Practical Solutions: Part 5

This is the second in a series of posts on managing transaction legal cost.  In the previous post, I listed what I see as the two primary components driving legal cost: “Deal Complexity” and “Negotiation Intensity.”  This installment introduces the concept of “Negotiation Intensity” which has a greater impact on the total legal bill than even the complexity of the deal itself.  I have worked on deals and negotiations of all sizes and of varying degrees of complexity, and I learned a few important lessons along the way that I would like to share with you…

Lesson #5:  The Critical Role of Negotiation Intensity  

I recently finished a book called Emotional Intelligence by Daniel Goleman, which I highly recommend to anyone interested in leadership and employee development.  The book explores the impact of “EI” in various aspects of our personal and professional lives but his central thesis is that EI is a much better predictor of success than IQ.  Many of the same fundamentals of EI cited in the book – self-awareness, self-management, social awareness and the ability to manage relationships – also factor into how I would define “Deal Intelligence.”   “Deal Intelligence” is a combination of experience, the ability to self-regulate, the ability to manage team members and the ability to adjust one’s  approach to a negotiation based on  the goals and the personalities of the people involved in the deal.  Lawyers often think of this as the ability to focus only on the important legal points and not spend time negotiating the less important points, but that skill only partially explains a lawyer’s success in managing cost. 

“Negotiation Intensity” is a function of three separate but interdependent factors: The  Deal Intelligence of the lawyers, the Deal Intelligence of the principals to the transaction, and the relative level of “balance” in the initial set of draft documents.   

Hiring a lawyer with a high level of Deal Intelligence goes a long way toward mitigating Negotiation Intensity and keeping legal costs under control but the Deal Intelligence of the lawyer on the other side also plays a significant role in whether or not the negotiation becomes “heated” and protracted.   You can have a lawyer on the other side that is highly experienced but temperamental and tone-deaf to the client’s goals and the dynamics of the other side.  I came upon this type of lawyer at a recent negotiation of a limited liability company agreement, where opposing counsel was tactically brilliant but so difficult to deal with that he was eventually fired by his own client for his numerous “blow ups” over the phone.  Another example of Deal Intelligence is an inexperienced perhaps junior lawyer that is highly attuned to the client’s needs and able to adjust to the personalities of the people involved.  The higher your lawyer’s Deal Intelligence, the lower opposing counsel’s Deal Intelligence can be and still result in a lower overall level of deal negotiation and legal cost.   Conversely, if your lawyer has a low level of Deal Intelligence but the other side has a high level of Deal Intelligence, your legal bill will be higher as your lawyer chases phantom issues or continues to argue in a futile quest to get you the deal you had all along. 

The perfect situation is one in which both lawyers have a high level of Deal Intelligence, that is, where both counsel have the experience to focus on the important points and the emotional self-control to avoid negotiating out of anger or deal fatigue.  The result is negotiation that moves quickly and a greatly reduced legal bill for both sides.  This happened to me recently in negotiating a complicated sale of a restaurant building where the tenant’s operations were impacted by the COVID pandemic.   Both of us were able to articulate our client’s needs while truly understanding the needs of the other side, and both of us were able to apply “market” compromises to several thorny issues involving allocation of risk.  The result is that the entire agreement was completed in three drafts and at a fraction of the cost that an agreement of similar complexity would have generated. My experience is that, if the lawyer drafting the initial set of transaction documents has a high degree of Deal Intelligence (especially if he knows that opposing counsel is also experienced), he will understand the importance of producing a relatively balanced set of initial draft documents.  Avoiding a strongly one-sided document greatly streamlines a negotiation.    The party that drafts documents already enjoys an advantage in the favorable way the terms are framed in an agreement.  Trying to extend that advantage by creating an “unfair” document will only create mistrust between counsel at the onset, leading to numerous phone calls and drafts in order to bring the document back to the “middle” where both sides feel protected.  In my view, the marginal benefit you might get out of starting with a document drafted strongly in your favor isn’t worth the loss of time and increased legal expense that both parties will almost certainly incur.

I’ve found that getting deals done is mostly about using common sense, creativity and people management skills and much less about actual lawyering skill. Finding that critical path toward a successful closing is the ultimate goal but that path is not always well marked.

Stay tuned for Part 6 of this “Practical Solutions” series, Your Negotiation Intensity Matters