A Lesson in Contract Negotiations: Be Willing to Walk Away

A number of years ago, I represented a shipping company which was negotiating to build new ships in a Chinese shipyard. The shipping company had done its due diligence and was satisfied that the shipyard in question could build the ships it wanted at an acceptable price and deliver them in a timely fashion. For its part, the Chinese shipyard was eager to land this contract, as it would represent an expansion of its business to commercial customers beyond China’s border. It was an attractive deal for both parties.

Preliminary discussions between the shipping company and the shipyard proceeded favorably, so well in fact that the shipyard sent a team of representatives to Portland in order to put the finishing touches on a shipbuilding agreement. The Chinese contingent consisted primarily of design engineers and vessel operation specialists and their efforts involved working out the technical specifications for the new vessels with the shipping company’s engineering department. The shipyard’s delegation was led by a business executive who also served as interpreter. She was plainly a person of some experience in the shipping business and had obvious status within her own delegation, as she was treated with particular deference and respect by the rest of her team and, of course, by the shipping company as well. We had previously provided the shipyard with our proposed shipbuilding agreement which included the standard terms and conditions customarily included in shipbuilding contracts throughout the world. We had heard no objections from the shipyard as to our proposed contract and when we inquired of the lead negotiator she politely deferred any discussion to a more opportune time. Or so we thought.

Our Chinese visitors worked diligently and enthusiastically with our engineering folks, and the technical specifications and other design features of the new vessels appeared to come together rather seamlessly. Such was the rapport between the shipping company’s engineering folks and their visitors that the shipping company hosted an elaborate lunch at a local Chinese restaurant for the two teams where our visitors delighted in challenging their American counterparts to sample some particularly hot and spicy Chinese dishes. Meanwhile, the shipyard’s lead negotiator kept her own counsel and remained somewhat in the background. If there were any business issues she wanted to discuss, she wasn’t mentioning them. Insofar as we knew, we were smoothly sailing towards an agreement.

Things were going so well that the shipping company scheduled a contract signing ceremony for 5:00 p.m. on the day prior to our guests’ planned departure. The corporate boardroom was reserved for a catered meal for members of both teams. We planned on presenting gifts to each member of the shipyard’s delegation, as tokens of our expectation of a long and harmonious business relationship.

A few hours prior to the appointed 5:00 ceremony, the shipping company’s chief executive officer summoned me to his office. There he sat looking a bit flummoxed along with the shipyard’s lead negotiator who appeared, well, something less than cordial. I was then told that the shipyard had “serious concerns” with our proposed form of contract. Interestingly, the issues in question had nothing to do with the price to be paid for the ships or their scheduled delivery dates or their technical specifications. Those major deal points were of no moment. Instead, the shipyard had objections to many of the standard boilerplate terms found in the contract and the shipyard’s negotiator proceeded to walk us through the draft agreement one item at a time. Thus ensued a marathon all-night negotiating session. Needless to say, the 5:00 signing celebration was postponed and rescheduled many times that evening. The special celebratory meal became a buffet night lunch for those who remained to work.

In retrospect, the Chinese negotiator’s last-minute objections were part of a well-considered strategy made well in advance of her journey to Portland. Her plan, I now believe, was to wear down her hosts by a long night of bargaining in order to achieve her negotiation goals by simply exhausting the other side.

In any event, we bargained for hours. Midnight came and went and still we discussed, explained, bargained and compromised where we could. We made the concessions we could live with and held the line on others. Finally by 2:30 a.m. we had come down to the final sticking points which, I suspect now, were the main issues for the shipyard all along. As in most shipbuilding contracts we had inserted a provision which required any disputes between the parties to be resolved by arbitration in London, England. Although this is a standard provision in such contracts and, in fact, was insisted upon by the shipping company’s underwriters, it seemed like kryptonite to our visitor. We explained to her that we could not change this provision without compromising our insurance coverage on the new vessels’ construction process and we simply weren’t going to go there. Either she did not believe us or thought, wrongly, that we wanted the deal enough that we would yield on this point. As it was, the entire deal seemed on the verge of tanking. Just then, however, a rather happy fortuity and a shrewd play by the shipping company changed everything.

At about this time, our vice president of engineering walked into the room holding a two inch thick binder which he said contained all of the agreed upon technical specifications for the new vessels. He sat down at the negotiating table and he listened patiently for a few minutes as we explained to the shipyard negotiator again why we could not budge on the last sticking point. Perhaps from sleep deprivation, or inattention, our engineering guy opened the binder of specifications and he began to initial each page in the lower right-hand corner. Engineers like to do such things. At least, they do that in the shipping business. He was well into this exercise in penmanship when our CEO, exasperated, told him to stop what he was doing and to put the book down. The engineer seemed a bit stunned and the Chinese negotiator immediately recognized what was happening. Our CEO politely explained to her that we were at the point where we would or would not have a deal, but we were not making any further changes to the contract. Whether a deal would happen was now in her hands. She left the room for a few minutes and when she returned she accepted our dispute resolution clause. We finally were able to close the deal.

The signing celebration took place at about 3:00 a.m., and it was as well attended as any gathering I have made at such an hour. We presented each of our Chinese visitors with tee shirts bearing our company logo, with large Chinese characters emblazoned on the front of the shirt which spelled, I am told, “teamwork”. For my participation, the Chinese negotiator presented me with a pair of porcelain harmony balls, which chime when being handled. I still have them. Every now and then when I see them in my office bookcase, I remember one tough negotiator. I also remember how the shipping company’s willingness to walk away from a deal it wanted was crucial to accomplishing its objectives. It eventually turned out that we purchased one or two ships from that shipyard. All in all, it worked out well for the shipping company.

Sometimes you have to be willing to walk away in order to get what you wanted from the beginning.

© 9/16/2015 Hunt & Associates, P.C. All rights reserved.

Charles A. Ford is an Associate Attorney with the law firm Hunt & Associates, PC in Portland, Oregon. He is licensed in Oregon and Washington and maintains a general practice including estate planning, business law, real estate law, family law, and personal injury. For additional information, please check out the company’s website: http://www.huntpc.com

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