How do you conduct due diligence in contract negotiation? (2024)

Focusing on Outcomes first aids in the definition of Objectives. In this hierarchy, Outcomes are reflections of what success means for the business i.e., what is the end result that the negotiation will deliver. Objectives provide a more tactical lens - what mechanism will help deliver the outcome. In this dichotomy, Objectives become a topic of negotiations, where during the Joint Solutioning process, both parties can determine the optimal Objectives to achieve Outcomes. However Outcomes are the key anchor points that are inflexible as they reflect the broader desires and vision of the business.

In my experience, the best way to start is with a blank piece of paper. As stated, you start listing your objectives with in a priority order. Afterwards, for each objective, you can add (or not) a suitable alternative. With the listed objectives and their alternatives, start marking those which are essential to you (or your client) and those which can be modified in order to understand where you need to stay firm or concede.

Before we start performing the due diligence, we need to define our negotiation objectives.Contract Negotiation Objectives can be in terms of:•Getting Best Overall Value•Negotiating favorable Terms & Conditions•Optimum Delivery Period•Better quality products & services•Better efficiency/productivity•Innovation•Latest Research•Better Safety & Environmental performance•Sustainability PracticesFor objectives, we need to agree on the metrics for measuring its success/failure.Once we decide on the important objectives & their metrics, it will help to focus our due diligence activities on the important & critical aspects of deal.It will also help us to avoid getting distracted by other irrelevant/non-critical details.

In my view the AI has missed the mark.There is preparation for negotiation, and that is what this article is about. The contributions are for the most part right on.For me due diligence is about validating that you are about to enter into a relationship with the right counter-party.That means checking references, and ensuring that the characteristics that made you choose this organisation are indeed true. It also means a comprehensive risk assessment to ensure they will continue to perform as expected and not embarrass you.How you do that is the subject of a different article.

Starting with clear objectives is like setting the destination on your navigation system. What do you want from this contract negotiation? What are the must-haves, and where can you compromise? Establishing these objectives provides a roadmap for your due diligence, ensuring you focus on the critical aspects that align with your goals.

When conducting due diligence in contract negotiation, it's imperative to thoroughly vet the other party by examining their online presence, financial reports, customer feedback, and legal history. This includes analyzing their website, social media, and industry publications, as well as reviewing financial stability through annual reports and insolvency scores. Additionally, consulting legal case file portals offers insights into any legal challenges they might have faced. Soliciting references or case studies directly from the party can further validate their credibility. This holistic approach ensures a well-informed negotiation, mitigating potential risks and identifying strategic advantages.

How I recommend researching the other party:🏛️ Check Legal Status. Verify the other party's standing at the Secretary of State. If it's lapsed, something is wrong.📂 Litigation History. For significant deals, consider a litigation search. This can reveal crucial insights.📄 Pose Critical Questions. In complex agreements, ask pointed questions. M&A deals have formal requests for info about contracts, employees, IP, past disputes, etc.🔎 Seek Full Disclosure. Aim for information from various sources. 🗣️ Consult Former Clients. For smaller contracts, past clients can offer real-world insights.

An often-overlooked resource is the Dun & Bradstreet report. It contains more than credit information. A business credit report for one company ranges from $61.99 to $189. One interesting feature is D&B's prediction as to whether the company will remain viable and whether it will be out of business in a year. D&B says that their predictions are reliable. The report also lists business history. The report may often be easily cost-justified.

Due diligence involves becoming a detective for a while. Investigate the other party thoroughly. Scrutinize their public image through websites, social media, and industry publications. Dig into financial reports and reviews from previous partners or clients. Request references to hear directly from those who've dealt with them. The goal is to gauge their credibility, uncover potential issues, and ensure they align with your standards and expectations.

The 3rd important step is to analyze market to study market dynamics, market trends, regulatory framework changes etc.We need to study market for:•Exchange Rate Fluctuations•Brent Crude Oil Prices & Futures•LNG & other fuel prices•Steel & Cement Prices•Import/Export policies•Free Trade Agreements•Labour salary trendsIn case of Oil & Gas industry, for Drilling Rigs, we can subscribe to reports which provide data on rig availability, Client, Contract period, Day Rates etc. For Steel, we can subscribe market intelligence reports like CRU-SPI Report, Preston Steel Tubes Report etc.There is information available on the web. We can gather information & arrive at meaningful conclusions based on study & analysis of market.

Understanding the market is akin to studying the battlefield before a strategic move. Analyze market conditions, competition, and industry trends. This insight helps you contextualize your negotiation terms. Benchmark your expectations against industry standards to ensure they are fair and competitive. Recognizing your competitive advantage positions you confidently in negotiations. It's not just about the deal; it's about where you stand in the broader landscape.

Avoid surprises, take a forward-looking view of due diligence work.It's not just a question of assessing the past situation or current regulations. Think about the future and the purpose of the deal. A short-, medium- and long-term vision is essential. Future risks and liabilities will determine important clauses in the contract, and may have a adverse impact on the deal's economic viability.For example, when buying land (residential or industrial), it is not enough to check regulatory compliance and licenses on the day of the transaction. It is also necessary to verify the potential existence of risks to the use or exploitation of the land.

How I approach legal and regulatory due diligence:📚 Understand Industry Regulations. When entering a new industry, familiarize yourself with its specific regulatory landscape.⚖️ Identify Legal Requirements. Each industry has unique legal obligations. 🔍 Assess Compliance Needs. Highly regulated industries demand more compliance. 📱 Example: Software Development. Buying a software company, like an app developer may have fewer regulatory hurdles.🏦 Contrast with Other Industries. In contrast, industries like financial services or healthcare face more stringent regulatory demands.Don't enter a new industry alone.

A thorough understanding of the contents of the contract along with its implications is essential.Be precise about the dispute settlement clause(s) with details regarding the Jurisdiction and the Law. If there is an Arbitration Clause, in such circ*mstances one should cautiously opt for the law applicable, the seat of the arbitration and the number of arbitrators and understand its consequences

In order to understand the impact of the contract, it is essential to keep in mind that one contract often leads to another if done successfully. Moreover, one partner may also have untapped or unknown ressources (contacts, other fields of intrest, etc.) which they might be inclined to share if everything works out.

In addition to studying market, researching other party, I also suggest the following due diligence:•Study about the history of contracts for same services. Do research about contracts awarded in last 3 years for same services & their performance. Also analyze all the change orders issued & any contractual failures. •Also, analyze the price trends & study any published prices. •Check if same contractor is providing any other services to the company. If they are, check their performance history & if there were any red flags. Also, speak with your contracts colleagues who handled these contracts.•Do Due diligence with other clients of this contractor. With this due diligence, we will be well prepared for contract negotiations.

Another important point to consider is to contextualize the contract to the actual works or deliverables you’ll be doing. I’ve been asked to review bulky and long-winded contracts that could have been a simple purchase order; or a major works subcontract that could have been a minor works subcontract. On the flip side, on rare occasions we’ve had clients who did not have any templates of their own and had asked for our own templates to contract upstream. The time and effort wasted in negotiating for significant changes to an irrelevant form of contract could have been avoided by choosing a suitable form of contract in the first place.

It is also a good idea to focus on open communication during due diligence. Create a framework for a transparent exchange of information between the contractual partners. Clarify ambiguities at an early stage and promote trusting cooperation. An open dialogue can help to identify potential problems and find joint solutions.