Making Deals Cooperatively and Competitively

As has been noted previously, we are most interested in negotiation as an alternative to resolving disputes, hence the name of this chapter! That said, there is a great deal to learn about negotiation in that context by looking at how negotiation can be played out when the parties are seeking not to resolve some conflict, but rather to put together a deal which will hopefully profit both sides.

EXAMPLE: Artie is a successful attorney who dabbles in real estate. He owns several houses as well as a small commercial building, all of which he rents out. He enjoys sitting back and collecting rent and would like to invest the $100,000 he has just inherited in another real estate venture. Charlie is a contractor who has extensive experience erecting large commercial buildings on behalf of owners. Lately, he has been thinking about how nice it would be to benefit from his skills on a long-term basis by owning a part of the building he helps put up. Artie and Charlie discuss a potential joint venture whereby Artie buys the land and Charlie puts up the building. They are on friendly terms and are very much looking forward to going into business together.

Everything here is amicable – there is no dispute. However, Artie and Charlie have not yet begun to discuss the finer details of their arrangement. Who will own what portion of the final property? How will decisions be made as to finding and choosing tenants, future improvements, and other matters related to ongoing operations? If one of the partners wants to sell, must the other partner be given a right of first refusal? The answers to these questions, and more, must be carefully laid out in the joint venture agreement or other documents formally establishing the endeavor.

Before the answers can be put to paper, however, the parties must agree on the content.

EXAMPLE PART 2: Artie believes that Charlie’s work and other building costs will be approximately equal to the $100,000 investment Artie is making. However, it is important to Artie that he have final say on all major decisions, and therefore he enters negotiations set on receiving 51% ownership.

One might assume that in the deal context, the materials from Chapter 2, Subchapter 2 (Adversarial Positioning & Distributive Bargaining) would play no role. In other words, the assumption would be that Artie and Charlie would engage in cooperative bargaining, given their existing friendship and the lack of contention surrounding the topic of negotiation. However, to the extent that there is only a certain amount of “stuff” to be owned when the project is completed, Artie and Charlie are necessarily placed in a zero-sum scenario, as any additional profit granted one party will mean a loss of profit for the other.

If Artie wants 51% ownership, this will necessarily detract from the portion Charlie owns. If Charlie wants total control over the building, this will necessarily preclude Artie from the decision-making process for that stage of the project. Since decisions about building will affect the final value of the property, and thereby affect the likely rental income, control by one party can only be affected by reducing the control given to the other party. A classic distributive bargaining (zero-sum) scenario.

EXAMPLE PART 3: Artie decides not to represent himself (always a good decision) and hires a local attorney to help negotiate and draft the agreement. Charlie also lawyers up.

How will the clients and their lawyers decide to negotiate this matter? Referring back to our Overview of the Process of Negotiation flowchart from Chapter 2, Subchapter 1, the parties can actually choose whether to behave more like parties involved in cooperative bargaining or like parties involved in competitive bargaining. After all, since this deal has distributive bargaining features, it would not be entirely inappropriate for the parties to initially exaggerate the strengths of their positions, engage in significant posturing, create time crises, etc.

EXAMPLE PART 4: At one point in the negotiation, Artie’s lawyer indicates to Charlie’s lawyer that there might be another deal open for Artie to take part in, and that unless this deal closes soon Artie will walk. In response, Charlie’s attorney points out that with today’s low interest rates and aggressive bank lending, Charlie now thinks he can borrow the money he needs and thereby maintain full ownership while paying off an affordable mortgage.

On the other hand, Artie and Charlie have a long-standing relationship which has brought them both profit in the past and which neither is likely eager to destroy. Therefore, they might engage in a negotiation style which is more akin to that of parties in a cooperative bargaining scenario. Even more so than in the case of negotiations to settle disputes, parties negotiating deals can choose to present themselves as problem-solvers or as adversaries, depending on what they hope to achieve and what they understand to be at stake.

The hypothetical above is set-up as essentially a distributive bargaining scenario which can be taken in either direction by the parties to the negotiation. What about a scenario which begins as a non-zero-sum scenario?

EXAMPLE PART 1: Jenny has developed a new way to make money on the internet (she won’t tell us what it is just yet…she doesn’t want to give the idea away). The business she has in mind, however, depends on having plenty of computer programmers at the ready for when people log on to the website. Samantha is an experienced Human Resources executive at a large software company. She has been thinking about leaving the safety of her salaried position if the right opportunity came along. Jenny and Samantha meet to discuss the possibility of going into business together, and after hitting it off, decide to enter into more formal negotiations.

So far this could be exactly the same as the hypothetical with Artie and Charlie. After all, here, Jenny can only gain increased ownership and/or control at the expense of Samantha’s ownership and/or control. For that aspect of the negotiation, we are again dealing with a zero-sum scenario. The business which is involved here, however, is quite different from Artie’s idea of developing a commercial property. There, the project is finite, as are the ultimate profits stemming from the endeavor. There will be a single tenant paying rent. Jenny’s internet business, however, can continue to grow.

EXAMPLE PART 2: Without giving away her billion-dollar idea, we have learned this much from Jenny: the more programmers available at any time, and the better trained and supervised they are, the more profitable the business becomes. Samantha’s job will be to hire, train, and supervise as many programmers as possible. The parties negotiate an agreement whereby Jenny owns 70% of the company while Samantha owns 30%. However, in addition to Samantha’s share of the profits, she will take an additional percentage for each computer programmer who generates over $10,000 in revenues per month. Should any programmers generate over $20,000 in revenues per month, Samantha gets yet a greater share. And so on.

A final agreement like this could not easily be reached by parties who choose to view themselves as engaged in distributive/competitive bargaining. Rather than viewing the business as having a finite value, which much be distributed between Jenny and Samantha, the parties recognize that based on one party’s input, the profit to be shared can increase dramatically. The more incentive Samantha is given for running her end of the business smoothly, the more the business makes, and the more Jenny’s share is worth. Both parties have theoretically unlimited profit to gain from this enterprise. Of course, someone might want to tell Jenny and Samantha that the “.com” boom might not last…

Rethinking the Classifications

In Chapter 1, § C of “A Practical Guide to Negotiation,” National Institute for Trial Advocacy (1997) (“Practical Guide”), we find reference to “cooperative adversarial,” “competitive adversarial,” and so on. While many take “competitive negotiation” to be synonymous with “adversarial negotiation,” this need not be the case. In fact, the hypotheticals above are clear examples of the limitations of the current labels attached to negotiation styles and scenarios.

The materials in this chapter are not meant to be the final say on the topic of negotiation. Nor can we, in this limited space, lay out a comprehensive treatise on the vast array of negotiation scenarios possible in today’s complex legal environment.

For those seeking a more detailed theoretical understanding of negotiation, we suggest close examination of the sources referenced in these chapters. For those seeking more practical experience with the fine art of negotiation, we urge you to pay close attention when attorneys are in conference, on the phone, or corresponding in writing. Ask yourself what elements of each negotiation style and scenario you can identify. In all likelihood, you will see a mix of each at every stage of the negotiation process which you witness, and with which you assist.