We all know applying process to standardize the work done in the course of reviewing and negotiating a contract helps to better manage risk and improve efficiency. In this regard, have you ever considered the utility of classifying the changes made to contracts in the course of negotiations?
On the surface that might appear a fatuous question. The very idea of a negotiation implies that the parties have differing interests and are trying to arrive at a consensus for which they propose changes on the basis of compromise. While there is some truth in that explanation, it gives the misleading impression that all changes are driven by one party’s gain at the cost of the other party’s loss. For a more accurate picture, let’s take a closer look at the reasons parties propose changes during negotiations.
Different, Unclear, or Unreasonable?
With respect to all changes proposed by either party in the course of negotiating a contract, we recommend three different labels for classifying changes based on the reason for the change. When one party asks the other to make a change to the contract language, the requesting party is essentially saying one (or a combination) of these three things.
- “This is different”
- “This is unclear”
- “This is unreasonable”
In each case, we articulate what the party is, in effect, thinking or saying with respect to the change.
1) This is different: “From the contractual language proposed, it appears you believe (or want us to proceed as though) the situation in this case was of a certain description. However, the current situation is actually different and language needs to change accordingly to take this difference into account.” The differences could be with respect to what is being exchanged under the contract, the other contracting party or with respect to the business need underlying the contract.
2) This is unclear: “While it appears that you and I intend and want to achieve the same thing, the current language in the contract does not say what we want it to say or the way we want it to be said. Therefore it needs to change.” The lack of clarity could be with respect to any aspect of the contract e.g., its structure, the rights or obligations therein, performance standards required, etc.
3) This is unreasonable: “The contractual language proposed (while it may address the situation and be clear) is not acceptable because the way it addresses the situation unduly favors your interests and prejudices mine. Therefore it needs to change.” Or, alternatively, “While what you are proposing may be very fair (and I don’t blame you for taking that position), it just doesn’t work for me. Therefore it needs to change.” In the second case there is no assertion of blame on the other party, but the effect is not very different, in that it is still unreasonable insofar as the first party is concerned.
The above three-fold classification serves to drive mutual understanding in a negotiation. If the facts are really different, it could well be in the best interest of the parties to change the clause or the risk contemplated by the party in drafting the original language may not exist. Hence they could change the clause without risk and bring the contract closer to closure. If the inability to articulate a common understanding is the obstacle, the parties can and should cooperate, and/or hire a skilled draftsman to resolve the problem. It is only in those situations where the parties disagree with respect to what is reasonable or fair, that a “win-lose” situation comes into play. The parties would then choose which issues they are willing to compromise, on the basis that the overall benefits of achieving closure will outweigh what was surrendered.
Certainly, implementing this classification in practice is not simple, and in a negotiation more than anywhere else, parties are apt to not say what they mean or mean what they say. It is easy to imagine a contract attorney adding “a little language to clarify the situation,” while onerously expanding the scope of the other party’s obligations. Attorneys would be advised to maintain their vigilance as well as a willingness to dive into the real reasons that drive changes. Secondly, a combination of the three factors may operate in different portions of a clause or some language could be both unclear and unreasonable or some other combination. In such cases an iterative approach using the three reasons in order would be required for resolution. This would mean asking (i) Does this language contemplate something different from what our side had in mind?; (ii) If not, is it clear?; and (iii) If so, is it reasonable to both sides?; (iv) and making changes to address resulting concerns. Lastly, the parties may not always consider factual verification or seek help rewording their understanding as it is not worth the effort. In any case, for parties seeking consensus, considering the reasons for change in this manner will help and expedite the process of either i) achieving agreement, or ii) clarifying that agreement is not possible; either of which is preferable to a protracted negotiation.
Implications for documenting positions and playbooks: When applying process and standardization to repetitive negotiations, clarity can be facilitated by organizing and storing versions of sample language that clearly address recurrent deviations to standard positions. Further, with regard to proposed deviations, situations that are A) “different” (i.e., where, based on the facts, a change to standard language either (i) can be agreed with minimal risk, or (ii) is actually required for adequate risk coverage), can be identified and tracked separately from, B) “unreasonable” deviations or change requests that necessarily involve a trade-off between the parties (and the perception is that we lose something by agreeing to the change). A good contract playbook will have mechanisms to specifically identify and track both types of changes and provide related guidance so that negotiations can proceed smoothly and quickly.
The role of a contract attorney in facilitating a negotiation extends to all three of the above, ensuring i) appropriate differentiation, ii) clarity, and iii) contractual fairness (or at least preventing unfairness with respect to its client). On top of all of this, they are expected to do so in an efficient manner.