“Should we just risk it?,” asked my daredevil of a client who was growing frustrated over the deal he was trying to close. His frustration was understandable, as the deal was approaching its twelfth month of negotiation and the two parties seemed just as far apart as they were at the outset. They were still wrestling with terms around risk — specifically in areas like indemnification clauses, cancellation notices, and right-to-cancel language. At every turn, my client’s vendor would push more risk onto him, and it was creating tension that was tough to bear. That begged the question: To risk or not to risk?
Most contracts serve two purposes: One is to document the responsibilities and expectations of all participants; the other is to mitigate risk and articulate predefined courses of action in the event that something happens. Typically, I’ve found the discussion around responsibilities and expectations to be fairly straightforward. The discussion of risk, on the other hand, seems to be the most complex and time-consuming. This is usually because most risk conversations come down to opinion-based conversations around the odds of something happening and, when it does, how to properly assign responsibility.
Opinion-based conversations are persuasive at best. Debating the future and what might happen can be as futile as discussing next week’s winning lottery numbers, which team is going to win the big game, or how stocks are going to perform. While there may be predictors of future behavior, when it comes down to writing a contract, we are speculating about what might happen — not what will happen. Which means that these conversations tend to be overly argued and endlessly debated. That’s what was happening in my client’s deal, which is why it was taking so long.
So, what do you do when you’re debating risk? How can you prevent it from taking more time than it should? And what are some ways to overcome the impasses that inevitably arise? Here are a few tips for dealing with risk . . .
Get the non-negotiables out early. Non-negotiables are exactly that: non-negotiable! Meaning, there’s no flexibility and no circumstance in which you can do a deal wherein a non-negotiable is not met. Therefore, if you have non-negotiables, get them out in the open early and don’t waste time on other parts of the agreement if non-negotiables are not acceptable. Find out what the other party’s are as well. If they can live with yours and you can live with theirs, then proceed. If they’re not tolerable, then no deal can be struck.
Before you tell me that there might be a situation where you’d move on a non-negotiable, I should tell you that it wasn’t a non-negotiable to begin with. There’s a big difference between immovable objects and items that require a high-price tag to move. Don’t get the two confused.
Gain perspective. When something is important to the other side, it’s your job to find out why. For instance, if someone is adamant about a cancellation clause and is pushing back on changes that you want to make, find out why. Ask questions that will better help you to understand the motivation behind their position or the spirit of what they’re trying to do — and under what circumstances they would back away from that position. Once you have perspective, you’ll be in a better position to negotiate an outcome.
Understand the priority. Within contracts, we’re usually negotiating multiple issues of risk. However, each issue is not of equal importance. Therefore, understanding the priority of each of these items will not only help you to better allocate your time, but it will also help you during the negotiation in terms of knowing which elements you might have more flexibility with. Once you know why something is important, along with its priority, you’ll be able to focus on what’s most important.
Stop the debate and place a bet. If you find yourself debating the future, it’s time to stop and place a bet. Let’s say you’re debating a penalty for a production schedule. The penalty clause states that for every postponement there’s an associated fee. While you have no plans to postpone, you know that, from time to time, things happen that might lead to that outcome. You don’t want to pay an exorbitant penalty for the unexpected, but your supplier wants to make sure that their costs are covered and their schedules are not constantly changing. In this situation, you could place a bet on the number of postponements. In exchange for lower or no fees for the first one or two postponements, you could agree to pay a higher fee for any additional postponements. Therefore, you’re taken care of in the event that the unexpected happens, and the supplier is covered should such an occurrence not be a rarity after all. With the bet placed on how often postponement will occur, the debate can be put to rest.
The more adept you become at managing these risk debates, the faster your dealmaking can go. The trick is to recognize when you’re caught in this debate and to know how to get out of it.
Don’t Risk It.
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