Remember that big sales contract you negotiated last fall, the one that got you a fat year-end bonus? Well, your manufacturing department has just told you that delivery will be two months late. So now it's your job to persuade your customer to accept a new date without canceling the deal. And that's not all. That long-term supply contract you worked so hard on a year ago? The supplier is asking for a meeting to revise the pricing due to its increased energy costs.
If you're like many managers in these uncertain times, you are probably spending as much time redoing old deals as you are negotiating new ones. Unfortunately, the dynamics of renegotiating an existing agreement are quite different from hammering out a deal from scratch, for several reasons.
First, you and your counterpart know much more about each other and about your transaction than you did when you negotiated your original agreement. That knowledge is bound to influence the strategies and tactics used in the renegotiation. For instance, your company's failure to deliver on time is likely to make your customer question everything that comes out of your mouth when you're renegotiating your sales contract.
Second, it's more costly to abandon a renegotiation than to walk away from an initial negotiation. Where are you going to find another supplier on short notice to replace the one asking for a price increase?
Third, renegotiations often happen against a backdrop of threats and counterthreats of lawsuits, contract cancellations, and the loss of future business. Unlike talks surrounding a new deal, which often are full of optimism and goodwill, renegotiations usually begin with both parties' disappointed expectations. If negotiation is about sharing expected benefits, renegotiation is almost always about allocating a loss.
When handled poorly, renegotiations are likely to exacerbate bad feelings and mistrust, and may be the last step before a lawsuit. In this article, I will show you how to reduce the risk of renegotiation and how to prepare for and manage such talks when they can't be avoided.
What leads to renegotiation?
Renegotiations generally are triggered for one of two reasons: an imperfect contract or changed circumstances.
The goal of any written contract is to express the parties' full understanding of their deal. Despite lawyers' belief in their abilities to capture that agreement in writing, in practice they can only achieve that goal imperfectly, for three reasons. First, the signers are incapable of predicting all the events and conditions that may affect their transactions in the future. Second, concerns about transaction costs limit the resources that parties devote to the contracting process. Third, even if both sides had the requisite foresight and resources to draft a perfect contract, they have no assurance that a court will interpret their contract exactly as they intended.
A change in circumstances is a second major cause for renegotiations. For example, a sudden fall in commodity prices, the development of a new technology, or unexpected increases in energy costs can force everyone back to the negotiating table. A change in circumstances usually increases the deal's costs or reduces its benefits for one side. When that party concludes that the cost of complying with a contract is greater than the cost of abandonment, it usually rejects the deal or demands renegotiation.
Although the risk of renegotiation is present in any deal, you can reduce this risk during your initial contract negotiation and also minimize renegotiation costs when they actually happen. The following suggestions on how to handle both situations are taken from my book The Global Negotiator: Making, Managing, and Mending Deals Around the World in the Twenty-First Century (Palgrave Macmillan, 2003).
What to do before the deal breaks down
1. Foster a relationship with the other side. Whenever one side fails to meet its contractual obligations, renegotiation is more likely to succeed if the parties have a strong relationship. Ideally, the aggrieved party will value long-term relations more than potential gains from a claim for breach of contract. For example, a bank will be more willing to renegotiate a loan with a delinquent debtor when the prospect of future business from the debtor is likely. Bondholders of the same debtor, on the other hand, will generally be more resistant to renegotiation, as they tend to lack opportunities for a profitable future business relationship.
2. Take the necessary time. Experienced negotiators know that building a strong relationship takes time. While speedy dealmaking may seem efficient, remember that any time saved during contract negotiation may be more than offset by the time you'll spend renegotiating the deal.
3. Provide for a renegotiation process. Traditionally, negotiators have dealt with the risk of change by writing a detailed contract that attempts to foresee all possible eventualities. Rather than viewing a long-term transaction as frozen in the detailed provisions of a lengthy document, try viewing the deal organically, as a continuing negotiation in which you seek to adjust your relationship with the other side to your rapidly changing work environment. Accordingly, your long-term contract might provide that at specified times or upon specified events, you will renegotiate or at least review certain provisions. Through this approach, you confront the problem of contract violations in advance and establish a clear framework for renegotiation.
4. Consider a role for mediation in the deal. Whether they're called mediators, conciliators, or advisers, third parties can assist in renegotiation by building and preserving business relations and resolving disputes without the need for litigation. Consequently, negotiators should consider stipulating in their contract that parties must try mediation for a period of time before filing a lawsuit.
What to do after the deal breaks down
Even with these precautions in place, there will be times when one side demands renegotiation of a deal. Here are some guidelines on how to proceed.
1. Avoid hostility. It's tempting to respond to a demand for renegotiations with hostile, belligerent, or moralistic objections. Such responses are rarely effective, however, as the other side typically will have determined already that its vital interests require changes to the deal. Only by dealing with those interests can the parties resolve their conflict.
2. Weigh your claim against the value of the relationship. Willingness to renegotiate a contract typically corresponds to the value one side attaches to a potential future relationship with the other side. If the relationship is worth more than your claim for breach of contract, you ordinarily will be willing to engage in renegotiation. If, on the other hand, you conclude that your claim is worth more than the benefits from a continuing relationship, you may insist on your contractual rights to the point of resorting to litigation.
You may not be able to accurately evaluate the worth of a claim or the value of a renegotiated contract without first engaging in discussions with the other side. Moreover, satisfaction of a claim through litigation is almost always a lengthy and expensive process, a further motivation for choosing to renegotiate.
3. Create value in the renegotiation. When your counterpart demands renegotiation, you may expect that any advantage he gains will guarantee a loss for you. An unwilling participant in a renegotiation is likely to be intransigent—to quibble over the smallest issues, to voice recriminations, and generally to block proposed changes. Naturally, such talks are unlikely to lead to joint gains. The challenge for both sides is to create an atmosphere in which problem solving can take place. Even if you feel forced into a corner, approach renegotiation as an opportunity to raise new issues that will benefit both sides.
4. Fully evaluate the costs of failure. In many cases, the alternative to a successful renegotiation is litigation. As you approach the renegotiation process, you and your counterpart must carefully assess the risks of later facing each other as defendant and plaintiff. Doing so will allow you to accurately evaluate the worth of various proposals. Notably, the side demanding renegotiation is likely to undervalue the risks and costs of litigation, while the party facing the demand probably will overvalue a lawsuit's benefits. Therefore, it's important for each side to ensure that the other has a realistic evaluation of alternatives to a successful renegotiation.
5. Involve all necessary parties. A successful renegotiation may require the participation of not only those who signed the original agreement but also of those who later gained an interest in the transaction, such as labor unions, creditors, suppliers, and government agencies. If you represent a bank that's renegotiating with a troubled real estate developer over a loan for a partially completed office building, you'll never reach a new agreement without input from the unpaid construction contractor whose lien on the property could block refinancing.
6. Design the right forum and process. Renegotiations often emerge from a crisis suffused with threats and high emotion. As the sidebar "Finding the Right Process in India" shows, choosing the appropriate renegotiation process may help mollify injured parties.
Sometimes the terminology used to describe the renegotiation may influence its success. Rather than using the label "renegotiation," which conjures up negative images of a drastically rewritten contract, parties might call the process a "review," "restructuring," "rescheduling," or "contract clarification." Calling a renegotiation a "request for waiver" is yet another means of respecting the agreement while giving the burdened party relief, if only temporarily, from contractual obligations.
7. Consider hiring a mediator. Amid the stress and ill will often generated by a renegotiation, a mediator or other neutral third person may help the parties overcome obstacles to a satisfactory renegotiated agreement. A mediator might contribute by designing and managing the process in a way that provides a maximum opportunity to create value, by assisting with communications in a way that facilitates positive results, and by suggesting substantive solutions to the problems that parties encounter during the course of their renegotiation. 
Finding the Right Process in India
In 1995, a new government came into power in the Indian state of Maharashtra and canceled a twenty-year power purchase agreement with the Dabhol Power Company, a joint venture formed by Enron, General Electric, and Bechtel. Claiming that the deal was improper and even illegal, the government declared publicly that it would not renegotiate.
When the government recognized that it had no other options to secure power, it began to soften its position. But if renegotiations were to take place, the parties would need a process that would preserve the government's dignity and prestige. Ultimately, the government chose to appoint a "review panel" consisting of disinterested energy experts to reexamine the project. The panel met with Dabhol representatives and project critics, and then submitted a proposal to the government that contained the terms of a renegotiated electricity supply agreement that both sides accepted.
The use of an expert panel to conduct what amounted to a renegotiation, in lieu of face-to-face discussions between the two sides, served to protect governmental dignity. The panel's independent status also assured the public that the renegotiated agreement protected Indian interests.