Minimizing Risks in Renegotiating Contracts

In a previous post I discussed some basic guidelines for attempting to restructure contracts that have turned out to be problematic in light of unforeseen events after the deal was first signed.  Obviously there are risks in attempting to informally renegotiate a contract.  The major concern is that if discussions are not successful the non-defaulting party, the customer in this case, has been given a substantial amount of information that can be used in subsequent litigation and information provided in good faith as a basis for striking a new deal can be turned into a harmful weapon in the hands of the party’s attorneys.  In many cases, however, the rewards exceed the risks and companies can resolve problems by providing the other side with sufficient information to allow them to make an informed decision and understand the benefits of a proposed compromise. 

Several safeguards should be used when entering into negotiations to restructure a troubled contract.  First of all, any documents provided to the non-defaulting party that contain sensitive information should be marked “confidential” and only disclosed after the other party has agreed to sign and return a confidentiality and non-disclosure agreement.  Second, while it is usually obvious that the reasons for the discussion are that the terms of the initial contract have become significantly unfavorable an effort should be made to avoid using language that the other party might reasonably interpret as being an admission of impending non-performance such that the other party might claim anticipatory breach.  Third, try to continue complying with the terms of the contract as they stand during a limited negotiation period even if this means incurring modest losses on the contract during that time.  If possible, start talking about restructuring a contract as soon as it appears that problems are on the horizon but before they reach a crisis level.  Fourth, try and determine if the other party has specific problems of its own that might be solved or managed in some way during the negotiation process.  For example, the other party might have an immediate need for cash that might open the door to discussing a buyout of the contract with an immediate lump sum payment that represents a substantial discount from the costs of performing for the entire term.  Finally, if litigation is a real possibility and there are legitimate concerns about misuse of information disclosed in good faith consider holding the discussions through a mediator.  A mediator is not only trained to get both parties to find common grown, and ignore emotions and anxieties, but it is also possible to have discussions with a mediator protected as confidential and privileged so that they do not later come back to cause harm in the event of litigation.

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