Principles of Contracts: Embrace Your Inner 2 Year-Old
Posted On May 31, 2011
— — — — Previous chapter: Everybody Knows Peggy Lee (Or Should)
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Implicit in the early installments in this series was the assumption that when you do a business deal, both parties have something to gain and something to lose. It follows then, that all other things being equal, when you approach the negotiating table, you’re negotiating with an equal. Unfortunately, things are most often unequal.
There are a lot of things that go into the power dynamics of a negotiation. The most obvious is need: whichever one of you needs the deal more has less power to dictate terms. That’s important, and we’ll deal with it in this installment, but it’s not the whole picture.
Why not? For two reasons:
First, people live in societies, and those societies have laws that govern how contracts are made and limit what terms can be legally agreed to, and under what conditions. It is not, for example, legal to sell oneself into slavery in the West, or to sell another into slavery. Snicker all you want, this was not always the case–in fact, by some looser definitions of the term “slavery,” this has only become illegal in the United States in the last two generations. I kid you not.
What constraints the law imposes on your bargaining ability varies from industry to industry, but in general the terms are governed by three areas of law: Contract law, Tax law, and domain-specific regulations (copyright laws, labor laws, real estate laws, environmental laws, etc.). Some of these laws vary radically from state-to-state, and Federal law can trump State law or defer to State law, or it can specify which State’s laws have jurisdiction in an interstate deal–all depending on the circumstances. As the party to a contract, it’s your responsibility to get familiar with the laws in the domains you’re dealing in. If you’re working in a heavily regulated industry, or an industry with a lot of caselaw (ex: anything involving employees or intellectual property), you’d be well advised to run things by a lawyer.
Second, everybody’s human, and as such are susceptible to losing sight of the deal because their focus shifts to the contest. This is the stock-in-trade of every salesperson on the planet: to convince you to buy what they’re selling by distracting you from the deal when you display reluctance. These distractions can take the form of compliments, social bonding gestures (getting you a cup of coffee, talking to you about movies), by threats and insults (“only a fool would pass this up,” “I can only give you this deal today”), incentives (“Act now and get a free dairy cow”), plays for sympathy (“how can I feed my children with a profit margin that slim?”) and affected offense (“I can’t believe you’d think I’d cheat you!”). These tricks come in all guises, and played well, they bear the stamp of legitimacy, but using the trump card I get to later you can strip away a lot of the pretense.
You’re not helpless before these tricks, but you must expect them. Salespeople and negotiators will use these tricks on you. But in many cases, a professional negotiator will be just as prone to fall for them as you are, because they’re used to being in the advantaged position. You can use these tricks on them, too. After all, everybody’s human.
The flipside of number two is that people can get sidetracked and pooch a deal for reasons having nothing to do with the deal itself. Perhaps they don’t like your tone, or your presentation, or something you say or do hits one of their emotional hot-buttons and they forget why you’re talking in the first place. Being on the lookout for such things is a non-sneaky way to give you a bargaining edge: when your partner gets off track, pull them back on track in a way that makes them feel like a valued party. Win/win, and none of the ethical grayness that bugs people about traditional sales techniques. Good feelings at the negotiating table almost always result in more favorable terms for the party held in greater esteem.
I spoke in earlier installments about how negotiation is a game. Like all games, it has trump cards–two of them, in fact, which are in play in every negotiation (there can be others that are context-dependent. I’m only talking about the two that are always present).
The first of these is the signed contract. Once there is ink on the vellum, the deal is done, and the terms laid out in the contract are the terms the parties are bound to. Further disputes are resolved by reference to the contract–and the language of the contract–not your unspoken “understanding”–is what trumps.
Yes, I know that some contracts are illegal, and can be gotten out of, but it’s a bad idea to depend on a contract’s breakability when you go into it. First, it’s an expensive strategy–see the previous installment Everybody Knows Peggy Lee for a look into how difficult it can be to break a bad contract or enforce a contract on a business partner. Second, signing a contract you don’t intend to live up to (or hope to get out of if something better comes along) is an unethical and frankly shitty way to behave–and if you don’t have ALL your p’s and q’s in order, it can get you into serious legal trouble. Words like “liar” “cheat” “dishonest” and “fraud” tend to spring readily to mind, and those are words that bad reputations (and long prison sentences) are made of. (There are ethical reasons to break a contract, and legal ways to do it, which I’ll deal with in a later chapter. What I’m talking about here is making a habit of signing contracts you hope to be able to break later, or contracts you don’t intend to live up to. It’s better not to get into contracts like that in the first place).
But when it comes to negotiation before the contract is signed, there is another trump card, and it’s far more powerful than most people imagine.
The Ultimate Trump Card
At any time before you actually sign a contract, you are at the bargaining table. And, so long as you are at the bargaining table, there is one word that trumps all of them:
And until your ink is on the page, there is no deal. There is only the prospective deal. Despite what salespeople or experienced negotiators will tell you when you’re at the table, you do have the right to walk away at any point before the deal is signed. Always. No exceptions.
When we’re two years old, we know how to say “no,” and we say it a lot. By the time we hit teenage years, we’ve been so thoroughly trained out of it that the adults around us spend a lot of time and money trying to teach us how to say it all over again (“Say no to peer pressure!” “No means no!”)–but they don’t want to actually hear it from us, and most of them don’t know how to say it themselves when they’re faced with someone of superior social standing.
Nonetheless, “No” is a powerful word. If you say “no,” there is no deal–and if you’re willing to walk away from the deal and not look back, it goes a long way toward evening the balance of power in an unbalanced situation. But here’s the thing: unless you’re really good at this, you can’t bluff. If you bluff, and your bluff is called, your leverage is gone.
There’s two reasons this trump card works:
First, you can’t be forced to sign a bad contract. You can be pressured, cajoled, emotionally blackmailed, shamed, guilted, and bribed, but you can’t be forced. If you say “no” and mean it, all the pressure in the world won’t work. If you say “I will not sign a contract with this clause” and you mean it, then the person you’re negotiating with will sense it. If the provision is one they’re willing to sacrifice the deal for, you’ll go your separate ways–but if the provision is less important to them than doing the deal, they’ll cave (either by capitulating fully or offering a compromise).
Second, as mentioned earlier, it’s human nature in a negotiation to get into the mindset that the deal must be made. In most cases, the person you’re negotiating with will be in this mindset–and if you’re willing to say no, then you’re not a prisoner to the same mindset. Sure, you want the deal (otherwise, why negotiate?), but the world is a big place, and there is almost always a better deal. If you walk away from this car, you can walk into another dealership. If you walk away from this publishing contract, there are literally hundreds more companies you can deal with (and the fact that someone made you an offer is often something you can use to lure another deal quicker than the first one came your way).
To reiterate: In most cases, there is NO SUCH THING as a once-in-a-lifetime deal.
There are some exceptions to this, though. There are some, very few, once-in-a-lifetime deals, like an offer to direct Lord Of The Rings.
Peter Jackson was offered this deal, and it’s a fair bet that there will never be another production of LOTR in his lifetime (or at least while he’s young enough to have the energy to do a project that big). It was worth it to him to take an unfavorable deal–but even a once-in-a-lifetime chance was not so important that he couldn’t say “no.” He did say “no,” several times, which is why the deal took five years to broker in the first place, and it took another eight years for New Line to convince him to do The Hobbit.
The Problem of Need
There is a reason aside from conditioning, though, why most people never think to say “no.” They feel like they need the deal.
The trouble with need is that, when you need a deal, chances are you’re gonna get screwed. But when I say “need” I’m not talking about material requirements. Objective, material need may exist, sure, but if an objective need (or strong desire) didn’t exist on some level, you wouldn’t be trying to do business.
No, I’m talking about felt, emotional need. That thing that impels you beyond reason, that thing that gives you the fear that if you don’t get this deal, then all is lost. You’ve missed your big shot, or you’re going to miss out on something great. These two kinds of need are not obviously connected.
You may, for example, really need a car–your old one is dead, and you have to commute, and you can’t afford a rental for more than a week (or less). But that doesn’t mean you need this car. Unless you’re in the middle of Africa with only one neighbor who has only one car for sale, then you have the freedom to shop around, no matter how much of a rush you’re in. Cars are the third biggest contracts that most people will enter into (coming in slightly behind houses and spouses), so it’s very important to separate the fact that you need a car from the felt need for a car.
Or, you might have your first publishing contract in front of you, and it’s your lifelong dream and longtime disciplined pursuit to sell a book to a publishing house. You’re so close you can taste it. Your felt need puts you in a very bad bargaining position.
Or, a situation I’ve been in, you’ve sunk a lot of money and years of your life into making a film, and you’re offered a chunk of change and a distribution deal to finish. You really feel the need in this case, trust me. And if you let that need rule you, you’re going to get screwed (in my case, the deal was bad and had long term negative costs attached, so I walked).
But if you master your need, keep your eyes on the objective aspects of the deal, and control your sentimental reactions, you might just be willing to say “no.” And if you can really, honestly, truly walk away, then you have the superior bargaining position–even if the other guy has more money, bigger lawyers, and more experience.
It’s your signature they’re after. Refusing to grant it is the ultimate veto power. Use it wisely.
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