Risk Pie, Anybody? How to Negotiate While Reducing Risk
Negotiation - the very essence of the word often conjures up the thought of adversarial trade-offs, however, when negotiating a purchase/sale agreement parties should turn away from opposing positions. A good negotiation takes a more integrative approach, resulting in a deal that satisfies all parties.
The pitfalls of a distributive negotiation often appear when assessing risk, and negotiating the representations and warranties of an agreement. Often, a vendor will simply seek to limit the number and scope of representations and warranties as much as possible, while a purchaser will seek to do the opposite. This tactic will see parties negotiating against each other in a zero-sum game in which they compete for the smallest slice of a fixed "risk pie". There are, however, some qualifications that vendors and purchasers can use to shrink the overall size of the pie - limiting risk for both sides simultaneously.
Knowledge and belief
By qualifying a representation or warranty with language such as, "to the best of the vendor's knowledge and belief", parties can often arrive at an agreement. The vendor can be sure that they aren't taking on risk stemming from an unknown factor, and the purchaser can be provided with enough comfort to satisfy themselves on the issue. A knowledge and belief qualification can be further fine-tuned to shrink the total amount of risk by taking the often overlooked extra steps to further define the qualification. For example, parties can consider a vendor's obligation to investigate an issue, or specify the people whose knowledge is to be relied upon.
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