Negotiations are an often underutilized Legal Risk Management (LRM) tool. Used as a dispute resolution mechanism, negotiations can be used to resolve disputes, internal and external to a corporation, prior to such disputes turning into litigation. It is another tool to avoid the risk of litigation or arbitration and can minimize legal costs and expenses that might otherwise occur. It can be used to prevent internal discord in an organization and can also be used to resolve differences between governments and political entities besides corporations and companies. In fact, we all use some form of negotiations on a regular basis and our career or life may be determined on how successful we are at negotiating. We negotiate for a raise, for a promotion, for a career, for almost everything in life- sometimes without realizing it.
Negotiations can be simple or complex, depending on the subject matter and number of parties involved. International negotiations are the most complex as they involve different cultures, languages, legal systems, and viewpoints. Nonetheless, all negotiations, whether domestic or international, will involve strategies, knowledge of the facts and issues, an understanding of the other side’s viewpoints, and, above all else, an understanding of the problem and risk at hand. To be successful, one has to be “willing” to negotiate.
Negotiation can be defined primarily as a decision-making process whereby two or more parties resolve their disputes or differences by advancing their interests vis-à-vis each other. Negotiations may be broken down into several distinct stages:
- The beginning or pre-negotiation stage
- The middle or negotiation stage
- The final or post- negotiation stage
All three stages are crucial to successful resolution of a dispute or potential dispute that could lead to the risk of litigation and onerous or excessive legal fees and costs.
1.1 The Pre-Negotiation Stage
Prior to negotiating with the other party or disputant, a party must understand the facts, identify the issues involved, and map out a strategy to deal with negotiations. Though it may seem easy, this stage actually involves numerous steps. Each step may involve several processes or sub-processes as well. The basic steps are as follows:
- Determining the problem at hand
- Determining the interests of all parties involved
- Identifying possible solutions
- Deciding upon negotiation strategies
- Understanding your best alternative to a negotiated agreement—sometimes called the BATNA.
Knowing your BATNA sets the bottom floor of any deal, as it will set the range of a possible settlement. No party will agree to a negotiation that offers less than the party’s BATNA. By way of example:
Tristar wants to enter into a supply contract with ABC Company to sell TVs at 15 percent above margin. ABC wants to purchase TVs at 5 percent above margin. Tristar knows it can sell all of its TVs to Best Bros. Company at 12 percent above margin. Tristar’s BATNA is 12 percent above margin.
Once a party understands the facts, has defined the dispute to be resolved, and knows its BATNA, it needs to develop its negotiation strategy. There are two basic strategies negotiators use in negotiating dispute:
- Position based
- Interest based
1.1.1 Competitive-Style ( Position-Based) Negotiation
Negotiations maybe conducted in a competitive manner whereby parties state their positions and negotiate from those positions. It is considered a win/lose strategy or position based strategy. It is the most common form of negotiation strategy that everyone is familiar with, though not the most effective, as it focuses only on the negotiating a party’s wants and needs and does not address the needs and wants or desires of the other party. Many people not familiar with negotiating will tend to follow the competitive style approach, which in some situations will not succeed.
1.1.2 Cooperative-Style ( Interest-Based) Negotiation
Negotiations may also be conducted as a cooperative process or interest based process whereby the parties focus on solving each other’s problems and addressing both parties needs and desires. It is, in other words, a win/win strategy or interest based negotiation strategy.
Parties may use one or the other negotiation strategy of win/lose, or both, or hybrids of both if needed. It is common to use both strategies in one negotiation. Using the strategies depends on how parties perceive negotiations and often whether they want a short-term relationship or long-term relationship with the other party.
In many situations, it is imperative to know the BATNA of the other side. This may facilitate negotiations, as the parties may try to solve each other’s problems. Failure to solve your counterpart’s main concerns and issues may lead to failed negotiations. Of course, your counterpart has his or her own BATNA. Here is an example of what companies may face when negotiating:
XYZ Company in Korea wants to distribute product XXX in Thailand. Thailand’s laws prevent direct sales. XYZ wants to find a distributor that can distribute its product XXX. Bainai is willing to become a distributor. It costs $1 million in investment and setup costs to distribute product XXX. To recoup its investment, Bainai wants a five-year exclusive contract. XYZ knows it can find other distributors later, but it needs a distributor now. It does not want to sign an exclusive arrangement with Bainai. What if Bainai is a poor distributor?
Question- What win/win solutions can XYZ and Bainai propose to each other so each can meet its BATNA, or solve each other’s interests? The answer of course is that XYZ and Bainai can agree to an agreement with milestones. If Bainai reaches a certain level of sales after 1 year it can get its exclusive contract for 4 years. If it can’t, its agreement turns into a non-exclusive agreement and XYZ can bring on another distributor. Both sides in effect get what they want.
1.2 Negotiation Stage
The negotiation stage or middle stage of the negotiation process involves numerous decisions too. Once parties have finalized the pre-negotiation stage, decisions still have to be made involving such issues as when, where, and how negotiations will take place.
For instance, parties may start negotiations via e-mail to negotiate minor items before concluding negotiations over the phone. Or they may start negotiations over the phone and wrap up with face-to-face negotiations. Or they may start with using email to negotiate minor items, phone conferences to settle some other items and then meet face to face to conclude the most important items and issues. Therefore, decisions have to be made on how to negotiate to one’s own advantage.
During the negotiation stage, internal and/or external parties and stakeholders may play a part in the outcome. Decisions must be made whether to include them or not. If third parties are involved in negotiations, one or both of the main parties may try to develop coalitions. Third parties may, in fact, add more problems and issues to negotiations or at least bring an added dimension to the discussions.
Parties must also decide upon a venue for negotiations. Many parties prefer a neutral site. However, those negotiators in a strong position may prefer negotiations to be held in their own office. It is all about tactics and to a certain degree perception of the other party’s position.
An equally important stage is the last stage of negotiations or the post-negotiation stage. This stage results in an agreement or resolution. Hopefully an enforceable one at that.
Parties must also decide whether to reduce an agreement to writing or leave it verbal—or a little bit of both. There are several sub- processes in this stage, such as concluding an agreement, drafting it in writing, and having the parties review it and approve it. Of course, each party may need its home office or upper management to approve the agreement as well. Parties may want their respective Law Departments or outside lawyers to review the negotiated agreements. Agreements need to be reviewed to determine if they indeed resolve the dispute, and if the agreements are enforceable.