Thursday, November 06, 2008

Re-negotiate the contract

A year after the BIG mining company had signed a 10 year long term contract with a foreign buyer to buy zinc in 10 annual instalments, the zinc market collapsed due to credit crisis. Instead of paying £6 a ton below world market price, the buyer now faced the prospect of paying £4 above.

The buyer faxed BIG to say it wished to renegotiate the contract. The final words of the fax read: “You cannot expect us as your new (and long term) partner to carry alone the now ruinous expense of these contract terms.”

BIG negotiators had a heated discussion about the situation.

What of the following statements would you suggest?

  • A contract is a contract. It means precisely what its terms say. If the world price had risen we would not be crying, nor should they. What partnership are they talking about? We had a deal. We bargained. We won. End of story.
  • A contract symbolises the underlying relationship. It is an honest statement of original intent. Where circumstances transform the mutual spirit of the contract, then terms must be renegotiated to preserve the relationship.
  • A contract symbolises the underlying relationship. It is an honest statement of original intent. But such rigid terms are too brittle to withstand turbulent environments. Only tacit forms of mutuality have the flexibility to survive.
  • A contract is a contract. It means precisely what its terms say. If the world price had risen we would not be crying, nor should they. We would however, consider a second contract whose terms would help offset their losses.

14 comments:

@vi said...

A contract is a contract. It means precisely what its terms say. If the world price had risen we would not be crying, nor should they. We would however, consider a second contract whose terms would help offset their losses.

This seems to be the best option.

Mike said...

A contract is a contract. It means precisely what its terms say. If the world price had risen we would not be crying, nor should they. What partnership are they talking about? We had a deal. We bargained. We won. End of story.

Sudden rise in price of zinc is unpredictable and no one should take the blame. Of course, someone would say that a second contract should be considered to ease the tension between them. But if the contract is re-negotiated, what's the meaning of signing a contract? How about the company policy? The policy has to be standardised and should always be going the same direction.

It can't be changed from time to time. If the contract is re-negotiated this time, all the other partners will ask for the same treatment afterwards. So, how is the mining company going to survive? What is more, all people will always ask for more as human wants are unlimited. If the mining company allows it this time, they will ask for more everytime if they face some difficulties. So, I don't think it's a wise decision to have the contract re-negotiated.

I would suggest not to change anything but keeping the original contract as we have to respect all the terms bargained in the original contract.

Dr. Paurav Shukla said...

Hmm... should we sign a new contract or not? Policy change or not? Long term of relationships or not? Quite a few things to consider.

David said...

The mining industry is same as oil industry. The price which is always fluctuate in different times,the sudden rise or fall is unpredictable.It's really dangerous to singn a long tern contract with a fixed price. From my point of view, it's better to have flexible-based price system join with a long term partnership with certain companies.
In normal case, the contract is always a contract,However, in this situation of credit crisis,I think it's better to provide a second contract with a flexible-based price system.

Dr. Paurav Shukla said...

Then why have long contracts is the question isn't it?

Mai Nguyen said...

Business is business. Who is stronger, who wins. According to the first statement, after bargaining the negotiators won. This presents the strength of that business. It is not a story about the fortune in here. The buyers are unlikely to ask the suppliers to be flexible in the contract as if switching these two position to each other, they would never want to loose the benefit. Especially, in the touch time ( credit crisis), every business fights for their survival in the market. Therefore, in my opinion the first statement is the best choice.

Teresa said...

Perhaps I'm being too soft (certainly bearing in mind the difficulties in changing a 'simple' mobile phone contract)but I prefer: A contract symbolises the underlying relationship. It is an honest statement of original intent. Where circumstances transform the mutual spirit of the contract, then terms must be renegotiated to preserve the relationship.
There are still nine years of the contract to run so ruining the relationship at this early stage could make things impossible in the future. A renegotiated contract would have to be thought out in greater detail to avoid this type of issue arising again.

furqan said...

As it is an contract it cant be changed. As Teresa said they still have the nine years of business with them. What if the zinc prices rise after the end of the current year, will they again reframe the contract. They would still want to go with the same contract. As the prices fluctuate they would keep on changing the terms of the contract.
The only option they have is to hedge and buy some more zinc, this would reduce the average cost of the total zinc bought. According to me this the only way out for the company. And to keep the long term relationship.

Dr. Paurav Shukla said...

Two interesting questions are emerging from this discussion:

1. If the contract was done for the long-term as stated, the negotiators would surely have kept the fluctuations in mind, so is there a need to re-negotiate?

2. However, if the supplier is unable to carry out the contract terms and (in worst case scenario) goes bust, is it worthwhile for the company to stick to the contract?

Teresa said...

It doesn't look as if they took everything into account with the first contract otherwise they wouldn't be going back to ask for a change now.

If there is the threat of them going bust then it is in no-one's interests to stick with the original contract. If this isn't an issue however, they might just have to agree that they made an error in signing the contract and hope for better days.
A steep learning curve perhaps.

Dr. Paurav Shukla said...

So, in a way Teresa you are stating that an error was made by the buyer. If the buyer made the mistake why should BIG pay for it OR should it?

Weiping said...

The significance of the contract is that its terms should protect interests and rights of both parties. Considering the sudden rise of zinc’s price, the Big mining company wanted to re-negotiate the contract, which means that they will break terms of the contract. If contract was renegotiated, the foreign buyer must suffer a lot of loss. Obviously, it is not fair to the foreign buyer. In fact, business is business; we can not avoid the risks but just can try our best to reduce them. So when the Big mining company signed the contract, they should considered the risks from the unstable market. A 10-year contract is so long, they overlooked the market risks such as price fluctuation, credit crisis and other factors.

Liz said...

A contract is a contract; it is there to protect both parties. I think it must be a poorly written contract if it did not state that the mining company could change price if certain circumstances arose. They are contracted to buy 10 instalments so they could either negotiate on the instalments or on the price. If BIG mining have control of the market, then they don’t need to renegotiate as the ball is in their court. The Foreign buyer is new and so they have not formed much of a relationship yet, and if they renegotiate with this new buyer then all their clients who have been buying off of them for years will expect the same treatment. On the other hand this will mean that they could lose a potential customer, and during this crisis the BIG mining company need all the customers they can get. So it would be wise to renegotiate so that both parties are getting the best out of market crisis. They will have to compromise.

Dr. Paurav Shukla said...

But by renegotiating they are opening pandora's box, arent they? Because market situations keep changing. Furthermore, if tomorrow the market conditions became favourable and the supplier decided not to renegotiate, then?