whether the work was in the scope of a broad contract. If you expressly include a negative stipulation in the contract telling them not to do this work, you have put yourself in the strongest possible position to comprehensively and quickly deal with the dispute by pointing to that clause and telling them that they did that work at their own risk and cost.

Knowing what you will do

A key aspect of negotiating contracts is not overpromising. What you say in the negotiations may be relied upon by your counterparty even though a half promise or overly enthusiastic comment you made does not end up in the written agreement.

In this sequence of events the representation made by the distributor was that it could do the work and had the skills in-house to meet the urgent demand. This was in fact not the case. The relevant person who would have done the work was not available. It was not best equipped to perform and overpromised. This meant that there was a much greater risk to the mining company in having the work done.

In entering the contract the mining company relied on a representation that the work would be done by the right people. There might have been other companies that were capable of doing the work and that were better suited to it with the key person available. This is a matter the mining company did not explore because Aussie, being the body approved by the manufacturer, told them that it could do the job.

The essential problem was a representation about what the distributor could do that was contrary to its real position. If the distributor had been frank about this, it would have been much better. The mining company would have been on notice as to what the distributor could and could not do, and therefore could not have complained about being oversold.

This issue is dealt with in far more detail in chapter 6, ‘Traps for the seller — pitfalls in negotiations’.

What you won’t do

As discussed above, a general negotiation in a short form of contract may lead to misapprehension about what you are willing to do and not do under the contract. A negative stipulation again in this context can be very helpful. Even if it is not in the contract, it can be made shortly after. It is useful to put the other side on notice of what you cannot or will not do. This is important in general contracts because the scope of work is often broad and interpreting the obligations you have under it can be difficult given the scope.

The problem here is caused solely by Trusty Advertising. The lawyers beneficially set out what they will not do under the contract meaning there was no dispute as to the ambit and nature of the taxation service the lawyers were to provide. Not only were the services to be provided comprehensively set out, what they would not do was also made clear. It made the position of Trusty Advertising in making a claim for the lawyers’ failure to perform the contract simply untenable. The contract made it clear what work the lawyers would do.

What do I need to do to perform the contract?

As a party that provides a good or service, it is critical that you form a view about your ability to deliver under the contract early on.

While the suggestion above that the scope of the work be set out precisely and rigorously was from the perspective of a buyer, it is equally important for seller.

You cannot simply elect to no longer be bound by the contract and write it off as bad experience.

Once you enter the contract, you are obliged. Subject to the contract being frustrated or terminated, your obligations will last as long as the duration of the contract. Your obligations will remain as set out in the contract. They may not be particularly favourable in hindsight. It doesn’t mean you can abandon them.

It is not possible to merely allege the contract has been frustrated at law on the basis that you emotionally or commercially want out. As you will have seen from the treatment of the principle of frustration, it requires there to be an event outside the walls of the contract for that principle to apply.

Poor commercial planning or an overenthusiasm to do a deal without properly understanding the elements necessary to get that deal done will generally not be a frustrating event for the purposes of the law.

There is a real risk in a case like that you would not be able to allege the contract was frustrated as a matter of law. This is because there was no third event occurring that was outside your control. The trigger for the industrial action was your desire to put the employees on different contractual terms. If you had not done this and maintained the status quo, there probably would have been no disruption to the services and the employees would have continued executing their obligations of their employment.

Again you allege the contract has been frustrated. However, it is probably not frustrated at law; this case is another example of the risks in overpromising.

At the time the contract was entered into, the contracting party had an agreement with the company in administration. You knew things were looking grim. A prudent businessperson would have entered into a new relationship with another entity who could satisfy their obligations. While this may have made life harder and the contract would have needed a lot more supervision because you would need to make sure the new people were up to scratch, it would have ensured that in the event of disaster a safety net was there.

This is another situation where a failure to ensure you can deliver what you said you could may cause an huge and insoluble commercial problem for you.

Can they do what they say they can?

Sometimes in a negotiation the deal you are about to do looks too good to be true. This is because it sometimes is.

It is remarkable the number of people who do deals in a entrepreneurial way thinking ‘it is a risk but it will be all right’. They win the contract and then decide how to perform it. This is world’s worst practice.

It is bad for the provider. However, it may quickly become bad for the buyer if it relies on the performance of that contract in its business. It is a cold comfort to have a lawyer tell you that you have a fantastic damages claim against a company with no assets when you are suffering daily commercial loss. The fact that a court might uphold you as being legally in the right in due course is meaningless in a crisis.

There is nothing in the law that prohibits you from asking for more information from your contracting counterparty. It is up to them as to whether they are willing to deliver this detail.

A party that is willing to do a fair deal will generally give you the information you want. If they have nothing to hide and are commercially and professionally ready, in the spirit of salesmanship they probably want to display to you how good their business practices are and otherwise how they are ready to perform the contract.

The most skilfully drafted contract in the world will not save you if the other party is simply not in a position to do what it has to under the agreement. Rights of action against them may be meaningless and will ultimately be very time consuming and costly to enforce.

This heartache can be prevented by a comprehensive due diligence at the outset.

It is always useful to remember that you have the whip hand if you are buying the good or service. You have significant leverage given that they are selling to you. A giver will generally take all steps possible to satisfy a purchaser that they are ready to do the deal.

The more documents you can see in support of their assertions about their readiness, willingness and ability to proceed, the greater the chance you will stop the problem from happening.

What ‘form of life’ is your counterparty?

There are various types of legal personality in which business can be conducted. In very broad terms, the two types of legal entities with whom you will be negotiating a commercial contract will be a person or a company.

A person is of course an individual. They run and conduct a business in their own name. They are therefore the contracting party. They will be the person named on the agreement. All of the rights and obligations in the agreement conferred on their side will be held by them. They have to personally perform them. If they breach the agreement the consequences are for them personally. Any breach will either need to be made good by them or, alternatively, any damages awarded will be paid from their assets. If they cannot meet their obligations under the contract it may be a consequence that they are ultimately bankrupted.

A company is a far more difficult beast to contract with. A company must have directors and shareholders. Directors are the controlling mind of the company. They make the decisions for the company as to what business it will do and how it will conduct itself commercially. It must also have shareholders. They own the company. The shares in the company are the equity or value it has. Shareholders may or may not be directors. They generally have power to elect the directors or nominate them.

A company is a useful tool for a party that wishes to enter into a contract but avoid personal liability. If you enter into a contract with a company, your contract is not with the directors or shareholders. It is with the company itself. Although the directors and shareholders look like the company, they are not. It is a separate legal entity. Any breach of the contract will be by the company. Any claim you have arising from the breach will be against the company. If you need to sue and seek damages, the viability of that claim will be regulated entirely by the assets the company has.

It is of fundamental importance that you identify who the contracting party is to be.

This sounds like an obvious point. However, your negotiations will always be with individuals. A company is ‘incorporeal’. By that, I mean it exists as a legal notion but does not exist in reality. You cannot shake hands with a company or have it take you to lunch. You can only shake the hands of or dine with its shareholders and officers.

You will therefore be negotiating with these people in the process of entering into a contract. It is easy to be lulled into thinking that the real person you are contracting with is a director or shareholder. You know, like and trust them. They have presented well during the negotiations. They seem credible, honest and forthright. This may all be true. However at the end of the negotiations you find that a company name pops up as the contracting party. This should have been a matter to which you paid close attention right at the start.

At the outset, you will need to seek, to the best of your ability, information about:

• the financial position of the company
• the latest accounts of the company
• the company’s assets and liabilities
• the current balance sheet and management accounts of the company.

It would be brave (and unwise) to enter into a contract with a company without knowing its financial position. This is because, if the contract goes badly, you need to protect your commercial position to make a claim against that company. It is unsatisfactory to be put into the position set out above where you have a fantastic legal claim but it has no consequence. Your damage cannot be made good. If a company is to be the contracting party you will need to obtain information about that company during the process of negotiating. To proceed without this information would be at significant commercial risk and may cause you both heartache and heartburn if the contract goes badly and you are left without legal remedy.

Beware of dealing with companies. They are a way in which deceptive commercial parties can obtain the benefits of the contract yet preserve their rights to get out of it at no personal liability or suffering themselves. However, your liability and level of suffering may be acute as a result of entering into a contract with a company that has no assets and is effectively a hollow shell. The fact that it is trading — for all intents and purposes — as a viable and prosperous entity does not tell the full story.