There may be opportunities during the life of a contract when approaching the counterparty to renegotiate some of the terms that make sense from a business perspective.
Cooley global law firm partner, Tom Connors says, “When circumstances in your business change, you don’t necessarily have to wait for the contract to expire to seek better contract terms.
The other side may appreciate the business relationship that has been established and be willing to renegotiate certain terms – or circumstances may have changed for them as well.”
The contract is up for renewal
This is pretty self-explanatory, but it bears mentioning.
Many contracts have a clause that stipulates that the contract will renew upon the expiration of the initial term so that the parties can continue to work together without having to negotiate and sign a new contract.
If both the parties are reasonably satisfied under the contract, but there are some terms you’d like to modify for the relationship moving forward, then this is a natural time to approach the other side about those changes.
If the other side is incentivized to keep the contract in place for the renewal term – e.g., they supply you with components or buy valuable products from you – then they’ll likely want to “play ball” and work with you on amended contract terms for the renewal.
There is a substantial change in your business
When you first sign an agreement, both sides have an expectation regarding their own and the other party’s performance.
If there is a material change in your business or financial condition, or there has been a material deviation above or below this expectation, it’s probably time to revisit your obligations under the current contract and amend them, if possible.
For example, demand for a company’s products could have been very high at the start of the COVID-19 pandemic due to the nature of those products (e.g., home fitness equipment) in 2022, that demand may have normalized.
During the high-demand period, your company very likely entered into at least a few contracts that now should be renegotiated to get them in line with your normalized business forecasts.
There is a substantial change in the market
During the early days of the pandemic, there were standard, run-of-the-mill agreements for items such as N95 masks, toilet paper, ocean containers and microchips.
This, among other things, specified quantities, availability and prices based on historical demand.
When the market was turned completely upside down, many suppliers required renegotiation of the terms of their contracts to better reflect the new market conditions and capture unique business opportunities.
Connors adds: “Stay on top of the news in your trade and keep an eye out for current and forecasted changes in your industry and the markets in which you operate (and hope to operate).
Doing so may help you anticipate demands from your business partners – and to position your company to take advantage of business and market opportunities.”
A word of caution
Of course, not all of your business partners may be open to renegotiating or amending current contract terms.
Nor should you necessarily be open to renegotiation just because a business partner requests it.
For instance, if a certain contract term is advantageous to your company, think long and hard about whether and how it should be amended.
If each side stands to gain something from renegotiated terms, which may include noncontractual benefits such as strengthening of the business relationship or a demonstration of goodwill should be able to arrive at an agreement.
But just as with the initial negotiation of the contract, the success of renegotiation will depend on leverage and an understanding of each party’s objectives for the relationship moving forward.
To simplify the process and increase your chances of success in contract negotiation along with business development and expansion in general, contact reliable supply chain consultants at Izba.
