“Proving value as in-house counsel and as a law department is a constant grind.   Should we negotiate clauses that we'll never litigate? Do we ever litigate contracts? Or, as we say at my company, do we just “manage the suppliers to death” when they are in breach?  To wit: we rarely litigate, but we'll negotiate firmly because (our customer) expects us to do so in order to protect the prime contract performance or security interests (export control, classified material, FCPA terms, etc.). Sometimes that makes sense, sometimes it does not. Are we disrupting commerce by negotiating fiercely on clauses that are never litigated or that provide very low risk margin, under the risk formula: B>P*L (does the Benefit of doing the deal outweigh the Probability times the Loss)? Relationship dynamics are key. We deal with the same customers on prime contracts over and again, and we deal with largely the same pool of subcontractors across several prime contracts. Consistency in dealing should be paramount to sustain those relationships but in a big company, our various lines of business and programs often treat both the customer and supplier vastly different. Adding value may be getting to yes, it may be in mitigating risk, and it may be in getting it just right through balanced risk.”

Adding to these challenging questions, IACCM member DC Toedt showed me an excellent blog that does a great job distinguishing between 'a deal, or transaction' and 'a relationship'. Here is an extract:

“A transaction is a quick, short-lived exchange. It's about this deal, these terms. Get a signature, and you're done. Negotiating relationships is a process with no clear beginning or end. Your goal is to build sufficient understanding, comfort and trust between parties that you can work together now and in the future, under conditions that enable both sides to prosper.

There are other critical differences:

• In a deal, the party you are negotiating with is, to a large extent, your opponent. In a relationship, the other party is your preferred partner.
• Deals are about getting as much of what you want as you can carry away. Relationships are based on fair division and joint burden-sharing.
• In a deal, you hold yourself aloof from the other party: hiding information, guarding your responses, pressing your position. In a relationship, you are more relaxed, open, and natural: sharing information and truly seeking to understand and resolve differences.
• In a deal, you may exaggerate the strength of your position or try to trick the other side into giving in. Successful relationships are based on honesty, reliability, and follow-through.
• Deals are static, inflexible, with exhaustive contracts intended to guarantee that every term and condition will remain carved in stone until the transaction is completed. Relationships are also based on fundamental agreements, but they are more accommodating, less rigidly detailed. Because relationships take place over time, change needs to be anticipated and managed constructively rather than ignored because it falls outside of the scope of the initial agreement. Relationships are dynamic, not carved in stone.”

 

As DC Toedt states, not all deals require relationships to succeed. But often negotiators fail to base their focus and behavior on whether the desired outcome is a transaction or a relationship.

When researching the differences in approach to negotiation between the East and West, a colleague of mine commented, “Westerners negotiate transactions from which relationships might follow; Easterners negotiate relationships, from which transactions will follow.”

In the West, we tend to let legal risk perspectives cause us to be adversarial and 'transactional' in the way we approach our trading partners. Collaboration occurs in spite of the contract, not because of it.

There is no absolute of right and wrong in the way we negotiate.

The point? All negotiators should ask, how can I optimally deliver the right value and the right outcomes for my business?

<p>    Over the past decade contract negotiations have become more global, less personalized, more process-oriented...and increasingly virtual.<br /> Our research and client projects suggest a shift in the dynamics of negotiation. Different approaches are needed to get the best outcomes. Globally, negotiation has expanded and the use of phone, voice mail, email and other technologies make it more challenging to manage the inherent language and cultural issues. As the amount of negotiation using virtual platforms increases, misunderstanding, relationship erosion, and impasse may also increase. Costly errors may abound.<br /> By Paul Hennessey, Executive Vice President, BayGroup International<br /> Copyright 2012 BayGroup International </p> <p> </p> <p>No silver bullet techniques guarantee success in virtual negotiations, but some common sense best practices can help avoid predictable mistakes and improve outcomes.</p> <p>Success starts with an understanding that virtual negotiations take place on a continuum.  Some online media offer relatively rich visual and auditory input like high-definition telepresence meetings and webcam-supported conference calls.  Other media involve much less, like email and instant messaging. </p> <p>And yet -- even within this shift to a fast paced, virtual negotiation environment -- smart negotiators still value the importance of reading the other party's tone, body language, and cultural nuance in negotiations.</p> <p><strong>Mix Your Channels</strong></p> <p>Email communications don't provide the kinds of auditory or visual cues that are so important to successful face-to-face negotiation.  It's important to write email with more “information rich” communication.  For example:</p> <ul> <li><em>Whenever possible, </em>make your kickoff meetings live (face to face, teleconference, or phone). This can help you build relationship equity.  In effect you are “putting money in the bank” that could later be withdrawn if misunderstandings occur in virtual communications, or if it important to “get tough” with the other party to finalize an agreement.<br />  </li> <li><em>Intentionally </em><em>mix your virtual media as you proceed</em>. Move back and forth from email to phone to webcam-supported meetings as a negotiation progresses.  In today's multi-time-zone business environment, it is tempting to engage in an “email only” interchange.  This can sometimes work, but making a conscious effort to connect via voice or teleconference can help maintain relationships, build trust, and avoid misunderstanding.<br />  </li> <li><em>Consider using the phone </em>to precede or follow up a difficult negotiation message. This helps avoid possible misunderstandings by preparing the other party for what might be bad news…or providing an opportunity after the fact to explain the rationale for your position. </li> </ul> <p><strong>Improve Your Content</strong></p> <p>When using email, avoid sending short, dry messages.  Although this is a fast way to keep things moving, a dry message can create distance between the parties, reduce the quality of personal relationship, and erode trust. </p> <p>Strategies here include:</p> <ul> <li><em>Build non-task “relationship enhancers” into your emails.</em>   For example, when possible, find some non-business area of common interest, and mention it from time to time in your messages (“I hope you enjoyed that golf trip.  I'm certainly looking forward to mine next month…”). <br />  </li> <li><em>Summarize and check accuracy first.</em>  Are your virtual communications understood accurately? One research study found that that 78% of email senders felt their messages communicated clearly, and 89% of receivers felt they had correctly interpreted those messages…when in fact only 56% of receivers actually interpreted those email communications correctly. It is vital to test assumptions before responding. Communications seminars have taught us that effective listening in a “live” setting includes some element of “feeding back” the other party's ideas and checking them for accuracy before responding.  You can do this in email.  Try to summarize the other party's ideas before sending an immediate response or counterproposal. <br />  </li> <li><em>Appeal to cultural preferences in your email content.</em>   Leading researcher Geert Hofstede (in his book <em>Cultures and Organizations: Software of the Mind</em>) suggests that people from different cultures have preferences that affect their motivations when negotiation:  individualism vs. collectivism; high vs. low sensitivity to hierarchy and “position power”; need for certainty vs. tolerance for ambiguity; long- vs. short-term orientation.  One way to improve any cross-cultural negotiation, especially those conducted online, is to find ways to frame your message to appeal to those cultural differences.  For example, at a key point in a negotiation a proposal might be described as “an approach that ensures you respond flexibly in response to changing market changes” (when negotiating with someone from a country with a high tolerance for ambiguity) and as “an approach that gives you a step-by-step process for ensuring success” (when negotiating with someone from a country with a high need for certainty).   Successful negotiators know that their job is to shape the subjective perception of value, and this kind of cultural “framing” can help them achieve this.</li> </ul> <p><strong>Avoid “Delivery Land Mines”</strong></p> <p>Even if you're doing it right – by mixing your communication channels and enhancing your message content -- you can still suffer misunderstandings in virtual communications. Because it is so easy to compose quickly and send, it's impossible to “unsend”.  Consider these strategies:</p> <ul> <li><em>Read it aloud </em>before hitting the “send” button.  Most negotiators find that taking this step—even putting aside the email and returning to it later helps them improve content, tone, and impact.<br />  </li> <li><em>Watch your CCs. </em>Don't ignore the impact of “copying” the wrong people on an email.  No one wants to look weak to peers or ineffective negotiators to their superiors.  This is especially true in cultures where negotiators pay particular attention to their company's hierarchy, or are relatively more sensitive to the possibility of losing face within the group they represent in their organization.  Sometimes a judicious “one-to-one” message, phone call, or voice mail can clarify a thorny problem that would otherwise escalate when discussed in email with multiple parties copied.<br />  </li> <li><em>When in doubt, sleep on it.</em>Negotiations can often turn emotional.  Responding ineffectively in the moment can easily make things worse. Always ask yourself,  “Can I sleep on it and review my response strategy tomorrow?” Negotiating with a cooler head usually produces optimal results.</li> </ul> <p>Virtual negotiation—especially using email—has become globally ubiquitous.  But conversely, the benefits are enormous if we take the time to implement these common sense ideas to help avoid predictable pitfalls of the process, and improve results.</p> <p><strong><em>Paul Hennessey is Executive Vice President of BayGroup International, a global performance improvement firm that helps Corporate Leaders </em></strong><strong><em>achieve critical profit improvement, cost containment, and team effectiveness goals quickly, with high impact.  </em></strong></p>

Using the contract renegotiation as a way to build bridges is one way that relationships can be restored. And that is what happened in the case of Westpac and IBM –who went on to win the Paragon award for the best sourcing relationship in IT outsourcing, despite the early years of their relationship resulting in 'losses of several hundred million dollars'. 

In an online article by itNews, the award judge, Don Easter, touted the win as a transformational change that upstaged other finalists.  The relationship between the two firms -- once described as dysfunctional -- is now painted with sparkling praises like “marked change in performance,” and “greater accountability in design and management” on the parts of both organizations. 

IBM recognized their need to restructure their relationship with Westpac and reshape new ways to work together. The organizations now operate as an integrated team. But in an environment where the relationship was under such stress, the approach to a new contract paved the way to this success. Indeed, the judge observed: " I think that will become a bit of a benchmark for future contracts ... it is a very modern agreement and so I wanted to recognise that."

Other IT outsourcers could learn from this, according to Easter, by insisting on teamwork, total accountability, and behavior changes to achieve desired results.

Benchmarking several simple things like the following might mean the difference between failure and victory:

• Understanding your client's business strategy
• Aligning yourself to it and deliver it
• Adjusting delivery to suit your client

And if something goes wrong, own it and fix it! 

In the case of the phrase “consequential loss” one has a category difference in approach in the understanding of language. Commercial people almost always interpret the term  “consequential loss” as meaning loss of profit, loss of business and financial losses in general. But judges, generally, interpret  “consequential loss” as meaning loss not caused “directly” by a breach. 

We do not really know what consequential loss is.   We do know what it is not, because there is a body of case law -- mainly from the Court of Appeal of England and Wales -- applied to disputes over the meaning of clauses which use a bare exclusion of “consequential” loss.

Examples of what is not consequential, according to the judiciary, include:

• Wasted overheads resulting from rebuilding a chemical complex destroyed in an explosion
• Loss of profit
• Loss of production
• Additional maintenance costs
• Additional borrowing costs
• Ex gratia payments to customers
• Costs of software errors that can cause you to chase debts thought to be due, but are not
• Additional stationery and correspondence costs for writing to customers to update them on hot topics caused by software failures
• Additional energy costs to run defective boilers
• Loss of sales
• Loss of opportunity to increase margins
• Loss of opportunity to reduce staff costs
• Wasted management time
• Payments for system testing
• Using a processing bureau in lieu of the software you contracted for
• Claim handling services provided to insurers for such costs as:
• payingout unnecessary sums on claims
• reserving claims inaccurately
• delays in passing on claims documentation and disrupting business in addressing the consequences of such delays
• over-reserving claims.

Consequently, when you are drafting consequential loss exclusion clauses use clear words.   Be careful not to use linking words in phrases such as the following. They may be interpreted as limiting the exclusion to, for example, indirect loss of profit; whereas, in reality parties wish to exclude all liability for loss of profit.

Example:   The Subcontractor will not be liable in any event for loss of anticipated profits, loss by reason of plant shutdown, non-operation or increased expense of operation of other equipment, or other consequential loss or damage of any nature arising from any cause whatever.

Similarly, be careful with phrases that include loss of profit under an umbrella phrase.  These may likewise exclude only consequential or indirect profits from recoverability.

Example:    XXXX shall not be liable for any indirect special or consequential loss, however arising (including but not limited to loss of anticipated profits or data)…

Be aware of clauses that have been “approved” in the courts. Those usually separate out the categories of loss to be covered and do not link the category to any words which might be interpreted as limiting the category by cause.  

Example: MF/1 Clause 44.2 [1] was considered in The London Fire and Emergency Planning Authority v Halcrow Gilbert Associates and Others, where a state of the art fire-fighter training facility in Southwark itself caught fire and burnt down due to a leak in the ductwork. The judge interpreted this clause as excluding each category listed in total, and did not allow an interpretation limiting the exclusion to consequential or indirect losses in each category.

 “Neither the contractor nor the purchaser shall be liable to the other by way of indemnity or by reason of any breach of the contract or of statutory duty, or by reason of tort (including but not limited to negligence) for any loss of profit, loss of use, loss of production, loss of contracts or for any financial or economic loss or for any indirect or consequential damage whatsoever that may be suffered by the other.” 

The underlined catch-all provision  -- for any financial or economic loss  -- is vital and should ensure that a good claims expert cannot spend profitable time trying to find alternative descriptions for non physical loss to avoid the exclusion of “loss of profit, loss of use, loss of production, loss of contracts.”

Notwithstanding, it might be sensible for draughting experts -- especially when not dealing with construction or engineering contracts -- to consider major possible heads of loss and cover those explicitly in exclusion clauses. If, for example, the contract concerns the provision of software, you may wish to consider the losses most likely to arise and think about excluding them using explicit words

Negotiation points 

Unless your team is aware of the basic principles and fundamental risks of not phrasing clauses clearly, and that failing to get the words right really can become a problem, then you may end up in negotiations with an impatient team on your side of the table, a team that is playing with Blackberries, talking among themselves – not interested in backing up your debates about linking clauses, definition of losses to be covered, or catch all provisions.

If you explain to your team why the words are so important and why basic, apparently comprehensive wording -- such as excluding any and all consequential loss -- will not be effective, then you can ensure that the team is engaged in the negotiation and will support you in the debate.

Be sure to include these points in training:

• The law interprets the term “consequential loss” as having no real meaning. In each of the liabilities listed above, a judge determined that the loss was not consequential.
• At worst, a bare exclusion of “consequential loss” will not cover some remote liabilities. Refer to the list of examples above to illustrate this.
• Courts will usually stretch language to define actual damage as not being “consequential”. Again, refer to the list above.
• Essentially one must exclude loss of profit and similar losses by using language clarifying that these losses are excluded whether they are incurred directly or indirectly and whether they are caused in contract or by negligence. It is sensible to assume that this is true for all legal systems.
• Wording is technical and one must either use boilerplates or take serious specialist advice. The drafting is key. The intent is almost unimportant.
• There is no link between contract value and potential loss. In one of the cases, a designer with a contract value of around £400,000 ended up facing a claim greater than £100,000,000.

 

---

Personally Identifiable Data, Criminal Data and Consumer Reporting

Researching global background checks requires an understanding of the complex laws and regulations designed to protect personal data privacy and data transfer security.   But the diversity of practices among the regions can be challenging, if not problematic!

For example, U.S. corporations commonly require candidate new hires to successfully pass a background check.  Outside the United States, law, regulation and customary practice can severely limit a company's standards.  As more companies expand globally, they should reassess their own standard hiring practices and review standards of global regions they are expanding into, before hiring not only full-time personnel, but also temporary staff.

The Asia Pacific Economic Conference uses a Privacy Framework for its member countries that purports to “establish principles against a background in which some economies have well established privacy laws and/or practices, while others are [still] considering the issues”.  Within the context of the emerging global economy, broad guidelines treat personal data with a view toward implementing “flexibility” in light of the “differences in social, cultural, economic and legal backgrounds of each member economy”.

The reality in many countries where no framework or laws exist to protect this type of data (e.g. China) is that many of the standard background check reports -- like criminal reports or consumer reports --simply are not available.  The result is de facto “protection” for the individual, that obviously weakens a corporation's global application of a background check standard!

The European model leads the way with a mandate for all member nations to “adopt laws covering all processing, collection and storage of personally identifiable data, data accuracy and data destruction requirements”.

Essentially the EU Directive creates a presumption against the collection of personally identifiable data unless five primary data quality principals are met.  Data must…

• be fairly and lawfully processed;
• exist for a specific purpose;
• be restrictive in nature (not overbroad);
• be accurate;
• be destroyed when no longer needed. 

The European Data Protection Act of 1998 provides further guidance to employers and broadly defines “personal data” to include any data “from which a living individual can be identified”.  One way to ensure compliance with both the Act and the Directive is to request a prospective employee to consent to collection of background check data and retention of relevant data pursuant to their employment contract when they are hired. 

These protections extend to temporary staff by law.  The broad implication for global companies is that they cannot avoid the law by engaging temporary staff over permanent staff. 

In the United States personal privacy is regulated at the federal, state and local levels.  The most established regulatory guidance impacting background check data collection in the U.S. is the Fair Credit Reporting Act (FCRA).  The FCRA provides specific guidance on the use of consumer data, requiring employers to do the following:

• certify they have a permissible purposes to request the information;
• obtain a written consent from the applicant; and
• provide a copy of the report, notice of adverse action and opportunity to correct.  

These actions are generally concluded prior to the employee being hired. Since most U.S. states support “employment at will”, no contracts or consents are required to retain this type of data after the hiring process is completed.  Further, temporary staff are generally not afforded the same hiring standards as potential full-time staff.  The burden of complying with corporate temporary staff onboarding policies generally lies with the company contracting with the hiring corporation.

Conclusion

Given the increasingly global reach of corporations, requirements for background checks are likely to continue expanding.  Understanding the general legal prohibitions on the collection of information about prospective permanent or temporary employees is a good place to start.  But a global corporation also must be aware of local customs.  And know that some, if not most, information you can request for background checks in the United States, may not even be available in some developing countries. 

References: 

Erlam, Understanding International Background Checks, Association of Corporate Counsel, ACC Docket, June 2011

EU Directive 95/46/EC of the European Parliament and the Council of 24 October 1995 on the Protection of Individuals with Regard to the Processing of Personal Data and the Free Movement of Such Data, 1995

The European Economic Area Data Protection Act of 1998

Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq.

Asia Pacific Economic Conference has promulgated a Privacy Framework

Wolters Kluwer, SHRM Poll Reveals Half of Employers Conduct Drug Tests on Final Job Candidates

The U.S. Equal Employment Opportunity Commission, Employment Tests and Selection Procedures Fact Sheet, published September 23, 2010.

European Workplace Drug Testing Society, http://www.ewdts.org/index.html

SAI Global World Watch, http://compliance.saiglobal.com/wwcce/

Karch, Workplace Drug Testing, CRC Press 2007

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Originally published by CPO Agenda: Summer 2009. cpoagenda.com

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Extreme Negotiations with Suppliers

By Jonathan Hughes, Jessica Wadd, and Jeff Weiss, Vantage Partners, www.vantagepartners.com

 

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Harvard Business Review, www.hbr.org

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Extreme Negotiations

What U.S. soldiers in Afghanistan have learned about the art of managing high-risk, high-stakes situations.

By Jeff Weiss, Aram Donigian, and Jonathan Hughes

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