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.

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 
• 

The culture conundrum

Mr. Geddy Teok, an American – Chinese (second generation) employee of a large New Jersey pharmaceutical firm, was based in Tokyo, Japan. His main aim was to get a major joint venture going with one of the largest Japanese pharmaceutical manufacturers. After four years of negotiating, the supreme moment had come for signing contracts. Obviously the lawyers from HQ in New Jersey were well prepared and sent the contract to Geddy one week before the ‘ceremony’.

After four years of Japanese experience, Geddy was shocked when he received the document from the USA. He thought: “I could not even count the number of pages. There were just too many. But I remember the number of inches it measured when laying it on the table. I would guess that with every inch one of the Japanese would leave the room in despair. I hope they come will come with a group of ten. Then at least I will keep one person to talk to. The Japanese will sign the contracts, but this can’t be taken this far.”
Geddy Teok decided to call HQ and ask for some help. The legal department said that the relationship was so complex that the contract needed to cover many possible instances. Moreover, a consultancy firm that advised them regularly said that Asians in general and Japanese in particular had a reputation of being quite loose in defining what was developed by them and what came from the USA: “we better have some pain now and be clear in terms of our relationship, than to run into problems later because of miscommunication. If they sign it at least they show that they are serious.”

Geddy was in despair, but he only had a day to decide what to do. The meeting was tomorrow. Should he perhaps call the Japanese CEO, with who he had built up quite a relationship? Or should he just go for it? Geddy framed his dilemma quite clearly. “Whatever I would do, it would hurt my career. If I insist on the Japanese partners signing the contract they will see it as proof of how little trust has been developed over the years of negotiations. This might mean a postponement of the discussions and in the worst case the end of the deal. If I reduce the contract to a couple of pages and present it as a ‘letter of intent’, HQ in general and even worse the whole legal department will jump on me, jeopardizing my career.”

If you were Geddy, what would you do?

(Adapted from: Riding the Waves of Culture: Understanding Cultural Diversity in Business by Fons Trompenaars and Charles Hampden Turner)

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 
•