CHAPTER 1

NEGOTIATION
Chapter 1

Negotiation is one of the most important, yet sometimes ignored, aspects of drafting
any agreement. The genesis of the word Negotiation seems to be the two Latin
terms, “negare otium”, which literally translates into “to deny leisure”. In French and
Spanish, deny leisure means “business”. In simple words, we may understand
negotiation as communication between the parties with the intention to reach a
mutually agreed common position.
Negotiation may also be viewed as a dialogue between parties for resolution of
disputes and bargain for individual or collective advantage. Examples include using
negotiation techniques to resolve crisis such as hostage situations, barricading,
kidnapping etc. Negotiation may also be resorted to for settling matters, as an
alternative dispute resolution mechanism through Lok Adalats, etc.
The need to find a common position in a contractual relationship occurs because
of divergent expectations of the parties to a contract – most parties intend different
outcomes (extremely different at times) in terms of consideration, timelines,
performance standards, and so on. By engaging in the negotiation process, they try
to reach a commonly agreed position so that each party is satisfied.
To this effect, we negotiate all the time in our lives. In fact, Indians take it to
extreme points sometimes! We bargain with our vegetable vendor, in electronic
showrooms, with banks (for reduced interest rates or waiving processing fee on
loans), with prospective employers for better remuneration and working conditions
and so on.

Importance of negotiation
Negotiation is an essential skill required to becoming a successful commercial
lawyer. A lawyer with effective negotiation skills can turn around a loss into a
beneficial compromise. One can overcome the challenges faced by your clients
during a transaction by implementing appropriate negotiation skills, which includes
a variety of other ancillary skills such as confidence, soft and hard skills, general
knowledge, market research and ability to understand the position of the other
party.
The significance of negotiation skills cannot be exaggerated. Having said that, a
draftsman should approach negotiation not as a competition, but as a compromise
in which everyone leaves the table feeling happy, respected and satisfied.
26 Practical Guide to Drafting Commercial Contracts [Chapter 1

Elements of negotiation
Negotiation needs clarity of thought and presence of mind, at all times. While it is
almost impossible to enumerate all the skills needed to be a good negotiator, the
Harvard Negotiation project lists seven major elements of negotiation which are as
follows:
Interests – A skilled negotiator must be able to extract the common and
individual interests out of any fact-situation. Understanding the
fundamental needs of the parties and prioritizing them is an important
skill for a negotiator.
Legitimacy – A negotiator cannot exploit the other parties involved in
the process to benefit his or her client. A good negotiator follows a fair
approach to address the concerns of all interested parties and in the
process, obtains the best outcome for his client. The result should be
driven by legitimate consensus and not by bulldozing the other party to
accept the demands.
Relationships – It is important to manage and maintain a healthy
relationship with the opposite party, irrespective of it being a successful
negotiation or not. No bridges should be broken ever.
BATNA – BATNA is the abbreviated form of Best Alternative to a
Negotiated Agreement. Before negotiation commences, a good
negotiator must know his BATNA. This enables him or her to know
when to walk away and when to stay. A skilled negotiator anticipates the
situations where an alternative may be required to obtain consensus.
Therefore, the ability to objectively think through BATNA helps a
negotiator to carry on a transparent negotiation with all parties.
Options - In a commercial transaction, each party involved has negotiable
and non-negotiable demands. The job of the negotiator is to identify such
demands, prioritize them in the order of importance. A good negotiator
also needs to think of options or choices (at times out of the box solutions)
that the parties should consider satisfying their demands.
Commitments – This assumes significance at the concluding stage of the
negotiation when the interested parties commit to observe and adhere to
the result of the negotiation process. A negotiated position is reduced to
writing through a contract.
Communication – The art of communication determines the success of
negotiation. A boisterous and rude lawyer cannot be a good negotiator. A
confident and dexterous negotiator will communicate in a manner that
makes the other party more comfortable. This means that the other party
will be more willing to bend to the demands of the negotiator and
ultimately lead to a win-win situation for all the parties.
Chapter 1] Part 4—Before you Draft 27

Possible outcomes of negotiation

The possible outcomes of negotiation are “win/win”, “win/lose”, and “lose/lose”.
Any negotiation can result in any of these outcomes. The outcome also depends on
the negotiation styles followed by the parties.

Win/Win Outcome
A win/win outcome occurs when both / all the parties arrive at a satisfactory result of
the negotiation fulfilling their individual goals and expectations. Negotiations
targeted towards this aspect lay greater emphasis on the development of a mutually
beneficial agreement. A simplistic example would be awarding of a contract at a fair
and reasonable price is in the best interest of both the contractor and the party
awarding such contracts.

Win/Lose Outcome
A win/lose outcome generally occurs when one party is perceived as faring
significantly better at the expense of the other. Such outcomes are due to negotiators
failing to anticipate situations beyond the initial transaction. A lack of motivation
for the party perceiving itself to be losing out in the negotiation process to foster a
long-term relationship can also result in this outcome. To illustrate, you may buy a
second-hand sports bike at a very low price after negotiating hard with the seller.
You realize it later that you will have to spend a fortune for its service and
maintenance without any recourse to the seller.

Lose/Lose Outcome
A lose/lose outcome is the result of a deadlock between the negotiating parties. Such
an outcome generally occurs when both the parties fail to reach a conclusion or
mutually agree to the terms and conditions. To illustrate this, in a transaction
involving equity infusion in a company, the investor wants to appoint two directors on
the board of the company to exercise more control while the investee company is
willing to allow the appointment of only one director. Ultimately, the transaction falls
through - the investor loses the opportunity to gain financial returns and the investee
loses the opportunity to receive a much-needed infusion of capital in the company.
No one gains out of such an outcome and this is certainly an avoidable outcome.

Negotiation of commercial contracts

The most negotiated elements of a commercial contract are: (i) representation and
warranties, and (ii) indemnities.
If due diligence is conducted to facilitate a commercial transaction, some key
issues / concern areas emerging out of the due diligence are listed. The party
subjected to the diligence or its promoters are confronted with these issues and the
party carrying out the due diligence seeks adequate representations and warranties as
28 Practical Guide to Drafting Commercial Contracts [Chapter 1

well as general and specific indemnities to address its concerns. Thereafter, the
parties agree on the scope of representations and warranties and indemnities.
The negotiation strategy adopted depends on the kind of coverage provided by
the indemnity, the type of indemnity and the bargaining power of the negotiating
parties. Similarly, the strategy to negotiate the representations and warranties also
depend on the bargaining power of the parties and findings of the due diligence.
It may be tough to lay down an exhaustive list of factors to bear in mind while
negotiating a commercial contract. However, here are some pointers:
Use of language – As mentioned at multiple places in this book, you
must always use business language while drafting a contract. Avoid
unnecessary jargons and Latin terms. Using simple to comprehend
language also allows the parties to fully understand the implications of
any provision. Only if you understand a provision comprehensively, can
you negotiate to reach the desirable position.
Use facts, not feelings - Negotiation is an emotionally draining process.
Having said that, it is important to dissociate your feelings from the
facts. A successful negotiator avoids letting an unpleasant personality
drag down the negotiations. It is also important to view negotiation as a
means to achieve common goals and not a warfare technique.
Use an ‘offer-concession’ strategy - You need to negotiate in a manner
that leaves the other party feeling that they have made a good deal. Do
not start negotiations by revealing your BATNA. When you make the
other party feel that they have won something, it is much easier to reach
your desired outcome.
Prioritize - A contract may have innumerable aspects that could be
subject to negotiation. However, such an approach does not work in
reality. It is important to identify the key asks of your client and
negotiate accordingly. There is no point to lose sleep over minor points
which do not substantially change your position. Keep your eye on the
prize - the absolute non-negotiables and better forget minor issues.
Industry standards are easy to negotiate - If you are negotiating an
agreement and you have considerable industry knowledge / experience, it
is much easier for you to justify your position pointing out that these are
in line with the market practice. It shifts the burden on the other party to
convince you as to why an exception should be made in the present case.
Therefore, you must know your position and your audience before you
decide on the negotiation strategy.

Commonly negotiated clauses in some of the key agreements

Set out below are the commonly negotiated clauses in some of the key commercial
agreements that you may come across.
Chapter 1] Part 4—Before you Draft 29

Share Purchase Agreement

● Payment of consideration - whether to be paid upfront or in tranches
● Escrow mechanisms - whether the consideration should be in escrow
during the time certain obligations are fulfilled by either party
● Representations and warranties provided by the seller
● Covenants
● Indemnity
● Pre-conditions to reach the Closing Stage (government approval, lenders’
approval, SEBI approval, lifting of some lien on subject shares, etc.)
● Post-closing obligations

Loan agreement
● Conditions precedent to disbursement
● Positive and negative covenants
● Representations and warranties
● Conditions subsequent
● Penalties for non-compliance by the borrower

Employment agreement
● Remuneration
● Service conditions
● Perquisites
● Termination of employment
● Non-compete
● Confidentiality

Non-disclosure agreement
● Confidential information - inclusions and exclusions
● Permitted use and disclosure
● Duration of confidentiality - whether only during the subsistence of
agreement or even thereafter
● Penalties for violation
30 Practical Guide to Drafting Commercial Contracts [Chapter 1

Service agreement
● Scope of services
● Sub-contractors
● Assignment
● Payment terms
● Termination
● Warranties