Goliath vs. Goliath – Econ 101: avoiding the costs of unnecessary contract stalemates
Fundamentally, the successful closing of most commercial transactions boils down to a basic principle learned in Econ 101: the seller’s supply curve and the buyer’s demand curve meet at an equilibrium price for the quantity of goods or services being sold. There is a “win-win” for both sides: the buyer purchases something it values and demands, and the seller is sufficiently compensated for the goods or services it supplies. Absent this equilibrium, shortages or surpluses develop and market efficiencies are lost.
Why do negotiating teams sometimes struggle to close deals or solidify business-to-business relationships when the “win-win” scenario is abundantly clear to commercial leaders on both sides?
In such cases, commercial leaders may find themselves talking less about the actual transaction at hand and more about contractual risk allocation for third- or fourth-order effects from hypothetical events that are extremely unlikely to occur or that no one genuinely understands. Going back to the Econ 101 comparison, in the worst cases, it may become so difficult for either side to discern its respective supply or demand curves that the deal’s closing gets unnecessarily delayed or never occurs. As a result, both sides incur the real costs, as well as the opportunity costs, of this market inefficiency.
What are some ways for companies to avoid these costs and delays?
First, buyers and sellers should make an early assessment of what “comes with the deal” beyond the core transaction being negotiated. Not unlike dating, it’s important to figure out what baggage comes with the relationship. When it comes to key contract provisions, certain terms tend to be in-market or not. As an example, if a buyer categorically requires broad-form indemnification with unlimited liability from the seller, the seller should (1) price that into the deal early (if that’s even possible), and (2) determine whether its balance sheet and insurance policies will even allow it to bear those risks. If neither are possible, it might be best for the seller to just move on.
Second, both sides should maintain focus on the core elements of a proposed transaction. After all, these transaction-specific items are what likely triggered contract negotiations in the first place. With time, institutional inertia and unhelpful posturing on both sides have the potential to cloud discussions. If negotiations get side-tracked for extended periods of time, both sides should attempt to re-ground their focus on the deal’s core elements and adjust accordingly—meaningful collaboration is key here.
Third, active involvement of skilled commercial attorneys can help companies reduce these types of inefficiencies and sometimes avoid them altogether. Complex contracts necessarily involve some amount of legalese. It is totally normal for a person not to know what a “statute of limitations” is, never mind how long it might last for a certain type of claim. An attorney can translate this sort of term into everyday language and help the client understand what it means within the context of the wider transaction. Example: “If a person gets physically injured in Ohio because of something you did wrong, the statute of limitations for that type of lawsuit generally gives the injured person a 2-year window to file their lawsuit against you after the injury. This helps to control the risk associated with the lack of a time limit in the limitation of liability section of your contract.”
Not all deals are good deals, but good deals should not be lost or delayed unnecessarily due to contractual sticking points totally outside the scope of a transaction. If your company needs a skilled commercial attorney to help draft a contract or negotiate a commercial transaction, please contact Mulhall Zion LLC at (216) 586-4278 in Ohio, or (240) 630-0407 in Maryland.
Mulhall Zion LLC is a boutique law office with practices in Ohio and Maryland, providing businesses and individuals highly-focused legal advocacy and a collaborative attorney-client experience. Clients’ needs and efficient resolution of litigation or transaction matters are the foundation of the practice philosophy. With depth of experience and training at the country’s highest and most competitive tier of law schools, private law firms, Fortune 10 companies and federal law enforcement agencies, clients (big or small) secure the highest quality of legal representation at a cost only a boutique practice can provide.