Negotiation Preparation: Client Authority & Risk

Preparing to Negotiate

• Preparation constitutes 80-90% of an effective lawyer's negotiation work.
• The client has the ultimate say in nearly everything.
• Never alter or introduce changes to the business deal without the client's explicit consent.
• It is important to never negotiate business matters without specific client authorization.
• Always seek clarification from the client on business-related issues, as lawyers may not possess the same level of business acumen.
• Clients must sign a final contract and the contract should be explained to the client.

Interests, Rights, and Power

• Deals are composed of varying degrees of opportunity and risk, with the main objective being to expand opportunities while diminishing risk.
• During negotiations, the focus is primarily on potential opportunities with business risks being the primary concern.
• An example of a business risk is when a seller commits to selling at a fixed price over the next year and worries about rising costs eliminating profits.
• Transactional lawyers specialize in identifying potential deal risks and safeguarding clients through risk avoidance, including suggesting clauses.
• Determining the acceptable level of risk for a client and discerning critical risks is important.
• Rights are principles validating a party's stance based on legal rules, statutes, case law, and regulations, or general conduct expectations like industry norms.
• Legal arguments are groups of ideas arranged logically to persuade someone towards a specific agreement or action.
• Effective argumentation includes a clear statement of the rule, relevant facts, and a conclusion.
• Strengthening an argument involves multi-dimensional reasoning, expanding the rules/standards or facts used.
• A balanced argument fosters reasonableness, showing an understanding of both sides, which bolsters the assessment of rights and reasoning.
• Acknowledging weaknesses in a balanced argument enhances legitimacy.
• Power is defined as the capacity to compel action and can involve coercion outside legal rights enforcement, and it can be a key aspect in negotiations.
• Relative power can shift and doesn't always determine the outcome, where, for example, car dealers can gain leverage, and buyers can gain power based on market conditions or inventory needs.
• Economic resources influence negotiation, with resource-rich parties potentially facing limitations and ostensibly weaker parties finding alternate power sources.
• Expertise on transaction issues can create power imbalances.
• The power to walk away from a deal depends on awareness for better alternatives or having a backup plan.
• A party must develop a best alternative to a negotiated agreement (BATNA) to have an effective walk-away strategy.

Best Alternative to a Negotiated Agreement (BATNA)

• Business people should be aware of their best option if an agreement fails.
• An unappealing agreement compared to other available deals should result in the party walking away.
• BATNA is the best course of action for satisfying one's interests without the other party's agreement, like finding another job while negotiating a raise.
• Transactional lawyers do not focus on BATNA contract negotiations, but it remains relevant if issues push it forward.

Problem Solving and Positional Approaches

• The main negotiation approaches are problem-solving and positional.
• Problem-solving targets parties' interests, while positional concentrates on rights and power.
• Most negotiations involve either type of strategy.
• The effective lawyer can function well using either strategy.

Problem Solving Approach

• Emphasis is placed on integrating each side's resources to improve the outcome for all parties, based on the assumption that each party supplies value to benefit others.
• During negotiations, the focus should be on integrating mutual interests into the final contract, avoiding problems.
• In the absence of an overwhelmingly superior bargaining position, contracts should strive for balance and fairness.
• A risk of this type of negotiation is the failure to fully advocate for the client's needs.
• Lawyers may become too collaborative.
• Frustration can turn problem-solving into positional negotiation.
• To prevent that, a "golden bridge" should be built between the client and the other party by focusing on the parties’ interests, facilitating incorporation, and helping the other party.

Positional Approach

• In this approach, each party claims entitlement to something, turning negotiation into a contest of concessions and compromises.
• Negotiators assume bargaining is confined to standard practices or agreements.
• Trade or business practices can evolve into "rights" that parties negotiate.
• Competitive lawyers can cause highly adversarial negotiations.

Navigating Impasses

• Clients may need to get involved to advance the deal and positional bargaining can be rejected as negotiators lock into positions when bargaining over positions.
• The opening position becomes more difficult to abandon.
• Your ego can become identified with your position.
• This approach can strain long-term relationships, but is acceptable for one-time deals with no expectation of future interaction.
• However, a problem-solving approach may still yield a better agreement.
• Trying to identify the other side's underlying interests by asking "Why?" helps understand their perspective.
• To understand this, attempt to determine why something is important to the other client.
• Ask "Why not?" after a lawyer rejects your proposal to understand their interests.
• Altering rhetoric can shift dynamics by framing questions to explore solutions benefiting both parties. Instead of directly disagreeing, ask “Would this, that, or the other thing help both of us?”
• Avoid lecturing on problem-solving, instead convincing the other lawyer that this approach better serves their interests.
• Achieving this requires prioritizing their interests over taking positions.
• Commercial transactions should avoid adversarial proceedings and focus on agreement.
• The legal system focuses on combat.

Combative vs. Collegial Styles

• Combative styles are tough, dominating, forceful, aggressive, and attacking.
• Collegial styles are personable, friendly, and tactful.
• Choosing between styles requires a strategy and selection will depend on circumstances and cultural context of negotiation.
• A combative style can demonstrate confidence in a positional approach.
• A collegial style encourages brainstorming in a problem-solving strategy.

Overlawyering

• Effective deal lawyers recognize when to stop.
• Lawyers can waste time and money on small risks.
• In a merger negotiation it is important to consider if the impact of the risk justifies the cost.

Requests, Demands, Offers, and Concessions

• A demand is an aggressive request implying the only answer is yes, which narrows discussion.
• Requests foster open dialogue.
• Transactional lawyers use civil language.
• "My client needs comfort on matter X" translates to, "My client is at risk because of X, and I want to reduce that risk through contract conditions or warranties."
• Offers propose an exchange and may involve modifications.
• "I might be able to live with your force majeure clause, although I'd feel better if labor slowdowns weren't covered," means, "I'll agree to your force majeure clause if you take out labor slowdowns and agree to my anti assignment clause."
• Regardless of expression, this is horse-trading and logrolling.
• Credibility and justification are key to effective presentation, providing reasons to agree even without agreeing with the reasons.
• Package concessions to minimize weakness impressions, avoiding rapid/large concessions or continuous concessions without reciprocity.
• Provide reasons for each concession, resisting pressure to concede without rationale.
• Discussions may deadlock in positional negotiation.
• Lawyers staking extreme positions can cause stalemate without progress.
• If the clients had to get involved this creates deal killers.

Anchors and First Offers

• Anchoring occurs commonly with numbers in business negotiations and sometimes with contract language. Negotiate the numbers.
• Offers influence value perception through numbers, concepts, and language, creating negotiation context and anchoring effects.
• The sticker price on a new car, while artificial, serves as anchor and the most effective strategy is to ignore the dealers sticker price.
• The dealer wants the rest of the negotiation to be a question of only how much less you'll pay than them.
• To implement this effectively, formulate your own offer by researching the dealer's wholesale price, add overhead/profit, and subtract negotiating room. You will then haggle accordingly by ignoring the sticker price.

Who Drafts

• The exact contract words matter and decide actions and are important for resolving disputes.
• Lawyers prioritizing concepts over precise wording can concede power to the drafting lawyer.
• The drafting lawyer may specify a shade of green and the nondrafting lawyer must notice that this shade favors the drafter.
• This also requires negotiating for a different shade by making concessions elsewhere in the contract.
• Drafting requires comprehensive deal understanding, minimizing oversight risk.
• Initial drafts are changed, thereby indicating that amending is tricky. Knowledge of the entire contract coupled with detailed contract knowledge, will minimize the risk of oversight.

Information Bargaining

• Preparation involves identifying information to obtain, disclose, and conceal.
• Asking questions is better than argument, since statements cause resistance.
• If questions do not work, use silence.
• Be aware of the skills to know when to speak completely and precisely and when to speak incompletely or ambiguously.

Common Problems in Negotiation

• These include ethical issues.

Ethical Issues in Negotiation

• It is unethical for a lawyer to knowingly make a false statement of material fact or law to a third person and it is punishable under ethics law and exposes the lawyer and the client to tort liability if the other party relies on it and suffers as a result.
• Misrepresentations can lead to contract rescission, potentially nullifying client benefits, and accidental misrepresentations can still induce the other party to deal.
• "Puffing" is not a misrepresentation because it is not a statement of fact.
• Omitting facts can cause problems and is unethical.
• Lawyers must not knowingly fail to disclose a fact to a third party when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client.

Scriveners' Errors

• Lawyers must correct scrivener's errors, incorrect expressions of agreed-upon terms.
• Even if the client objects or the other party doesn't notice.
• A written contract is evidence of the actual (agreed-upon) contract.
• If a scrivener's error hurts a party, the court will reform the contract by reforming the contract to express the agreement accurately.
• Scrivener errors only hurt if the hurt party can't remember what it agreed to, or cannot prove the contract is wrong, or the cost of litigation is outweighs.
• Correct errors by unilaterally redrafting or collaborating with the other counsel. Lawyers are not obligated to tell the client of the error or that it is being corrected.

Threats and Warnings

• A threat is a statement of intent to assert a right or power if the other party doesn't comply with a request or demand.
• It's meant to coerce; however, it makes agreement harder and can damage relationships.
• Threats are an abused tactic, resulting in pointless dialogue and an extended threat display, missing careful negotiation.
• A warning demonstrates the existence of a right or power without drama.
• It should come across as what will happen if there is no agreement.
• Warnings are only impactful if credible.