You’ve signed a contract with your client to represent him for the sale of his building. The agreement states that you’ll be paid a two per cent commission upon sale of the building. You begin working and marketing the property. Given your close interaction with your client, you become good friends.
During one of your dinner meetings your client offers you an extra 0.5 per cent increase in your commission fee, “just because”. Your cousin – who’s a lawyer – tells you to get this in writing. Your client happily modifies the agreement and within a year you sell the building. When you get your cheque, however, it doesn’t reflect the promised 0.5 per cent increase in your commission rate. Can you sue for the 0.5 per cent outstanding?
There’s no such thing as a free lunch
For those who guessed “yes”, you’re wrong. The basic elements that make up a binding contract are offer, acceptance and consideration. The missing element in the above scenario is consideration. And this doesn’t refer to being nice.
What is consideration? It’s generally understood that we make business contracts to exchange goods or services for a variety of forms of payment. After all, apart from helping friends and family or giving gifts during the holiday season, profits are gained because we do not give up something of value for nothing in return. This is why courts created the concept of consideration, which requires both parties to give up something.
What happens if there’s no consideration? If there’s no consideration, a contract can be invalid. This is true despite the fact that you get the other party to agree to something and you put it in writing. In our example, you and your client already committed in writing to sell the property for a particular fee. You gave your time and effort and your client gave up his money in exchange. Consideration was passed. However, when your client offered you a higher rate, you gave nothing up in return.
How can you avoid the consideration problem? To make the renegotiated fee enforceable, you should have offered something nominal in exchange. For example, you could have offered to increase your marketing budget or promised to close the deal ahead of the expected schedule.
Consideration doesn’t have to be of equal value to the concession being given – even changing the font in all of your marketing materials or baking cookies would have been sufficient to meet the consideration criteria.
Should you renegotiate an existing deal?
Renegotiating existing deals is a common practise and an excellent negotiating tactic. This tactic, however, should only be used with a counterpart you trust and with whom you have a great relationship. The reason why renegotiating a deal is a good negotiation tactic is because we typically don’t reach our fullest potential before we stop negotiating.
A variety of Kellogg studies conclude that we leave about 25 per cent of “value” on the table. By reopening the conversation after you’ve signed a binding deal and asking how you both can do better (not just how you can do better!), you not only allow both sides to get a better outcome, but you also ensure that the consideration rule is met. In other words, you both make an exchange to achieve a better outcome.
I’ve seen this renegotiation technique successfully used by one of my students in the negotiation course I teach at the Real Estate Institute of Canada. Both parties made concessions to get a better outcome and both walked out forging a better deal and relationship. Not only did they both “make” more, their mutual willingness to make concessions ensured enforceability.
The golden rule is simple: make sure you give first and receive. If you fail to do this, you’ll not only come off as Scrooge, but you’ll also fail to have a binding agreement.