Deal Making: What Leads to Renegotiation?

Saturday, April 5, 2014

Deal Making: What Leads to Renegotiation?

Adapted from Redoing the Deal by Jeswald Salacuse for the April 2005 issue of Negotiation.

Renegotiations generally are triggered for one of two reasons: an imperfect contract or changed circumstances.

The goal of any written contract is to express the parties’ full understanding of their deal.

Despite lawyers’ belief in their abilities to capture that agreement in writing, in practice they can only achieve that goal imperfectly, for three reasons.

The signers are incapable of predicting all the events and conditions that may affect their transactions in the future.
Concerns about transaction costs limit the resources that parties devote to the contracting process.
Even if both sides had the requisite foresight and resources to draft a perfect agreement, they have no assurance that a court will interpret their contract exactly as they intended.

A change in the circumstances is another major cause for renegotiations.

For example, a sudden fall in commodity prices, the development of a new technology, or unexpected increases in energy costs can force everyone back to the negotiating table.

A change in circumstances usually increases the deal’s costs or reduces its benefits to one side. When that party concludes that the cost of complying with a contract is greater than the cost of abandonment, it usually rejects the deal or demands renegotiation.

Although the risk of renegotiation is present in any deal, you can reduce this risk during your initial contract negotiation and also minimize renegotiation costs when they actually happen.

The following suggestions on how to handle both situations are taken from Jeswald Salacuse’s book The Global Negotiator: Making, Managing, and Mending Deals Around the World in the 21st Century.