Basic Principles of Negotiation - University of Houston

Basic Principles of Negotiation Paul W. Fulbright, MBA, JD, LLM Assistant Professor of Business Law © 2018-2024 Law Office of Paul W. Fulbright, PLLC  Overview 1. Our Focus: Good-Faith Contractual Negotiation. a. A Closer Look at the Definition. 2. What Determines Success or Failure...

Basic Principles of Negotiation Paul W. Fulbright, MBA, JD, LLM Assistant Professor of Business Law © 2018-2024 Law Office of Paul W. Fulbright, PLLC  Overview 1. Our Focus: Good-Faith Contractual Negotiation. a. A Closer Look at the Definition. 2. What Determines Success or Failure in Negotiation? a. What Results define Success or Failure in Negotiation? b. What Factors Determine Whether You Will Likely Succeed or Fail in Negotiation? 2  Our Focus: Good-Faith Contractual Negotiation ◼ Our focus in this class is: Good-Faith Contractual Negotiation. ◼ Definition: A good-faith contractual negotiation is: 1. A series of communications 2. exchanged between 2 or more parties (directly or through their representatives), 3. each party having alternatives to agreement, 4. and each party having imperfect information about the interests of the other, 5. for the good-faith purposes of enabling the parties to enter into a valuable enforceable contract, if possible. ◼ “Good faith”?: Sometimes (rarely), Company A will initiate a negotiation with Company B even though A has no intention whatsoever of actually (ultimately) entering into a contract with B. Perhaps it’s a misdirection, or a stall, or some other tactic. We are not focusing on such bad faith tactics in this class, but you should be aware that they exist. 3  A Closer Look at the Definition of Good-Faith Contractual Negotiation ◼ A few things to note about that definition: 1. The negotiation is the process, the back-and-forth communications, that occurs between the parties. A lot of preparation occurs behind the scenes, but that prep isn’t the negotiation. The meetings & communications are. 2. There are two possible results: (a) one or both parties decide to NOT enter into a contract; OR (b) the parties enter into a contract voluntarily. Party A and Party B both have alternatives, and voluntarily entering into a contract is one of them. Sometimes, one side has a much weaker bargaining position (that is, it needs the agreement more and has fewer good alternatives), so perhaps the deal it agrees to isn’t very good. But it still chooses to enter the deal. 3. In contractual negotiations, the parties exchange information (talking, emailing), and they evaluate that information as they cobble together a potential agreement. Question: What are they talking about? Answer: What each wants, what each would find acceptable, etc. Thus, they start out with imperfect information, and then they communicate, and those communications (a) reveal information (which may be true or false) about their interests and (b) influence whether an agreement will be reached (and, if so, what it is). 4  WHAT RESULT Defines Success or Failure? ◼ SUCCESS in a negotiation is NOT based on: ◼ Simply whether you “got a deal”. After all, the deal you got may be a bad one! ◼ Whether you got everything you asked for. After all, you may not have asked for enough! ◼ PROFESSIONAL NEGOTIATORS usually focus on the following principles to determine whether they view the negotiation as a success. Pros grade themselves hard! (critically)! ◼ SUCCESS = WALKING AWAY FROM A BAD DEAL: If the best deal that could reasonably be negotiated by you was a bad deal (compared to your alternatives), you should have walked away from it. That’s right – sometimes success in contractual negotiation means NO CONTRACT at all. Food for thought: A great deal of research suggests that auctions produce significant “buyer’s regret.” (Question: Why might this be so? Answer: They paid too much!) ◼ SUCCESS = IF AGREEING TO A DEAL, GETTING THE BEST DEAL POSSIBLE: If you entered into the contract, then your negotiation will be viewed as a success to the extent that: (a) entering into the contract was better than your available alternatives; and (b) the contract you entered was the best contract that could be negotiated by you under the circumstances. Example: Everyone at Acme Inc. is congratulating Stan on the sale of the Widget Division for $7M, because almost everyone associated with the project expected the deal to close at around $5.9M. Privately, Stan thinks to himself, “If I had handled that last negotiation session differently, I’ll be I could have gotten them to $7.9M. Hmmm… I give myself a B.” 5 WHAT FACTORS Determine Whether You Will Likely Succeed or Fail in Negotiation? NEGOTIATING TECHNIQUE (Behaviors, Tactics, Communications) ANALYSIS / BARGAINING PREPARATION STRENGTH (Evaluation of (Alternatives BATNAs, Interests, Available to Each People, Options, Party) (BATNAs) Criteria, Processes) 6  WHAT FACTORS Determine Whether You Will Likely Succeed or Fail in Negotiation? What Determines… Whether you should WALK AWAY from a Bad Deal? Whether you will likely GET THE BEST DEAL possible (the BEST TERMS possible) in your negotiation? YOUR ALTERNATIVES determine whether you should WALK AWAY. NEGOTIATING Alternatives drive the Bargaining Strength of the Parties. TECHNIQUE (Behaviors, Tactics, Example: If the party on the other side has a great “Plan B” Communications) (and really doesn’t need the Contract), then it’s often almost impossible to pressure him into agreeing to your terms. You have no bargaining strength. On the other hand, if he has NO good alternatives, then you often almost get to DICTATE the terms. ANALYSIS / BARGAINING PREPARATION You have enormous bargaining strength. STRENGTH (Evaluation of (Alternatives BATNAs, Interests, Available to Each People, Options, What determines the ACTUAL TERMS NEGOTIATED? Party) (BATNAs) Criteria, Processes) The Analysis / Preparation done by the party; and Its Negotiating Technique. That is, if you prepare thoroughly, AND you perform well during the negotiation, you maximize the probability that you get the best deal possible under the circumstances. 7  Basic Principles of Negotiation Paul W. Fulbright, MBA, JD, LLM Assistant Professor of Business Law © 2018-2024 Law Office of Paul W. Fulbright, PLLC