How do we get what we want in contract negotiations? NBA great Jalen Rose said that “you never get what you deserve; only what you have leverage to negotiate.” Understanding leverage is key to getting closer to what we feel we deserve. But what is “leverage,” anyway? The word has become a negotiating cliché.
Leverage literally means “the exertion of force by means of a lever or an object used in the manner of a lever.” Used colloquially, leverage means the ability to get the other side to agree to one’s preferred terms—akin to lifting an object with a lever.
Contract negotiating leverage can take two forms: (1) commercial leverage (one side needs the other more); and structural leverage (the draft favors one side by default). Understanding each of these leverage types can help you negotiate better terms.
- Commercial Leverage. Commercial leverage is market-based power. In many industries, there are a few important players. There are only so many OS software providers, mobile carriers, online marketplaces, or soft-drink makers in a given market. Not working with one of these often means limiting growth or ceding ground to competitors. Commercial leverage allows a party to make more onerous demands than firms in competitive industries. When there is pushback, they can say “take-it-or-leave-it” to their preferred terms, confident that the other side will eventually come around.
- Structural Leverage. Structural leverage lives inside the contract, not the industry. When a party provides an initial contract draft, they provide not just the chess pieces, but the chess board itself. Clause organization, inclusions and omissions, and defined terms are set by the drafting party. The other side can object, but it is doing so with a ticking clock and on terrain provided by the other side. The drafting side can often retort with canned responses (“that won’t work”; “these are our standard terms”; “everyone signs these”).
One important caveat is that commercial leverage is often asymmetrical. There may be cases when the leading companies in two industries butt heads, but this is extremely rare. By contrast, the non-drafting party can obtain structural leverage, but it requires good timing and careful execution.
What can you do to maximize leverage in contract negotiations? A few pointers:
- Just Ask. “Non-negotiable” often isn’t. The sunk cost fallacy applies to contract negotiations. If someone has entered negotiations with you, they want to get a deal done. Minor concessions are one way to get things over the finish line. By simply asking, you are creating a higher probability of getting your preferred terms, even with companies that have structural or commercial leverage over you.
- Recognize Commercial Leverage. Contracting parties often make crude assumptions about who has more commercial leverage. Many startups and SMEs assume that a bigger partner can impose its will on smaller fish. This is often wrong. Many larger companies want a diversity of suppliers or retailers, or fear a rival beating them to market. If you’re entering negotiations, it helps to understand—and be able to articulate—your commercial leverage.
- Create Structural Leverage. Structural leverage comes from the contract document itself. You can get this document-based leverage in a few ways. First, you can insist on providing the initial draft. To do this, it helps to have templates that are catered to the use case. Be prepared—any delay or sloppy drafting can invite an offer to substitute for the other party’s draft. Second, you can insist on a Word version and redline extensively, so much so that your redline becomes the new “base draft.” This requires serious time commitment and can be read as slightly aggressive. However, you’ll be fighting much less of an uphill battle.
AI has made finding your optimal clauses easier than ever. The question is how to get the other side to accept them. Leverage is the key.
Disclaimer: This blog is for informational purposes only and does not constitute legal advice. Reading or interacting with this content does not create an attorney–client relationship. You should consult a qualified attorney for advice regarding your specific situation. Mehaffy, PLLC disclaims all liability for actions taken or not taken based on this blog.