Top 5 Tips for Contract Renegotiation

At the time of entering into a business agreement, you were likely satisfied with your rights and obligations under the contract. However, as the last year has demonstrated, it can be difficult to anticipate the needs of your business if circumstances change. If this happens, you may seek to renegotiate various contracts to better suit your business’ needs.

Review your Original Contract

Your original contract may have contemplated the need for re-negotiations. It may specify what events and actions may give rise to renegotiation, what process and procedure the parties must follow throughout renegotiation, and any actions or behaviour that may preclude renegotiation. If the contract specifies a process for renegotiation, you will adhere to those stipulations. If your contract does not specify a process, it is common practice to submit a renegotiation request in writing and ensure it is signed by all parties to the contract.

Consider the Business Relationship

Engaging in contract renegotiation has the potential to both strengthen and disrupt relationships. In contract renegotiation, the dynamics can be more delicate than when negotiating a new contract. As such, it is important to be honest and keep communication open with the other party. As we witnessed during COVID-19, parties to a variety of contracts were often sympathetic to the change in circumstances. Even in normal circumstances, parties to business contracts will often value long-term relationships more than the opportunity to exercise their rights under contract. The strength, openness, and trust present in the business relationship will play a large role in determining a successful renegotiation.

Know your Risks

If you are seeking to modify contract terms through renegotiation, it is important to be aware of the potential for relationship breakdown and litigation. If you are asking to renegotiate, ensure that you accurately evaluate the likelihood and expense of litigation. It can make sense, from a commercial perspective, to renegotiate contracts in order to avoid the time and expense associated with enforcing the original contract terms – especially if future business from you is likely. However, how willing the other party is to renegotiation will often depend upon the circumstances faced by both parties and what your ‘non-negotiables’ are.

Create Value for the Other Party

It can be difficult to approach the topic of renegotiation. If there are opportunities for renegotiation that will benefit the other party to the contract, present these along with your request to renegotiate. This can include broadened terms or length of engagement, higher interest rates or rate of pay, or offering other rights. This may encourage the other party to engage in renegotiations, and become a willing participant in the rebuilding of the business agreement.

Hire a Mediator

If renegotiations are at a standstill or litigation is being contemplated by one or both parties, consider hiring a mediator to encourage resolution and to salvage the business relationship. This form of alternative dispute resolution is non-binding, and thus mediation is a no-pressure forum for both parties. A mediator can facilitate positive and productive discussions, and may even be able to suggest novel solutions to points of contention. This is particularly beneficial for small businesses with more limited resources.

If your circumstances or those of your business have changed, you may wish to commence discussions with your business relationships to renegotiate contracts. Perhaps you are unclear on how the original contract pertains to your circumstances, or you have found yourself in dispute with the other party to the contract.

If you require advice surrounding contract disputes, or have any questions regarding business agreements and how they pertain to your business, speak with one of our experienced business lawyers by calling us at (02) 4929 7002, emailing us or completing an enquiry form.