Published in: 2 Canadian International Lawyer 195-200 (1997).

AFTER THE CONTRACT, WHAT?

NEGOTIATING TO WORK SUCCESSFULLY WITH A FOREIGN PARTNER

by

Jeswald W. Salacuse

SUMMARY

An important trend in international business is the creation of long-term cooperative relationships among firms from different countries. As a result, businesses in all countries are increasingly faced with the challenge of working with foreign partners. This new business orientation also calls for a new approach to international business negotiation by lawyers and business executives. First, they must learn to see their task as creating the foundation for a business relationship, rather than merely negotiating a contract. Second they must recognize that a long term business relationship is a continuing negotiation between the parties. Third they must learn to use the prenegotiation phase of business negotiations more effectively. And fourth, the application of mediation, conciliation and other similar devices to create and preserve effective business relationships needs to be addressed during negotiations.

The deal is done at last. After eighteen months of effort, nine trips across the Pacific, countless days and nights of discussions in China, Hong Kong and at home, you have finally negotiated a signed contract establishing a joint venture between your client and the Great Wall Company of Shenzhen to manufacture components for audio systems. The agreement is clear and precise. It covers all contingencies and has strong enforcement mechanisms. You look at the document with satisfaction. You have given your client a solid foundation on which to launch a profitable enterprise abroad. As you return the contract to the file, a question occurs to you for the first time: After the contract, what? That question should have been upper most in your mind throughout the negotiations. The fact that it was not may mean trouble ahead for your client.

I. The Challenge of Working with Foreign Partners

As a result of globalization, North American businesses, like your client, are increasingly entering into long-term relationships with companies and organizations abroad. Rather than merely engaging in separate foreign trade transactions or establishing foreign branches and wholly-owned subsidiaries to pursue their objectives, companies are joining with businesses from around the world in all sorts of long-term, ongoing relationships -- joint ventures, strategic alliances, global franchising arrangements, fifty-year production sharing agreements, construction consortia, and build-operate-transfer infrastructure deals, among others. An important result of this trend is that North American companies in growing numbers are becoming partners in substance, if not in name, with foreign enterprises throughout the globe. Indeed, the essence of international business success today and for the foreseeable future in all countries is very much a matter of working effectively with foreign partners. Even when your clients make cross-border acquisitions of other companies, they will usually find that they also face the challenge of working with foreign partners -- the personnel, management and organizations that they have acquired.

If it is true that working with foreign partners has become the essence of international business today, it is also true that few international managers and their lawyers are prepared for this challenge. Working with foreign partners in an international business relationship presents problems and obstacles that executives do not ordinarily encounter in purely domestic dealings. In particular, these kinds of partnerships require international lawyers and business executives to develop a new approach to international business negotiation.

Although the parties to alliances, joint ventures and mergers usually announce them with great fanfare at the start, they often become disappointed within a short time and in many cases terminate them earlier than expected. Various studies have found that between 33% and 70% of international alliances surveyed eventually broke up and that business executives generally consider joint ventures to be notoriously unstable.

The challenges of working effectively with foreign partners present themselves in many forms. Some are external to the partnership; some are internal to the relationship between the parties. Here are a few examples drawn from experience around the world:

• Your client’s foreign partner, a small emerging market company, feels that it is much weaker than your client and is constantly fearful that it will be taken advantage of. Consequently, in all dealings with your client, it is extremely guarded and slow to reach agreement, an attitude that is hampering the development of the venture.
• Your client has created a pharmaceutical joint venture in Russia. It wants to confine to it to narrow and specific areas, but your Russian partner wants to expand into activities unrelated to your own client’s competence, like the production of television programs. Disagreement over this question is causing tension in the relationship.
• A European company a and Chinese enterprise have established a joint venture that has clear mutual benefits, but both parties are very cautious about sharing information. The Chinese partner withholds information about customer problems with products and requests for new product features. In response, the Europeans have slowed the transfer of technology badly needed by the venture. The two sides are also in conflict over advertising expenses. The Europeans want to spend heavily on advertising while the Chinese oppose these expenditures as unnecessary.
• Your client, a pharmaceutical firm with a long tradition of strong presidents and top-down management, has acquired a Swedish firm with a management style that entails getting the whole management group's approval before making a big decisions, rather than handing down orders -- alla aer I baten, "getting everybody in the boat", according to the Swedes. The difference in style is causing severe internal conflict and the possible loss of talented managers and scientists.

None of these problems can be solved by contractual provisions alone. None can be settled by invoking arbitration or other dispute settlement clauses. One may argue therefore that these issues are management problems or personnel questions, matters that have nothing to do with law or the lawyer's work in negotiating and structuring international transactions. On the other hand,if the lawyer's fundamental task is to help the client establish the best possible basis for an international transaction, not just to draft a contract, then these issues should be of concern from the very start of negotiations.

II. A Few Rules For Negotiating a Foreign Partnership

Rather than to view the basic objective in an international business negotiation as securing an advantageous contract for the client, an international lawyer ought to strive for the goal of establishing a basis for the client to work productively with a foreign partner. Had the negotiators in the deals mentioned above kept that aim in mind, perhaps their clients would have avoided the problems they later encountered in working with their foreign partners. Throughout negotiations, international business lawyers must keep asking themselves a basic first question: After the contract, what?

To negotiate productive working relationships between your client and a potential foreign partner, the following are a few principles to bear in mind.

1. A Signed Contract Does Not Necessarily Create an International Business Relationship. In long-term transactions, the parties are seeking to create a business relationship, a complex set of interactions characterized by cooperation and a minimum degree of trust. A relationship implies a connection between the parties. Just as a map is not a country, but only an imperfect description thereof, a contract is not a business relationship. A contract may be a necessary condition for a business relationship in some, but not all countries; however, it is never a sufficient condition for a business relationship in any country. A business negotiator, while necessarily concerned about contractual provisions, should also be concerned that a solid foundation for a business relationship is in place. Accordingly, a negotiator should also ask a variety of non-legal and non-contractual questions: How well do the parties know one another? What mechanisms are in place to foster communications between the two sides after the contract is signed? Is the deal balanced and advantageous for both sides?

While a contract may seem the essence of a business relationship in North America, other cultures often give it less far importance. Indeed, different cultures may tend to view the very purpose of a negotiation differently. For North Americans, the goal of a business negotiation, first and foremost, is usually to arrive at a signed contract between the parties. They consider a signed contract as a definitive set of rights and duties that strictly binds the two sides, an attitude succinctly summed up in the statement "a deal is a deal."

Japanese and other cultural groups in Asia, on the other hand, often consider that the goal of a negotiation is not a signed contract, but the creation of a relationship between the two sides. Although the written contact expresses the relationship, the essence of the deal is the relationship itself. For Americans, signing a contract is closing a deal; for many Asians signing a contract might more appropriately be called opening a relationship. This difference in view may explain why Asians tend to give more time to negotiation preliminaries, while Americans want to rush through this first phase in deal making. Negotiation preliminaries, whereby the parties seek to get to know one another thoroughly, are a crucial foundation for a good business relationship. They may seem less important when the goal is merely a contract.

2. An International Deal is a Continuing Negotiation. Some lawyers think that the negotiation process ends when all the details are resolved and the contract is signed. In fact, this view is hardly ever a reflection of reality. In truth, an international deal is a continuing negotiation between the parties to the transactions as they seek to adjust their relationship to the rapidly changing international environment of civil strife, political upheavals, military interventions, monetary fluctuations, and technological change in which they must work together.

No negotiation can predict all eventualities that the parties may encounter, nor can any negotiation achieve perfect understanding between the parties, especially when they come from differing cultures. If they do encounter changes in circumstances, misunderstandings, or problems not contemplated by their contract, the parties need to resort to negotiation to handle their difficulties. In short, negotiation is a fundamental tool for managing their deal. And when the parties to a deal are embroiled in genuine conflict -- for example, the failure to perform in accordance with one side's expectations or interpretation of the contract -- negotiation may be the only realistic tool to resolve the controversy--particularly if the parties want to preserve a business relationship. Thus when the deal is broken, negotiations may be the only means to mend it. So in the life of any deal, one may encounter three types of negotiation: deal making, deal managing, and deal mending.

If the risk of change and uncertainty is constant in international business, how should deal makers cope with it? They should approach the problem of renegotiation before, rather than after, they sign their contract. Both sides should recognize at the outset that the risk of changed circumstances is high in any long-term relationship and that at sometime in the future either side may seek to renegotiate or adjust the contract accordingly.

Most modern contracts deny the possibility of change. They therefore rarely provide for adjustments to meet changing circumstances. This assumption of contractual stability has proven false time and time again. For example, most mineral development contracts assume that the agreement will last for period of from fifty to ninety-nine years, but they rarely remain unchanged beyond a fraction of that time. One method of dealing with this problem is to provide specifically in the contract for renegotiation at defined periods for specific issues that are particularly susceptible to changing circumstances. Rather than dismiss the possibility of renegotiation and then be forced to consider review of the entire contract at a later time in an atmosphere of hostility between the partners, it is better to recognize the possibility of renegotiation at the outset and set down a clear framework within which to conduct the process. In short, recognize the possibility of redoing the deal, but control the process.

3. Don't Rush Prenegotiation. The initial phase of any international business negotiation is prenegotiation, a phase in which the parties to a potential deal determine whether they want to negotiate at all and, if they do, what they will negotiate about, and how, when, and where they will go about it. This phase is vital if the parties are to know one another well. The prenegotiation phase is characterized by information gathering and efforts by each of the parties to evaluate the other. It ends when both sides make a decision to negotiate a deal with the other, or when one informs the other, directly or indirectly, that it no longer wishes to continue discussions.

As a general rule, North American executives and lawyers seek to "dispense with the preliminaries" and "to get down to cases". Consequently, they have a tendency to rush through prenegotiation and to view it as not really important to building a strong deal. Asians tend to devote more time and attention to the prenegotiation phase of deal-making than do North Americans. Most Asians consider prenegotiation an essential foundation to any business relationship; consequently they recognize the need to conduct prenegotiation with care before actually making a decision to undertake substantive negotiations of a deal. One of the consequences of this difference in approach is that North Americans sometimes assume that discussions with Asian counterparts have passed from prenegotiation to a subsequent stage when in fact they have not because the Asians have not yet decided to undertake substantive negotiations. This type of misunderstanding can lead to suspicions of bad faith, resulting ultimately in total failure of the talks. It is therefore important to be sure that you and your counterparts are always in the same phase of the deal-making process.

4. Consider a Role for Mediation or Conciliation in the Deal.

Third parties, whether formally called mediators, conciliators, advisors or something else, can often help the two sides in deal making, deal managing and deal mending negotiations and in building and preserving partnership relations. For example, when some companies contemplate long-term international business relationships requiring a high degree of cooperation, they may hire a consultant to develop and guide a program of relationship building that might include joint workshops, get-acquainted sessions, and executive retreats, all of which take place before the parties actually sit down to negotiate the terms of their contract. The consultant will facilitate and perhaps chair these meetings, conduct discussions of the negotiating process, make the parties recognize potential pitfalls, and discuss with them ways to avoid possible problems. Once negotiations start, the consultant may continue to observe the process and be ready to intervene when the deal-making process encounters difficulties.

Once the deal has been signed, consultants, lawyers, and advisers may continue their association with one or both parties and informally assist as mediators in managing conflict that may arise in the execution of the transaction. In some cases, the parties to a complex or long-term transaction, seeking to minimize the risk of conflict, may include specific provisions in their contract stipulating a process to manage conflict and prevent it from causing a total break down of the deal. For example, the contract may provide that in the event a conflict cannot be settled at the operational level, senior management of the two sides will engage in negotiations to resolve it. Generally, top management, not directly embroiled in the conflict and with a broad view of the transaction and its relationship to the company's over all strategy, may be in a better position to settle a dispute than persons at the operating level, who have come to feel that they have a personal stake in "winning" the dispute. Once top management of the two sides have reached an understanding, they may have to serve as mediators with their subordinates to get them to change behavior and attitudes with respect to interactions at the operational level.

The international construction industry has developed an important form of deal-managing mediation that employs a designated third person, often a consulting engineer, to resolve disputes that may arise in the course of a major construction project, like a dam or a power plant. International construction projects typically include many parties, involve highly technical complexities, and take a long time to complete. The possibilities for conflict among the participants are virtually endless, yet it is essential for all concerned that their disputes not impede the progress of the project. The construction contract will therefore usually designate a consulting engineer, review board, permanent referee, or dispute advisor, with varying powers, to handle disputes as they arise in a way that will allow the construction work to continue. Sometimes, as in the case of a consulting engineer, the third person will have the power to make a decision, which may later be challenged in arbitration or the courts; sometimes as in the case of dispute advisor, the third person plays the role of a mediator by engaging in fact finding or facilitating communication among the disputants.

The use of such dispute review boards or dispute advisors in construction contracts has proved to be a cost-effective means of settling disputes while permitting a continuation of construction project in an expeditious manner. This mechanism would seem to have application in other areas of international business. For example, in a complex multi-party strategic alliance, the participants might designate a person or organization to serve as a permanent mediator to assist the parties in managing conflicts that may arise in the course of their business relationship. Thus far, however, this device does not appear to have reached much beyond the construction industry.

The dispute resolution mechanism of choice in most international business transactions is international commercial arbitration. The parties invoke arbitration in much the same circumstances that in a domestic deal they would resort to litigation: when they judge the deal to be broken. International commercial arbitration is much like litigation in that it is expensive, adversarial, and in most cases lengthy. It usually results in a dissolution of the business relationship, not in its reconstruction.

Traditionally, companies engaged in an international business dispute have not actively sought the help of mediators or other third parties. They have first tried to resolve the matter themselves through negotiation, but when they judged that to have failed, they have immediately proceeded to arbitration. Various factors explain their failure to try mediation: their lack of knowledge about mediation and the availability of mediation services, the fact that companies tend to give control of their disputes to lawyers whose professional inclination is to litigate, and the belief among many lawyers and executives that mediation is merely a stalling tactic that only delays the inevitability of an arbitration proceeding.

With increasing recognition of the disadvantages of arbitration, a few companies are beginning to turn to more explicit forms of mediation and third-party intervention to resolve business disputes. When a dispute can be quantified, for example the extent of damage to an asset by a partner's action or the amount of a royalty fee owed to a licensor, the disputants sometimes engage an independent third party such an international accounting or consulting firm to examine the matter and give an opinion. The opinion is not binding on the two sides but it has the effect of allowing them to make a more realistic prediction of what may happen in an arbitration proceeding.

Recognizing the terminal effect of arbitration on the business relationship, some parties to a business transaction agree in their contract to attempt conciliation before invoking arbitration. Many arbitration institutions, such as the International Chamber of Commerce and the International Centre for Settlement of Investment Disputes, offer a service known as conciliation, which is normally governed by a set of rules. In addition, the United Nations Commission on International Trade Law has prepared a set of conciliation rules which parties may use without reference to an institution.

Generally, in institutional conciliation, a party to a dispute may address a request for conciliation to the institution. If the institution concerned secures the agreement of the other disputant, it will appoint a conciliator. While the conciliator has broad discretion to conduct the process, in practice he or she will invite both sides to state their views of the dispute and will then make a report proposing an appropriate settlement. The parties may reject the report and proceed to arbitration, or they may accept it. In many cases, they will use it as a basis for a negotiated settlement. Conciliation is thus a kind of non-binding arbitration. Its function is predictive. It tends to be rights-based in its approach, affording the parties a third person's evaluation of their respective rights and obligations. Conciliators do not usually adopt a problem-solving or relationship building approach to resolving the dispute between the parties. The process is confidential and completely voluntary. Either party may withdraw from conciliation at any time.

Few disputants in international business avail themselves of conciliation. The magnitude, complexity, and duration of international business transactions creates a substantial and continuing risk of conflict. International commercial arbitration, the primary dispute settlement mechanism designed for international business, has proven itself to be expensive, destructive, time consuming, and in some cases lacking in finality. Mediation of varying types offers international business executives a possible attractive alternative, an alternative that they should explore at the time they negotiate their transactions. They might include in their contracts from the outset mechanisms such as dispute advisors to help in the problem of deal management, and they might also commit themselves to try mediation or conciliation before they take the usually irrevocable step of submitting their disputes to arbitration.

III. Conclusion

The new emphasis in international business on long-term collaborative relationships among firms from different countries -- what one writer has termed "the alliance revolution" -- calls for a new approach in international business negotiation. It is an approach that focuses the negotiator on creating a business relationship, rather than just forming a contract, and on securing the foundations of partnership, rather than merely imposing contractual conditions for short-term advantage.