At any given moment in the negotiation of a contract—or in the settling of a dispute—the two parties may be more (or less) predisposed toward concession.  Each party’s willingness to compromise is not flat or linear.  It is ever oscillating at different wavelengths.  The following figure illustrates this concept:

From one week to the next, each party’s perspective on settlement varies, bringing them closer together or further apart.  Understanding this pattern is particularly important for energy dealmakers because their negotiations often last several months.  Timing can make a difference.

Much of negotiation theory focuses on the actions one party can take to trigger concessions.  Some of these are carrots (e.g., offers of immediate cash) or sticks (e.g., threats).  Others are in the nature of persuasion, such as explaining why the other party’s understanding of the facts (or law) is simply wrong—or at least unlikely to prevail in court.  All of these actions can potentially influence the counterparty, although sometimes they cause movement in the wrong direction.  Offers of money can be perceived as weakness, bolstering the other side’s confidence.  Threats can provoke anger, leading to distrust, defensiveness, and retribution.

Negotiators who are too focused on their own actions sometimes miss how unrelated events may be influencing their counterparty.  These include:

• Internal Politics. Managers at large companies are under varying levels of pressure to achieve a deal or resolve a dispute.  The boss may demanded results.  Bonus determinations may be imminent.
• Change of Personnel. Changes in personnel often cause oscillations.  If the successor has inherited a pre-existing problem, he or she may want to settle it quickly—attributing the cost to the predecessor.
• Financial Distress. Financial distress tends to move counterparties toward conciliation.  The company may need the new deal to survive, or it may want to stem the flow of legal fees.
• Sale of Company.  The current owners may be willing to accept worse terms in preparation for selling the company—at the expense of long-term erosion of value (that will be someone else’s problem). Disputes also need to be resolved, as they can scare off potential buyers.
• Going Public. Similarly, planned IPOs can cause a counterparty to be more amenable to compromise.  For example, material disputes must be disclosed on public filings.

The following figure illustrates how such factors can predispose a party toward concessions:

Imagine two people holding opposite ends of the same rope.  It’s easier to pull the other closer if he or she is moving (or leaning) toward the middle.  If the other person is pulling in the opposite direction, it’s much harder.

Negotiators must be good listeners and keen observers, always being sensitive to changes in their counterparties.  If one detects that something has caused the other party to shift toward resolution, that is the time to pull hardest.  Pulling hard usually means making reciprocal concessions, which tend to accelerate the matter’s conclusion.  There is no better time to close a deal than when the adversary is moving in your direction.

The best and most experienced negotiators can sense such moments.  They may discover them in a change of tone (in voice or text), by a sense of urgency in scheduling, or in the substance of proposals.  The last thing a negotiator wants to do is miss such an opportunity and discover that the counterparty is moving away again.  As Thomas Hobbes said in Leviathan, “Hell is truth seen too late.”

About the Gaille Energy Blog.  The Gaille Energy Blog discusses issues in the field of energy law, with weekly posts at http://www.gaillelaw.com.  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of two books on energy law (Shale Energy Development and International Energy Development).