Six top tips for renegotiating contracts during COVID-19

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By Paul Fisher, Associate Fellow, Saïd Business School & Programme Director, the Oxford Programme on Negotiation

The renegotiation of contracts is a difficult exercise at the best of times with a return to the table often indicating that things have gone wrong or there was a flaw in the original agreement. The atmosphere around the negotiations can also be very different second time around with high emotions, recriminations and – in some cases – an admission of failure.

With the COVID-19 pandemic and companies facing a dramatically different business environment within just a few weeks, the challenges of contact renegotiations have been magnified. From supplier pricing to reducing salaries to the renegotiation of leases and penalty clauses, companies are rushing back to the negotiating table, often with little preparation and in a state of panic.

Yet, if you stick to key negotiation principles, it’s still possible to get a mutually beneficial (and even better) deal that in many cases can make the difference between survival and bankruptcy. Here are six tops tips…

It’s Easy to Say But Try to Stay Focused on The Benefits and Value

The principle of loss aversion means that losses hurt twice as much to us as gains make us feel good. If we, therefore, go into a negotiation staring at lost revenue and potential insolvency and determining how we can share the pain, negotiations are likely to become even more competitive and rancorous. There are still benefits and value to be created from a renegotiated contract. Try to focus on that and how one can trade issues of different value and importance with one’s negotiation counterpart to generate value.

Put Yourself in The Other Side’s Shoes

At times of difficulty – in particular with the current pandemic – it’s never been more important to put yourself in the other side’s shoes and understand the pressures they may be under. Don’t just get wrapped up in your own problems, however valid. Listen, ask questions and try and understand your counterpart’s challenges. The more you find out about them and their priorities, the better you can start thinking about potential trade-offs and what’s important to you and what’s important to them.

Don’t Let Emotion Take Over

At times of great disruption and business stress as with COVID 19, emotions and feelings can run high. Research tells us, however, that strong emotions don’t necessarily lead to better negotiated outcomes. Take a step back, call time outs, where possible, and if your counterparts gets angry or stressed, let them vent, don’t get angry yourself and certainly don’t lower your aspirations or make concessions because of their approach.

Consider Contingency Contracts

At a time of great present and future uncertainty, contingency contracts really come into their own, providing greater flexibility within the deal and leaving certain elements of the deal unresolved until such uncertainty is resolved. It is contingency contracts that can often save deals where the beliefs of each party are very different or where there is a need for flexibility. Commercial landlords, for example, could agree to lower rent but that rent rises again once the tenant’s profits or revenues reach a certain level; or penalty clauses on delays to construction projects only be reinstated when there is a full opening up of the economy.

Consider the Make-Up of Your Negotiating Team

It’s often considered logical to put the same negotiating team together as was involved in the initial contract. While they certainly have the knowledge of the original agreement and the relationships, there can also be disadvantages, however, in that they have too much invested in the original deal and may be loathe to admit failure. Sometimes a different perspective and a new team can make all the difference.

Be Aware of the Costs of Failure but Don’t Underestimate Your Leverage

In our negotiation teaching, we always stress the importance of a BATNA –  your best alternative to a negotiated agreement – essentially your walk-away point. The stronger your alternative, the more power you have at the negotiating table.

However, when it comes to renegotiating contracts, the BATNA is often weak with a call to lawyers, litigation or bankruptcy the alternatives. Remember, however, that you often have more leverage than you think. At a time of economic difficulties, for example, how easy would it be for a landlord to find a new tenant or a company to find a new supplier that can provide the necessary specification for its customers? Power is not absolute, it’s relative and don’t go into a renegotiation without realising the potential cards you hold.

If COVID-19 and the current challenging times have told us anything, it is that we’re all in this together. With an understanding of each other’s positions, a focus on benefits rather than losses, and a flexible approach, renegotiated contracts can offer that all important first step towards business recovery and a more sustainable future.

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