7 Pieces of Advice on How To Renegotiate Contracts

The COVID-19 crisis serves as a stark illustration. State-imposed business shutdowns across various countries resulted in supply chain disruptions, thwarting the achievement of anticipated revenues or profits. Consequently, numerous contractual obligations went unmet: suppliers were unable to produce or deliver because they couldn't manufacture the products due to their own supply shortages (e.g., from China or Italy); retailers struggled to pay rent as the shutdowns drained their liquidity.

Businesses found themselves negotiating on multiple fronts: with banks to secure government-provided financial aid; with landlords for rent deferrals or temporary relief; and with customers to adjust delivery timelines or payment terms.

In scenarios such as these, it's vital for all market actors (both governmental bodies and businesses) to adeptly manage the renegotiation of existing contracts or the negotiation of new ones (such as procuring masks or other critical supplies). For example, Bavarian Prime Minister Dr. Markus Söder disclosed in a press conference that the Free State of Bavaria was consulting with negotiation experts from major corporations, a commendable and exemplary approach.

Negotiation specialists methodically review checklists with their clients, injecting order into impending negotiations. While there's a wide variety of checklists, their contents tend to converge on similar themes.

I routinely employ the TOP LADY formula, an integral component of the Driver-Seat concept (as previously mentioned), which adapts the principles of crisis negotiation to all forms of business and personal negotiations alike.

For the Decision Maker (such as a CEO, Head of Sales, Director, Vice President, or Senior Manager), who does not engage in the negotiations directly, the checklist encapsulated by the TOP LADY acronym includes:

Please remember to always keep the following formula in mind, as it is applicable across all negotiations:

TOP LADY-Formula:

T stands for Team, O for Options, P for Positions, L for Learn, A for Adapt, D stands for Discuss, and Y stands for Your Instruction.

This leads us to the 7 actionable pieces of Advice in regards to the Decision Maker (also referred to as "Senior Manager" here).

Tip Nr. 1:

Form a Team

As a Senior Manager and key decision-maker, it's not your role to engage directly in negotiations, adhering to the guiding principle: "the boss does not negotiate." Your first step is to assemble the right team for the task at hand.

In the context of renegotiating a contract, the expertise of a legal professional is crucial for reviewing the contract details and recommending any necessary modifications, whether due to "Force Majeure" clauses or invoking the legal principle of "frustration of purpose" (§ 313 BGB (German Civil Code)) as a bargaining lever. Ideally, this role should be filled by the attorney who originally crafted the contract, given their comprehensive understanding of its history and the dynamics of the initial negotiations.

Additionally, the role of a lead negotiator is critical, someone who is well-versed in the nuances of negotiation best practices. While your legal counsel could in theory fulfill this role, it's often more effective to appoint a company manager, here referred to as "Project Manager," who has already established a positive working relationship with the negotiating counterpart. In this setup, the lawyer and Project Manager work synergistically at the negotiation table or in a virtual meeting — the lawyer adopts a straightforward approach, while the Project Manager ensures the maintenance of a constructive relationship, effectively balancing the "Bad Guy/Good Guy" roles.

Tip Nr. 2:

Review Your Options

For every senior manager, it's second nature to continually explore options. Yet, the focus here is on those moments when you're compelled to renegotiate a specific contract due to unforeseen events, without the desire to terminate and start anew with a different partner. Often, you're left with no alternatives (such as no other landlord or alternative supplier to turn to). In these scenarios, the mindset of skilled negotiators, especially those versed in crisis negotiation strategies (like the approach outlined in McMains and Mullins' "Crisis Negotiations", 6th edition, 2020), becomes incredibly valuable. In situations devoid of options, it's crucial for the senior manager (the decision-maker) and the project manager (the chief negotiator) to maintain a strong mental fortitude and pursue the senior manager's defined goals, without being psychologically weighed down by the absence of alternatives. They must adhere to the FBI negotiators' guiding principle: "Focus on your goal" (Misino, "Negotiate and Win", p. 171). Only with this focused determination can you stand a chance to achieve your desired outcome.

Tip Nr. 3:

Develop Your Negotiation Positions

After reviewing the contract, your (highly experienced) lawyer will advise you on which positions to take and how to negotiate them. They will start by assessing the risks assigned to each party by the contract (as the distribution of risks in a contract is usually binding) and whether a "Force Majeure" clause (Act of God) covers the specific situation. The next step involves examining the legal consequences outlined in the Force Majeure clause. This task, even for the most seasoned attorneys, requires meticulous legal analysis (see, for example, Weller et al., NJW 2020, et seq. 1017 ff.). If there's no Force Majeure clause, or if it doesn't apply to the case at hand, the German Civil Code (BGB) often serves to provide a solution, particularly Section 313, which deals with the "adjustment of the basis of the contract."

In essence, Section 313 of the BGB allows one party to demand a contract adjustment from the other if adhering to the original terms becomes unreasonable. If necessary, it's possible to withdraw from or terminate the contract (Section 313, Paragraph 3 of the BGB).

After a thorough legal review, your lawyer will recommend specific positions for the senior manager, which the project manager should then assert in negotiations, with the lawyer acting as a strategic advisor. In relation to Section 313 of the BGB, typical positions might include: (i) a deferral of payment obligations, (ii) a temporary suspension of certain obligations (e.g., partial waivers) for a defined period, (iii) an equal sharing of the risk, or (iv) an early termination of the contract under specific conditions. Your lawyer will strive for a "fair distribution of burdens" or an "equitable distribution of risks."

The standard measure for developing the negotiation position is the answer to the question: "How would the parties have structured the contract if they had foreseen the current crisis and its effects at the time of signing the contract?"

From a negotiation strategy perspective, as a Senior Manager, you will want to slightly optimize your target positions (what you truly aim for) to create a margin for negotiation. Prepared with these new optimized positions, the lead negotiator (Project Manager) will enter the negotiations (Starting Positions).

Nun haben Sie als Senior Manager nach Beratung mit Ihrem Rechtsanwalt Ihre Mission definiert: Sie haben Ihr Team aufgestellt, Sie fokussieren sich auf Ihre einzige Option bzw. haben Ihre Positionen (nämlich Ziel-Positionen und Start-Positionen) entwickelt (kurz TOP).

As the Senior Manager, after having consulted with your lawyer, you now have a clear definition of your mission: you've assembled your team, are focused on your sole option or rather, have finalized developing your positions (namely, your target positions and starting positions), succinctly referred to as TOP.

A note on motivation: It's essential for both the Senior Manager and the Project Manager to stay motivated. This drive is reinforced by the Federal Court of Justice. If there's a genuine case of fundamental change in circumstances, and you're seeking renegotiations as a result, you have a legitimate claim to contract negotiations (Federal Court of Justice, NJW 2012, 373 et seq.). So, you're not approaching the table as a supplicant, but as an equal partner, ready to collaboratively and successfully navigate an unforeseen crisis.

Tip Nr. 4:

Try to Understand Your Partner's Mission (Learn)

As a Senior Manager, after initially focusing exclusively on your own predicament and formulating your negotiation strategies, turn your attention to grasping your counterpart's objectives. You might already possess some insights, yet it's common for your negotiator to uncover these details - more often than not - during the negotiation itself. Adhering to a specific sequence I consistently follow is crucial: (1) Refrain from interpreting stated positions (such as "I will no longer pay rent") as definitive, and set them aside mentally, because communication breakdowns almost invariably lead to misunderstandings. (2) Proceed to comprehend your partner's circumstances. (3) Revisit the previously sidelined positions, interpreting them in light of the newly understood situation. (4) Validate your interpretations by asking probing questions ("Never assume, always clarify"). For instance, instruct your negotiator to clarify: "Could you explain what you mean by saying you will stop paying rent?" Only after this step can you begin to identify or accurately define any conflicts, resolving them with targeted inquiries, like: "Are you suggesting a two-month rent hiatus, with a plan to settle later in 2021, essentially seeking a postponement?" What appears straightforward in theory is often a complex journey in reality. Only after extensive discussions with your negotiation partner can you sometimes begin to fully grasp their intentions. The initial stance ("I will no longer pay rent") can vastly differ from the mutual understanding developed during the "Learn" phase ("From what I gather, due to a liquidity crunch, you're looking to defer rent for two months, with the aim to catch up by this year's end, provided it doesn't compromise your business operations. Is my understanding correct?").

Legally, you will need to be prepared for the following arguments from your partner: "According to the contract, the risk associated with the COVID-19 crisis falls solely onto you; we see no need to make any adjustments. Section 313 of the German Civil Code (BGB) is not applicable because our contract is comprehensive. Even if Section 313 BGB were generally applicable, the specific conditions required are not present in our case," and so forth. You should thoroughly prepare with your lawyer for these sorts of instances. Thus, "Learn" means to gradually comprehend your partner's positions through means of gathering information, essentially taking the time to understand what your partner is truly seeking.

Tip Nr. 5:

Decide on the Right Conflict Strategy (Adapt)

Once you've learned about your partner's real positions and defined the conflicts from the gathered information, you'll decide how to adapt, specifically which conflict strategy to employ. According to the internationally recognized Thomas-Kilmann-Conflict Mode Instrument (https://kilmanndiagnostics.com/overview-thomas-kilmann-conflict-mode-instrument-tki/), there are five fundamental strategies for resolving conflicts (including during negotiations): (i) Competing (aiming to assert yourself and win), (ii) Avoiding (not addressing the conflict now, playing for time), (iii) Accommodating (yielding without receiving anything in return), (iv) Collaborating (working together to find solutions that satisfy both parties), and (v) Compromising (everyone is dissatisfied with the hastily found "middle ground").

Professionelle Decision Maker und Negotiator kombinieren das Competing mit dem Collaborating wie folgt: Zunächst werden die jeweiligen Positionen inhaltlich unnachgiebig und persönlich sehr respektvoll diskutiert, bis alle Konflikte analysiert sind. Dann wird eine Pause eingelegt. Danach werden alle Konflikte mit einem Paket-Deal gelöst. Das ist ein sehr strukturiertes Vorgehen: zuerst die Analyse aller Konflikte und erst danach Lösung aller Konflikte im Paket. Profis beginnen deshalb immer mit dem Competing und klären zuerst durch destruktive Kritik die Konflikte (vgl. Gerhard Schwarz, Konfliktmanagement, 9. Aufl.). erst danach werden mit konstruktiver Kritik Lösungen gesucht.

Professional decision-makers and negotiators combine Competing with Collaborating in the following way: Initially, the respective positions are discussed firmly in terms of content while maintaining high personal respect until all conflicts are analyzed. Then, a break is taken. Afterward, all conflicts are resolved within a package deal. This is a very structured approach: first, the analysis of all conflicts, and only then, the resolution of all conflicts as one comprehensive package. Professionals therefore always start with Competing, clarifying conflicts through destructive criticism first (see Gerhard Schwarz, Conflict Management, 9th Edition), and only afterward, seeking solutions with constructive criticism.

The approach outlined here, derived from the Thomas-Kilmann-Conflict Mode Instrument, which I refer to as the ABC strategy in the Driver-Seat-Concept, is typical for professionals (A stands for Analyze Open Points, B stands for Break for Change, and C stands for Concessions Package Procedure or Collaborating).

Tip Nr. 6:

Discuss Your Approach with the Team (Discuss)

Take the time to discuss your planned strategy (team setup, options, positions, hypotheses regarding your partner's objectives, and conflict strategy) within your project team. Such discussions are incredibly beneficial, as diverse perspectives can enrich and expand the collective understanding and broaden the horizon. In my career, there have scarcely been any team discussions that did not lead to significant adjustments in our team configuration, our evaluation of options, the positions we planned to advocate for, or our assumptions about the partner's mission by the end. One element, however, has always remained the same: the conflict strategy. It invariably starts with an in-depth analysis of all conflicts (Competing), followed by a break, before collectively working towards resolving all conflicts in a holistic manner (Collaborating).

Tip Nr. 7:

Issue your Lead Negotiator a Specific Directive (Your Instruction)

As the Senior Manager, it's your responsibility to direct your Project Manager to enter negotiations (working together closely with the attorney) with clear objectives: (i) to discern the true intentions of your counterpart ("Learn"), (ii) to steadfastly and respectfully maintain your stance on all issues until every conflict has been dissectively analyzed, and thereafter (iii) to provide you with a comprehensive report ("Report Back"). Following this, you re-engage with the LADY strategy and issue subsequent instructions. This cycle persists until you, as the Decision Maker, decide to either finalize a specific agreement or discontinue the negotiations.

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In summary, when a crisis impacts you significantly enough to necessitate contract renegotiations, make sure to approach these crucial negotiations with professionalism. First, ensure structured preparation with using a checklist (or the TOP LADY formula outlined here). Second, only entrust the negotiation to individuals whom you know to be professional negotiators, based on your personal experience of working with them. Crisis negotiations should be led by experts; avoid costly experiments.