Contract negotiation plays a vital role in the formation of legally binding agreements. It is the process by which two or more parties discuss and mutually agree on the terms of the contract. There is often confusion about whether contract negotiation is more about legal principles or leverage. In actuality, the process of contract negotiation often depends far more on leverage than on law.
In this context, leverage refers to the power that one party holds to influence the outcome of a negotiation in their favour. This blog examines the dynamics between leverage and law in contract negotiations, analysing their respective roles through legal frameworks, case law, and practical illustrations. It argues that while legal principles are the foundation of contracts, in the actual process, leverage plays a more decisive role.
The Role of Law in Contract Negotiation
The role of law is often indirect, but it is the foundation of contract negotiation. The law defines the basic requirements for a valid and enforceable contract. The basic principles are offer and acceptance, consideration, and mutual consent. These principles ensure that the contract is binding and can be enforced.
Basically, the law provides the structural framework within which negotiations occur. The contract law ensures that contracts must be entered into freely, i.e., there must be no duress, fraud, or undue influence on the part of any party.
There are different statutes in every country that govern the terms of contract, like in India, the Indian Contract Act, 1972, governs these rules. For example, Section 37 of the Act defines the obligation of parties to a contract. In the case of Waugh v. Morris, 1873 LR 8 QB 202, a contract was entered into by the parties to smuggle goods. But the court held it unenforceable as contracts which promote illegality are void as per Section 23 of the Indian Contract Act.
Despite the fact that the law acts as a rulebook, it is not the driving force in the actual negotiation of contract terms. This is where leverage comes into play and shapes the outcomes of a negotiation.
Understanding Leverage in Negotiations
Leverage in contract negotiations refers to the power one party holds to influence the terms of the agreement in their favour. Legal principles are universally applicable, whereas leverage is dependent on the party. Leverage can come from the availability of reputation, financial strength, and expertise. A party that holds greater leverage has more influence on the contract, and there will be more terms in its favour.
For example, in the case of Walford v. Miles [1992] 2 A.C. 128, the parties were negotiating on the contract for the purchase of a business. The defendants orally promised not to negotiate with anyone else as long as talks with the claimants were ongoing. The case illustrates how parties with leverage can walk away or pressure the other side.
It is important to distinguish between leverage and legal principles. Legally, a party may have no stronger claim, yet still influence the negotiation in its favour due to its strategic position. During negotiations, parties do not use case law or statutory provisions to win. Instead, they rely on their economic strength. The law becomes more relevant once the contract is signed. But in shaping those terms, leverage is often the decisive factor.
The Real Power in Negotiations
In theory, contract negotiation is a mutual agreement governed by legal principles. In practice, negotiation outcomes are often power and not laws. This “power” is commonly referred to as leverage.
- Leverage determines what you can get: Legal principles serve as a rulebook to govern contract negotiations, whereas leverage determines what you can get. Leverage shapes the negotiation long before legal terms are finalised.
- Leverage is dynamic, law is static: Legal rights are fixed, whereas leverage differs from party to party. A party entering a negotiation may have greater leverage depending on strategic alliances.
- Having Legal Rights Doesn’t Always Mean You Have the Upper Hand: Legal rights are a theoretical concept. The party with greater leverage influences the outcome, even if the law favours the other party.
- Courts don’t usually come into play just because one side has more power: Judicial systems are built to maintain legal fairness. They don’t interfere unless a legal line is crossed.
- Negotiation is more about power than legal rules: Nowadays, the person who has greater resources and a stronger reputation is prioritised.
In the case of Williams v. Walker-Thomas Furniture Co., 22 Ill.350 F.2d 445, 121 U.S. App. D.C. 315 (D.C. Cir. 1965), the customer was a low-income individual who had very little bargaining power. The company took advantage and added a cross-collateral clause. The court examined the contract and held that extreme leverage can lead to unfair terms.
Conclusion
Contract negotiation is influenced by both law and leverage, but in practice, leverage often plays the more decisive role. The legal framework provides the rules, but leverage determines who wins. Courts generally avoid interfering unless there are unfair practices involved, such as undue influence or unconstitutionality. This brings in the importance of legal professionals to not only understand the law but also to master the art of leverage.