Contract Negotiations: What are the Deal-Breakers?
Contract negotiations are just that—negotiations. Some back and forth is to be expected when building an equitable set of contract terms, but at what point do terms become non-negotiable? Here are five examples of some the major deal-breakers in contract negotiations:
Deal-Breaker #1: Your organization just can’t do it.
In general terms, if there is something in the contract that your organization simply cannot or will not do, this would be considered a deal-breaker unless the other party is willing to change its requirement. For this deal-breaker, we’re mostly referring to an operational or organizational ability to carry out the contract’s requirements. For example, your organization might have $1M/$3M in insurance coverage, but the clinical trial agreement you are negotiating requires $5M/$10M in coverage. In this scenario, you’ll either have to buy more insurance (can you do this? are you willing to do this?), or ask the other party if it will work within the constraint of the lower insurance amount.
Another example would be that the other party doesn’t offer indemnification of your organization under any circumstances, but your organization prohibits you from contracting with another organization unless you are indemnified in the agreement for certain minimum acts or omissions. This means that you should do an early scan of the draft agreement for any terms that you simply cannot meet and ask whether the other party can adjust that requirement to allow you to go forward. If the answer is no, then don’t waste any more time on the agreement.
Deal-Breaker #2: Contract terms contradict another agreement or would require you to act illegally.
Watch for terms in a contract that require your organization to do something that you believe is illegal or contrary to another contractual agreement you have made (e.g., an employment contract, a credentialing agreement or an accreditation organization with a specific requirement contrary to the contract’s terms). Another possible example is that your contract requires you to submit a payment to a government health plan that is contrary to that plan’s billing or claim filing requirements, or perhaps it requires you to increase your referrals or script writing to the other party.
These types of circumstances may be simple, inadvertent misunderstandings by the other party. For instance, if you are contracting with a foreign entity or with an entity from another state with different requirements for the same situation, they may not be aware of what your state and local laws require. If this is the case, you may be able to clarify your legal obligations and have the requirement changed. It may be possible to eliminate your obligation to follow a “foreign” law, or to insert language that is consistent with your local or state laws or your contractual promises to another party. If not, you can’t agree to do something contrary to your legal obligations. Seek guidance from your internal or external counsel if you are concerned that this circumstance appears in your contract.
Deal-Breaker #3: The costs for delivering the services required by the contract aren’t sufficiently covered.
You identify that the contract you are working on will not sufficiently compensate your organization for its reasonable costs to perform the services required by the contract. It’s possible that you might be willing to absorb certain costs due to your strong desire to obtain a contract with the other party, but this decision should be made knowing exactly the scope of the financial sacrifice you are making. For example, if you want a “foot in the door” with the other party, you may be willing to accept less than your actual costs in order to establish the relationship. This is risky, because the other party will expect similar concessions going forward; however, this may be a risk you are willing to take. Just don’t “blindly” accept the financial remuneration offered by the other party without knowing whether it will at least cover the operational costs to perform the services required by the contract.
Deal-Breaker #4: The contract doesn’t support your mission.
Beware accepting a contract that does not support your organization’s mission. For example, you are working on a contract for a new study, to which effort you will dedicate numerous staff, and the leader of the study team wants to write a book or an article about the experience immediately following the completion of the contract. You learn in the process of the negotiation that the other party will not permit the book or article to be written. If your team is dedicating an extensive period of time to the effort, but cannot benefit from the effort by writing a book or article as desired, your team will be understandably disappointed, frustrated, and dissatisfied. If the other party will not accede to the team leader’s reasonable expectation to write about the experience, the team leader might leave or decline to complete the work in favor of another opportunity.
Deal-Breaker #5: The other party isn’t interested in an equitable relationship.
The last deal-breaker to mention in this article is the circumstance in which you learn, through repeated contacts and attempts, that you are not able to obtain any needed concessions from the other party. We’re talking about working with an individual on “the other side” of the agreement who doesn’t understand your organization’s reasonable requests, needs, requirements (or possibly doesn’t care) and only seeks to obtain concessions from your organization without also making reasonable concessions in order to achieve an equitable deal.
Working with an inflexible “other” can be damaging to your organization and may not be appropriate. Contracts should give both parties what they need and what they want, but perhaps not everything they want. This is something you will sense as you are working with the other party; if the other party cannot understand or allow your organization some concessions, it may be a very difficult “contract lifetime” for your organization.
While there are specific situations we may not have covered in this article, these five deal-breakers can be useful points of reference when determining whether your contract negotiations are heading in a sustainable direction for your organization.