Third Party Conflict Resolution in Business Negotiations

Resolving Contractual Conflicts using Negotiation Strategies
This hub analyzes the possible intervention strategies for a sample company in which the contract negotiations begin to go wrong. This hub, from the third party's perspective applies what I believe to be the best strategy and explains how it should resolve the conflict.

Note: In your contract negotiations, it is always wise to develop at least one contingency plan in case your best strategy does not work, or is rejected.

Managing Conflict in Negotiations

The Pacific Oil Company went into negotiations with Reliant Manufacturing, and its goal was to sign a more long-term agreement. Pacific assumed that the new contract would be signed with no major hurdles or objectives, and that the dominant point of negotiation would be price. Jean Fontaine, who is the marketing vice president for Pacific Oil, went into a negotiation process with Reliant. Jean started the process several years before Reliant Manufacturing’s contract was up, hoping to beat her competition to the lower price offers and leave with a contract extension of 5 years. Unfortunately, Jean did not properly research her client’s needs or adequately project what the outcome might be. Because of this, Pacific Oil Company was not prepared to address the concerns and requests that Reliant brought up during the negotiation. Though both parties wanted to move quickly toward signing a contract, Pacific Oil Company elongated this process because it did not have a thorough negotiation strategy that included a contingency plan or best alternatives. Pacific oil also neglected to draw out its best alternatives or bottom line in advance.

Staying on the Same Page in Business Negotiations

Pacific believed that other elements of the contract might be discussed, but that no dramatic changes would be expected. Because of Pacific’s lack of strategic planning, they wasted valuable time, money, emotional stress and energy. They also risked losing other opportunities that could have been more favorable for them. Adding to the problem was Pacific’s assumption that Reliant would sign a new contract quickly. Because of the time and money spent on traveling and negotiating back and forth, and the potential need for new technology development, which would be based on the contract’s outcome, Pacific Oil Company became increasingly desperate to finalize a contract with Reliant. As a result, Reliant obtained the advantage needed to make more demands during negotiations. Additionally, Reliant was aware of Pacific Oil’s dependence on its business, and took full advantage of these opportunities.

Negotiating Problems before they become Problems

Problem solving using mediation would work well in this situation. “Unlike arbitration, where the intermediary listens to the arguments of both sides and makes a decision for the disputants, a mediator assists the parties in developing a solution themselves” (Spangler, 2003). A mediator for the Pacific Oil Company and Reliant Manufacturing negotiation would likely have taken the form of an attorney or economist. Mediators can provide ideas, suggestions, and formal proposals for a settlement. Still, their main objective is aid in the negotiation process. This means they help the parties communicate more effectively and find acceptable compromises.

Using a Mediator in Negotiations

In most cases, a mediator will encourage both parties to focus on the important issues, and defer discussion of non-vital parts of the agreement until later in the negotiation process. In the same way, the parties involved are encouraged to focus developing ways in which both parties core interests can be met. A mediator cannot force an outcome, but can be very effective in finding a solution. “They do this by helping the parties determine the facts, they show empathy and impartiality with the parties, and help generate new ideas. Mediators can also use persuasion to get people to soften hard line positions” (Spangler, 2003).

If a mediator had been used in the negotiation between Pacific and Reliant, time could have been because the core issues would have been discussed more quickly, and alternative options would have been discussed initially rather than having parties defer each new issue to another meeting. This would have allowed Pacific to be more prepared during each meeting, rather than surprised with each new request. It also may have helped Pacific view a better perspective of the situation so they could be more aware of the full scope of Reliant Manufacturing’s demands. Still, Reliant used Pacific’s lack of preparedness, and was able to negotiate a much more favorable contract without the assistance of a mediator. Unfortunately, Pacific does not feel that they have entered a win-win solution, and the future business relationship between the two companies may be compromised.

Acting in the Best Interest of Both Parties in Negotiations - Sometimes Possible!

In the case between the Pacific Oil Company and Reliant Manufacturing, both companies are best served by quickly agreeing to final terms. If Reliant Manufacturing wants to be sure that adequate funding be given to the technology that supports the refinement and transportation of goods, they must understand that Pacific Oil Company needs a firm commitment. The Pacific Oil Company has met an ever increasing list of demands from the Reliant company, one of its largest and most valued customers. At this time, Reliant Manufacturing should realize that long-term business relationships are best served by the mutual gain of both companies. Once the fundamental issues have been resolved, Reliant Manufacturing must also work to give Pacific Oil Company the perception of mutual gain from the agreement. Whether that means extending the duration of the contract, or allowing Pacific to continue the use of current measuring techniques, Reliant must compromise rather than risk losing what the negotiations have gained until this point. The upper level of management at the Pacific Oil Company has become increasingly dissatisfied with the demands of Reliant. As a result, Pacific Oil Company has recruited an internal evaluator to assess the situation.

Stay Cool and Collected, even when High Stakes are involved in Negotiations

The stakes are high for both parties and a miscalculation could prove painful for everyone. Both companies have experienced favorable business transactions in their history of working together, and used negotiations to find mutual success. Favorable feeling is a positive business setting that does not preclude the other company from seeking the best of a business situation. If Reliant Manufacturing gains from its contract with Pacific Oil in a way that hurts Pacific’s success, it will not have the advantage of using that company in the future. The potential volatility of the market raises the stakes in the current negotiation setting. Reliant has strategically out maneuvered the Pacific Oil Company team throughout the negotiation process, and is in danger of making demands that Pacific Oil will not be able to sustain over time.

Inability to Close - Negotiations with No End in Sight

In the same way, both parties have demonstrated an inability to wrap up their business negotiations. Once Reliant proposes a demand and Pacific Oil Company accommodates that desire, Reliant seeks an additional request. Pacific seems incapable of holding firm in its negotiations. If Pacific Oil Company had outlined its bottom line demands in advance; it would be more capable of forcing Reliant to back down from making unreasonable demands. However, Reliant Manufacturing continues to push the envelope on the demands during nearly two years of negotiation. Pacific Oil Company is demonstrating an accommodating stance, while Reliant is being very competitive in their negotiation stance.

Using an Arbitrator in Negotiations

An arbitrator will allow both parties to tell their side of the story. The arbitrator is a neutral party that has extensive training handling complex business negotiations. The Arbitrator will have the power to decide a fair and equitable resolution to the negotiations. This prevents the perception that one side has gotten the better end of the agreement. This will enable the companies to pursue future business opportunities at the conclusion of the negotiation. An arbitrator will often conclude the negotiations more quickly than a mediator can. The best interest for both companies is to conclude the negotiation so that strategic planning can be mapped out and implemented for future enterprises (Barry, Lewicki, Saunders, 2006).

Having a Contingency Plan when Negotiating

If the initial negotiation plan fails, a contingency plan will need to take place. Once Pacific Oil Company provides Reliant with written contract modifications can be made throughout the course of the negotiation. Negotiating based on a percentage of cost between suppliers and purchasers will protect against major fluctuation in supply and demands. Market prices will be controlled by the competitive supply on any day that is requested. Having a long-term contract will protect both parties with major negotiable elements including prices, product, quantity and the delivery point and credit terms. Still, Pacific Oil understands that competitive pressure may reduce the desirable length of the contract substantially.

Clearly Define Contract Terms in All Negotiations

The initial contract states that payment terms on the contract shall be U.S. dollars no discounts or deductions unless noted. One percent is charged per month if invoices are not paid on the due date. The seller can change the price on the contract only on the first day of any calendar month by a written notice sent to buyer within 30 days. Shipments and delivery buyer agrees with seller to give reasonable notice for shipment which include date of delivery and shipping Instructions. Most of these terms are negotiable, and are the first areas Pacific Oil will want to give on during concessions. Contract terminology and new agreements are written into a new contract before it can be signed. The contract will contain additional elements such as measurements, competition, favored nations, purchasing requirements, force major, disclaimers, and assign ability, notification and other clauses such as legal framework and taxes.

Contract Management in Negotiations

Contract management and maintenance govern how parties will work together throughout the contractual relationship. The relationship between the seller and the buyer requires constant monitoring, evaluation and discussion by seller and buyer representative organizations. Ideally, the purchaser accepts a fair price in negotiation, and does not push the supplier into a low price. At that time, the purchaser accepts the formula price that has been negotiated from both parties. Problems between the seller and purchaser are openly discussed and resolved mutually with honesty, trust and open line of communication seeking best solution. In the case of Pacific Oil Company, contract prices are determined on formula prices. Reliant wanted a two-year contract renewal instead of a long-term commitment with Pacific Oil Company because of the promise of increased future competition. Negotiating a new contract now could be a win-win deal for both the seller and the purchaser for Pacific Oil Company negotiation plan.

Determine the Best Strategy for Negotiations

The best strategy for Pacific Oil Company would be to hire a mediator to facilitate the negotiation process. This will ensure that all remaining points of negotiation are addressed initially, and the meetings are not drawn out for an additional year. This will allow both negotiating parties to evaluate which of the points of discussion are flexible, and which are not. In this way, a fair resolution for both negotiating parties can be achieved. If this form of negotiating is not possible, an alternative is to have an arbitrator aid in the process. Pacific Oil Company must also determine what its bottom line needs are, and stick to the core points of negotiation without losing more than the contract is worth long-term.


References
Barry, B., Lewicki, R., & Sanders, D. (2006). Negotiation. New York: McGraw-Hill
Irwin.
Spangler, B (2003). Problem Solving Mediation. Retrieved July 9, 2009, from
Beyond Intractibility Web site: http://www.beyondintractability.org