What is a Pre-Negotiation Agreement? Good Faith

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Mohammad Hamdan
Russian Federation

What is a Pre-Negotiation Agreement? Good Faith

🔥NEW Negotiations should be based on the principle of "good faith" (reflecting that it should be built on an ethical basis and on ethical behavior by both parties).
That may seem logical, but one day you may find yourself sitting at a negotiating table in good faith, and passing information to the other party, and then you are surprised that your counter-party quickly terminates the negotiations (sometimes even without warning), and contracts with some other, third party. Not only that, but the information you provided earlier on becomes available in the market for other parties and you find yourself and the company that you represent the biggest losers as a result of this way of ending the negotiations end behaving in this unethical way.
To avoid this situation, agreeing beforehand to negotiate in certain ways is considered as one of the most important means to secure protection for yourself and the company you represent, especially when negotiating a contract of great financial importance or when therelated to any strategic "know-how" that must be kept confidential.
Below we will review the definition of a pre-negotiation agreement (also referred to as "negotiation agreement") and the obligations that typically result from it.

Pre-Negotiation Agreement. Definition

A pre-negotiation agreement is a legal contract (typically in the form of a written document) whereby each party commits to enter into negotiations in good faith to conclude a subsequent contract whose terms and elements (basic and secondary) have not yet been determined.

Obligations in a Pre-Negotiation Agreement. Clauses

Given the considerable procedures and many stages involved in the negotiation process, and due to the lack of good faith of many negotiators, it is preferable to write the negotiation contract in detail, including the specific obligations of the parties. The most important of them are normally:
  1. ENSURE CONFIDENTIALITY
    One of the most important principles of trade contracts, specifically international trade, is the commitment to confidentiality of information provided during negotiations. Always try to include in the negotiation contract a condition that binds you and the other party to the confidentiality of the information announced during the negotiation stage. Confidentiality takes various forms; it may be tax secrecy, professional secrecy, bank secrecy, administrative secrecy, and/or business secrecy, as these types of confidentiality play an important role in many areas such as the competitive field, economic strategies, not to mention the confidentiality of "know-how" related to a specific technology in different industrial or commercial fields.
  2. INFORM THE OTHER PARTY
    It is also called the "Obligation to Disclose", according to which each contracting party is obligated to inform the other party of all the information, data and facts related to the subject of negotiation.This is in order to avoid one of the parties accepting the contract, without having good knowledge of the subject of the contract, its nature, or even the character of the other contractors and their capabilities, which affects the validity of the contract, results in the avoidance of the contract and may cause great losses that can not be avoided.
  3. BROADCAST CONFIDENCE
    Raising doubts in the negotiation stage dissipates confidence in the dealings between the negotiating parties. Such suspicion afflicts one of the parties if she/he feels that the other party is not serious or that her/his sitting at the negotiating table is for spreading publicity or studying the market. Therefore, make sure that the negotiating contract stipulates the necessity of preserving the confidence required, by refraining from taking actions that may undermine the confidence, such as spreading false hopes that increase the ambitions of the other party. The obligation to broadcast confidence also includes not withdrawing from the negotiation or severing it in an arbitrary and sudden manner, especially when the negotiation approaches its final stages.
  4. PROHIBIT PARALLEL NEGOTIATIONS
    This obligation means not to conduct parallel negotiations with third parties regarding the same deal without informing the other party. That is considered a sign of bad faith, because when one of the parties pursues negotiation and in the same time looks for another contractor, that means that she/he has no intention of reaching an agreement from the beginning. The negotiating parties cannot be responsible for such an obligation, unless it was clearly and explicitly contracted through the negotiation contract. For example, such a term could be used in contracts in which one of the parties is a public authority willing to bring in a certain technology, and according to which a financial sum is allocated to this party, as a compensation of the commitment not to negotiate with a third party that may present a better offer.
  5. RESOLVE DISPUTES BY ALTERNATIVE DISPUTE RESOLUTION WAYS
    Although the negotiation agreement is a preliminary contract, like any other contract it may result in disputes between the parties as a consequence of breaching contractual obligations. That requires resolving the dispute quickly to avoid the damages increase a lot. because of this, it is often preferable that the negotiation agreement includes a term for resolving disputes arising from it through alternative ways (negotiation, mediation, arbitration).
References:
Charles B. Craver (2010), "Effective Legal Negotiation and Settlement", p. 148
J. Alexander Tanford (2000), "Basics of Negotiation", p. 19

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