In negotiations you are often required to predict and manage future uncertainties. It shouldn't be a surprise, therefore, that without ways to manage uncertainty, those involved can fail to reach agreement, or find themselves quickly and unexpectedly renegotiating the original agreement. In this issue of Negotiation Insights we look at the importance of building contingencies into agreements.
On 29 September 2014 the State Government of Victoria signed a $5.3 billion contract to build a freeway that would connect the city of Melbourne’s Eastern and Western suburbs. Being a large-scale project there were many risks to manage. Perhaps one risk the consortium responsible for building the freeway did not fully envisage was an election and a new State Government, whose differing infrastructure priorities would ultimately result in the project being cancelled.
By not having a contingency in the contract to manage these circumstances, the parties now needed to either resolve their differences through the legal system, with significant financial and reputational costs, or as an alternative, negotiate a mutually beneficial resolution. On April 15 2015 the State Government reached a negotiated agreement that resulted in the consortium accepting $339 million to terminate the contract.
On reflection, and to mitigate future risks, either side could have tried to protect their interests by including a clause in the original agreement to manage these circumstances.
When confronted with future risks and uncertainties, don't argue about whose view of the future is right, instead build contingencies into the agreement and by doing so give the other party the opportunity to satisfy their interests while simultaneously protecting your own.
Quick tips – Building contingency agreements
- Negotiate multiple issues and stay in discovery long enough to understand where you and the other party are exposed to uncertainty
- When differences over performance exist, consider scalable incentives, staggered payments, or holding a form of security in advance
- When negotiating mergers and acquisitions that involve concerns over a commitment to the negotiation process, consider a break fee that requires the breaching party to pay a penalty
- When there is the potential to dispute issues that lack objective criteria agree upfront on a binding dispute resolution process