Zachary Davis | Ahead of Schedule
When negotiating design and construction contracts for large projects, it is common for sophisticated parties to push to the end of their negotiations the half-dozen or so provisions that one side or the other has characterized as “deal-breakers.” Often in the eleventh hour, one of the parties will make a concession (sometimes many concessions), have their bluff called, or possibly propose a creative solution that saves the agreement from irreversible derailment.
Other times, negotiations fail, and the deal derails. This result may be the unavoidable outcome of a marriage that was not meant to be. But in other cases, there may have been a missed opportunity for compromise.
How can parties mired in a stalemate find a way to pass the checkered flag? Here are some tips:
Consider whether the stated position is really a “deal-breaker”
“We never agree to that” is a common refrain during negotiations. But the absence of historic precedent is by itself not a rational justification for not agreeing to something in the present. There may very well be a good reason why such precedent was established in prior deals. But that reasoning may not apply to the current deal, and there is value in reexamining the basis for such precedent on a case-by-case basis.
Consider whether there is room for a “bend-but-do-not-break” middle ground
When parties cannot get over that final hump with disputed terms, it is often because they tend to gravitate toward a “take-it-or-leave-it” mindset with the contract terms they deem most important. Waivers of consequential damages are an area where this happens. For contractors and design professionals, obtaining from the owner a waiver of consequential damages is often a “non-negotiable” deal point. On the flip side, owners want to preserve their remedies against responsible parties, believing that they should not be forced to take on risk that others are in better position to control.
Too often, both sides see these and other similar limitations on remedies as black and white and not subject to negotiation. And while both parties may be justified in their concerns, a deal can often be made that provides the contractor or design professional with insulation from outsized risk, while also preserving a remedy for the owner by, for example, excluding from the waiver amounts recoverable from insurance. The owner may also seek to condition the enforceability of the waiver on the other party maintaining the insurance required under the agreement. This solution provides the contractor or design professional with peace of mind that its own out-of-pocket risk will be limited—so long as it complies with the requirements to maintain insurance—while ensuring that the owner will have a remedy.
Consider whether negotiations on certain items should be escalated to the parties’ executive teams
Another reason why deals sometimes fall apart is that the negotiation teams do not involve—or wait too long to involve—the key executives with decision-making authority. One of the most effective ways to resolve an impasse at the negotiation team level is to engage the executives from each side. The executives may have authority that the negotiation teams lack and will also bring a different perspective that could lead to better focus on priorities or creative compromise.
Consider whether there are commercial levers that could help resolve an impasse over legal terms
Legal negotiations are often siloed from negotiations on commercial terms. But one way to resolve disputes over risk allocation is to adjust the commercial deal to ensure that the financial terms align with the risk allocation.
Do not let perfection be the enemy of the good
A law professor once told me that the best negotiated deals are the ones in which neither side is happy with the outcome. While there may be some hyperbole to that statement—nobody wants to start a construction project from a position of disappointment—it is a good reminder that striving for the perfect deal every time is not a realistic outcome.
Negotiating contracts on complex construction projects can be challenging. But a challenging negotiation can be a sign that both sides are engaged in a healthy exercise to equitably balance risk in a way that starts the path to a successful project.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.