There Is No Such Thing as a Standard Contract

I was speaking with a client this morning and was reminded of Rodney Dangerfield’s joke: “I just signed a big contract with General Motors for two years. I bought a new car.”

In the corporate development world, when two willing parties sit down to negotiate an arm’s-length agreement, one party may propose its “standard agreement,” but that is just the starting point. There is no such thing as a standard agreement when the business opportunity matters more to both sides than adhering to standard terminology or wooden documents.

In law school, first-year contracts taught us about contracts of adhesion. This is the contract that a big company (your lender, insurer, landlord, airline, hospital, employer or mobile carrier) hands you to sign, and it is essentially non-negotiable; take it or leave it. Asking to negotiate amounts to the end of the conversation. Not surprisingly, courts tend to uphold these terms unless a specific provision is unconscionable or falls well outside the reasonable expectations of the adhering party. And getting to that point usually means legal bills that far exceed the amount in dispute.

The arm’s-length agreement is different. When principals sit down, look each other in the eye and genuinely want to do business together, there’s give and take. This is about finding solutions to the likely areas of friction: pricing and deposits, delivery timeframes, product and service details, SLAs and liability. For corporate development, this is your happy place.

It starts with introductions and small talk, which should be managed but not cut short. This foreplay establishes the necessary atmospherics. Then comes a high-level conversation in which each party listens carefully to understand the other’s strategic objectives, business motivation, urgency and other deal drivers.

This is why it is so important to have another person on your side of the table as an observer or wingman, listening for every nuance and watching every reaction from the other side. Listening, flexibility and a little creativity increase the likelihood of a winning deal.

Once the strategic fit is clear, the process moves in stages, and each stage narrows what remains open. I stay away from letters of intent and even memoranda of understanding, much preferring a term sheet that captures the material terms in a few pages: scope, term, pricing, exclusivity if any, and the handful of points each side has said it cannot live without. Nothing is binding yet except confidentiality and perhaps a period of exclusive dealing, but a good term sheet does most of the work.

I refuse to include Most Favored Nation (MFN) terms, which are nearly impossible to enforce and onerous on the provider. Refusing MFN is a prudent policy for any provider.

Then, and only then, comes the definitive contract: the material terms spelled out, plus the standard legal boilerplate. The lawyers translate the business deal into definitions, representations, indemnities and termination rights. Their job is to protect against what could go wrong. The principals’ job is to make sure they don’t kill the deal while doing it.

There is some risk for the party that prepares the first draft, which I prefer my side to do if, and only if, the lawyer’s work is reviewed before it is sent so that any overreach does not unnecessarily embitter the other side. The “one free bite” rule for aggressive animals applies to contracts too: you can only blame the lawyers once.

So how do you win? The principles I’ve followed for four decades apply here more than anywhere.

Know what you want and take the lead. Before you sit down, settle on the three or four points you must have, the longer list you would like, and what you are willing to trade. The side that has done this homework sets the agenda, gives ground gracefully on things it never cared about, and collects credit for every concession.

Put yourself in their shoes. Listening is more than a courtesy; it is how you learn what the other side actually values, which is rarely what they lead with. Once you know that, you can trade rather than split. When it comes to price, meeting in the middle looks like compromise, and a lazy one at that. "Exchanging a longer term for a better rate or a more bespoke rate structure, or a larger deposit for a firmer delivery date, creates value rather than simply dividing it.

Find the line on every key issue. If they don’t push back, you are probably leaving something on the table. Test each major term until you feel resistance, then decide whether the resistance is real or theater.

Never be afraid to walk away. If you cannot afford to walk, you cannot afford to be in the room. A deal that compromises your core values or business objectives is not worth pursuing, and every credible position you take at the table rests on the other side believing you mean it.

Build the relationship, not just the deal. A win is an agreement both sides believe met or exceeded their internal business objectives. A lopsided deal gets renegotiated, litigated or quietly ignored. And the counterparty you squeezed this year may be the one you need next year. Your first deal with anyone is only the beginning.

There is no substitute for experience. Knowing which of the other side’s demands are real, when the lawyers have wandered too far from the business, and when to bring the principals back into the room to remember why they wanted to do this in the first place: none of that comes from a template.

Rodney’s contract with General Motors was a contract of adhesion. The deals worth writing about are the ones where two parties negotiated their way to something neither could have drafted alone, and both walked away feeling they had brought back a win.

Then they can proudly shout “Done Deal” to their stakeholders.

Note: The above is my business advice drawn from decades of corporate development and deal experience. Other experienced dealmakers approach negotiation differently, and some will disagree on the particulars; take what's useful and leave the rest. It is not legal advice. Any document that could bind your company should be prepared or reviewed by competent counsel.

Photo by Vitaly Gariev