In our last discussion, we established that the flexible, non-binding nature of most negotiations is a primary source of their power. But what happens when the situation demands a higher level of commitment? What if you need concrete assurance that the other side is genuinely prepared to invest time and resources in a good-faith dialogue, not just feigning interest as a delay tactic?
Enter a sophisticated and often-overlooked tool in the negotiator’s kit: the contract to negotiate.
As a business owner, you live and breathe contracts. They are the scaffolding that supports your commercial relationships. You use them to formalize everything from sales and service agreements to employment and lease terms. It may seem counterintuitive, then, to apply this rigid structure to the fluid process of negotiation. How can you “contract” to have a free-flowing discussion? What would such an agreement even require?
This is a nuanced concept, but understanding its application can provide a decisive strategic edge in a complex business dispute. Let’s demystify the contract to negotiate and explore how it can be used to bring a reluctant party to the table and, more importantly, keep them there in good faith.
Clarifying the Distinction: “Contract to Negotiate” vs. “Agreement to Agree”
First, we must draw a bright line between a contract to negotiate and its unenforceable cousin, an “agreement to agree.” You cannot create a legally binding contract that forces the parties to reach a final settlement. The law rightly recognizes that you cannot compel a “meeting of the minds.” A contract that simply states “we agree to agree later” is typically worthless because the essential terms of the ultimate deal are still undetermined.
A contract to negotiate is an entirely different creature. It is a binding agreement that obligates the parties not to a specific outcome, but to a specific process. That process is the act of negotiating in good faith. It does not guarantee a settlement, but it does guarantee a sincere and concerted effort to achieve one.
Consider this analogy: if you engage an architect, you cannot contractually bind them to design a building that will win a prestigious award. That outcome depends on too many subjective and external factors. However, you can create a binding contract that requires them to produce a set of blueprints, to meet with you regularly, to incorporate your feedback, and to apply their professional skill and judgment in good faith. You are contracting for their diligent effort, not for a guaranteed prize.
A contract to negotiate operates on the same principle. The parties are not promising to settle their dispute. They are promising to try to settle it, and to conduct themselves honestly and constructively throughout the process.
A Landmark Lesson: Copeland v. Baskin-Robbins U.S.A.
To see how a contract to negotiate works in the real world, we can look to a pivotal California case that I frequently reference when counseling my own clients: Copeland v. Baskin-Robbins U.S.A.
The facts are straightforward but illustrative. A potential buyer, Copeland, entered into negotiations to acquire an ice cream manufacturing plant from Baskin-Robbins. A crucial condition of the sale was that Baskin-Robbins would then purchase the ice cream produced at the plant under what’s known as a “co-packing agreement.” The parties exchanged a letter in which Baskin-Robbins agreed to move forward with the sale and to continue negotiating the terms of this co-packing deal. Copeland accepted.
Subsequently, Baskin-Robbins, citing a change in its corporate strategy, abruptly terminated the negotiations. Copeland sued, not for the loss of the final deal, but for the breach of a contract to negotiate the co-packing agreement in good faith.
The California Court of Appeal, in a landmark decision, sided with Copeland. The court carefully distinguished the binding contract to negotiate from a vague, unenforceable “agreement to agree.” It recognized a crucial business reality: when parties invest significant time and money in complex negotiations, they need to be able to rely on the other side’s commitment to the process. The court found that Baskin-Robbins’s letter and Copeland’s acceptance had indeed created a legally enforceable contract to negotiate in good faith.
This case provides a powerful precedent. It confirms that you can have a legal right to the other party’s sincere participation in the negotiation process itself, even if a final settlement remains elusive.
Defining “Good Faith” in Practical Terms
If you sign a contract to negotiate, what does the legal requirement of “good faith” actually obligate you to do? While there isn’t a single, exhaustive checklist, the concept of good faith in this context has been consistently interpreted by courts to include several core duties. A party acting in good faith must:
- Actively Participate: You cannot simply sign the document and then ignore meeting requests or refuse to engage. You have a duty to show up, to listen, and to participate in the dialogue.
- Maintain Honesty in Dealings: While you are not required to reveal your bottom line or your entire legal strategy, you cannot engage in deception. You must be truthful in your factual representations.
- Give Genuine Consideration to Proposals: You cannot adopt a “take it or leave it” posture from the outset or summarily reject the other side’s proposals without meaningful consideration. You must have a rational basis for your negotiating positions.
- Refrain from Sabotaging the Process: Good faith prohibits unfair tactics like stonewalling, making unreasonable demands at the eleventh hour, or attempting to renegotiate terms that have already been agreed upon.
In short, acting in good faith means you are genuinely trying to find a path to a deal, even if you ultimately cannot agree on the final destination. A failure to agree is not a breach. A failure to try in good faith is.
Practical Application: When and How to Deploy a Contract to Negotiate
Now for the practical questions: When does it make sense for a business owner to use this tool? And what should it contain?
I generally advise clients to consider a contract to negotiate in circumstances where:
- The Dispute is Highly Complex: For multifaceted conflicts with numerous interdependent issues, a contract to negotiate can provide a structured roadmap and a clear set of ground rules for the discussions.
- A Power Imbalance Exists: If you are a smaller entity negotiating with a much larger corporation, a contract to negotiate can act as a leveling mechanism, compelling the larger party to take the process seriously.
- Significant Upfront Investment is Required: If you must invest heavily in expert analysis, market research, or other due diligence simply to prepare for the negotiation, a contract to negotiate offers a degree of protection for that investment, as was the case for Copeland.
- Trust Has Been Compromised: When there’s a deep history of mistrust between the parties, a formal agreement to negotiate can serve as a “commitment device,” forcing both sides to adhere to a mutually agreed-upon code of conduct.
Should you opt for a contract to negotiate, it is imperative that it be drafted by an experienced business litigation attorney. A robust agreement should clearly define:
- The Negotiation’s Scope: What specific issues will be addressed?
- The Timeline: Establish clear start and end dates, as well as key milestones for the exchange of information and proposals.
- The Procedural Rules: Will a mediator be used? How will confidential information be handled?
- The “Good Faith” Standard: While you can’t foresee every possible scenario, you can outline specific expectations for constructive behavior.
Understanding the Remedy for a Breach
What is the consequence if the other party breaches a contract to negotiate? This is a vital point of clarification, as the available remedy is often misunderstood.
You cannot sue for the profits you hoped to gain from the final, unrealized deal. Courts deem these “expectation damages” to be too speculative, as there was no guarantee a deal would ever have been struck.
Instead, the remedy for a breach of a contract to negotiate is “reliance damages.” This allows you to be reimbursed for the out-of-pocket expenses you incurred in relying on the other party’s promise to negotiate in good faith. These recoverable costs can include:
- Attorney’s fees incurred during the negotiation phase.
- Fees for expert consultants or accountants.
- Travel and other direct expenses.
In some limited circumstances, you might also recover for “lost opportunity costs”—demonstrable, profitable opportunities you forwent in order to pursue the failed negotiation. Proving such costs, however, presents a high evidentiary bar.
The crucial takeaway is that a contract to negotiate is a shield, not a sword. It protects the process of negotiation, not the outcome. It provides a remedy for a breach of good faith, not for the failure to reach a settlement.
The Strategic Bottom Line
The contract to negotiate is a sophisticated instrument, and it isn’t necessary or appropriate for every dispute. But in high-stakes situations that demand a structured, committed, and fair process, it can be an invaluable asset. It can provide the framework needed to bring a resistant party to the table and ensure they engage constructively. It offers the security needed to invest fully in the process of finding a resolution.
If you are facing a complex business dispute and need more than a simple handshake to initiate a meaningful dialogue, a discussion with your attorney about the strategic use of a contract to negotiate is a wise investment. It’s a powerful method for not only getting them to the table, but for ensuring they play by the rules once they are there.