Renegotiating Contracts Can Save Your Business
Let’s Make A Deal
Certain situations necessitate the review, renegotiation or termination of a contract, especially when it means that one of the parties is in danger of bankruptcy or dissolution. Organizations have an ethical and legal obligation to notify the other party to a contract that the situation is dire long before the relationship is jeopardized by legal proceedings.
Renegotiation of a contract can preserve working relationships with open and direct communication. Both parties must ultimately agree to the renegotiation and each must be willing to modify the terms in anticipation of better days ahead.
For instance, the buyer may ask for a per unit reduction, but may be willing to guarantee a higher quantity over the life of the contract. The seller may be willing to upgrade the quality of the components for the same price if the contract is extend over a longer period. Any number of options is possible, provided both entities demonstrate genuine compassion for the well-being of the other party. Overlooking the other party’s best interest may result in a stalemate and a broken relationship, or worse, legal action.
It’s important to remember that a commitment to procure products or services by contract assumes that both parties will benefit. Failure to notify the other party of an impending issue with the terms of an existing contract can jeopardize the longevity of multiple organizations and individuals. Abrupt termination of a contract without the other party’s consent can bring serious legal ramifications and is never advisable.
To begin the renegotiation process, follow these steps:
Leaders Drive Negotiations
Top leadership in the organization must contact the other party’s leadership and request a meeting to review the terms of the contract. Delegating this responsibility to procurement or another department sends the wrong message.
Consult Legal Experts
If the contract terms and conditions are difficult to follow or there is any uncertainty, it’s wise to contact legal experts in contract negotiation and administration before beginning discussions with the other party.
Put Cards on the Table
During the meeting, leadership needs to explain its position in clear, concise and direct terms, particularly if the relationship is to continue beyond the renegotiation. Don’t appear desperate, but be clear of the potential outcome of failure to renegotiate the terms. A contracted party who is interested in retaining the relationship and has a vested interest in the outcome will listen intently.
Leadership also must solicit the input of organizations and departments that work with the other party. Is the relationship solid? Can it withstand a request for renegotiation? Are new sales contracts signed that would offer the other party increased purchase orders and long-term commitments, despite the renegotiation of the existing contract?
Assuming the other party is willing to review the terms of the agreement, leadership must come to the table with viable alternatives that will not automatically diminish the perceived or real value of the contract. How will both parties ultimately benefit from this renegotiation? What guarantees exist that performance will take place? What other steps has the requesting organization taken to avoid contract termination? Does good faith exist in the process? Can offering the other party a cash deposit with the new terms provide better volume pricing?
Be Patient, Forthright and Conduct Research
If the organization is evaluating purchasing options with competitors of the existing vendor, conduct research to determine the quality and value proposition of alternative vendors. Some existing vendors may be willing to meet or beat the competition to save the contract and the relationship. It may be more cost effective to buy-out the existing contract and engage another supplier than it is to renegotiate.
The anticipation of default isn’t the only time contracts should be reviewed. Contracting parties may find the need to break a contract due to an engineering reconfiguration, obsolescence or legal issue associated with the manufacture of a product, among many other scenarios.
Regardless of the reasons behind the renegotiation, it’s important to create a win-win environment with an open dialogue. Organizations that prosper together will work diligently to resolve these issues. It serves neither entity to be in breach of contract when it could have been avoided.
If the other party is unwilling to renegotiate and the only option is to buy out the remaining terms of the contract, then do it professionally and through proper legal channels. A bad reputation travels quickly across industries, and refusing to take a contract seriously can jeopardize future agreements.