Introduction
Pacific Oil Company had entered into a contract with Reliant Chemical Company of Europe in October 24th, 1982 for the supply of Vinyl Chloride Monomer (VCM). The contract was initially written to run for five years ending in December 1987 with minimum quantities to be supplied being capped at 150, 160, 170, 185 and 200 million pounds for the five years starting from 1983 to 1987 respectively. Other conditions of the agreement stipulated that the product was to be metered at from the Pacific Oil side, and invoices raised using the same quantities with an allowance of 0.1% for losses. Failure of the buyer to buy at least more than 10% of the designated quantities every month led to a fine, and the buyer was also obligated to the provision of the anticipated quantities demanded. The contract ran smoothly in its first two years, so good that Jean Fontaine, the Pacific Oil Marketing Vice-President in charge of Europe and Paul Gaudin, the VCM marketing manager, deliberated on igniting negotiations for the extension of the contract, three years from the expiry date. Then challenges started trickling in from the Reliant Chemical Side.
Problems during negotiation
Both parties expressed willingness for the extension of the contract, but Reliant Chemical Company of Europe was adamant on several fronts. First, given the changing market dynamics and the entry of other companies, the price of VCM might go down, making it expensive for Reliant to manufacture its products. That would put the company in a poor position in the market as it would make it lose out on major customers. On the other hand, for Pacific Oil, losing Reliant Chemical as a customer would be very costly, as getting another client who would buy more than 100 million pounds of VCM would be very hard. Zinnser, the vice president for Reliant, proposed a change of the formula coefficients. Gaudin and Fontaine realized that Zinnser’s proposal would make Pacific Oil lose 2 cents per pound, an effect that would be unsustainable. After a series of meetings and communications, the two parties agreed to change the formula coefficients in a way that reduced the price of the VCM by one cent per pound, meeting middle way.
The second challenge fell on the length of the contract. Reliant Chemical noted that the unpredictable nature of the market made them hesitant on long-term contract engagements, as that might expose them to the changes in demand and other market fluctuations. While the Pacific Oil representatives understood that, they were surprised by the sudden turn of events, and once again, both parties negotiated to extend the contract for a period of three years, to December 31st, 1990. That contract extension was not the only issue, as Reliant also expressed reservations on the minimum amounts of VCM they would take yearly. The estimation by Fontaine and Gaudin was that, based on the existing contract, the minimum volumes would rise from 200 million pounds (at the end of the existing contract) to 220 million pounds in the first year of the new contract, then rise 240 and 265 million pounds in year two and three respectively. On the other hand, Reliant Chemical stressed on the need to freeze the minimum volumes at 200 million pounds in the first two years of the contract, then increase to 210 million pounds in the third year. After negotiations, Reliant agreed to increase the estimates to 205, 210 and 220 in the three years, respectively.
Time was running out and in December Fontaine and Gaudin flew to Brussels to finalize on the contract negations and wrap up the process. However, new technicalities arose, as Zinnser cited an issue with the measurement of the product, saying that Reliant Chemical did not receive the same amount of liquid that it was billed for. The possibilities were that the pipes were faulty (hence leaked the product), but it was the first time a client was raising such a complaint. Reliant proposed that Pacific Oil installs meters directly outside its plant, and bill for the amount of product that was measured from that meter. Fontaine noted that complying with the demands of Reliant Chemical would be very expensive to Pacific Oil, and it would also interrupt service provision. After lengthy negotiations, Pacific Oil agreed to re-meter the pipes.
Lastly, in January 23rd, 1985, when almost all the issues had been concluded and settled, Reliant Chemical came up with new requirements to adjust the language of the contract. Zinnser demanded that Pacific Oil inserts the ‘favored nations’ and the ‘meet competition clause.' In the first clause, if Pacific Oil agreed to supply a client with VCM at a lower price than the one agreed with Reliant Chemical, then the price of the contract would be adjusted to that lower price. The second clause meant that Pacific would adjust prices to the lowest in the market, especially if a different supplier offered a less price. In addition to these issues, Reliant Chemical demanded a right to resell the amount of VCM that they did not use.
Effectiveness of the Messrs
Fontaine and Gaudin
The representatives of Pacific Oil are futuristic and modest. First, they decided to start the contract discussions in good time to avoid last minute interventions and deadlocks. They are also forward-looking, as they noted the product demand in advance, and planned on ways to gain an advantageous position in the market. The two men are also very good at anger and disappointment management, as they rise from every single roadblock erected by the representatives of Reliant Chemical. These characteristics made them solve most of the issues that arose in the one year of negotiations before Reliant Chemical demanded a resale agreement, an act that frustrated Fontaine (Brooks, 2015).
The two gentlemen are great negotiators; they understand the importance of the deal to Pacific Oil, and the need to agree on the basics with Reliant Chemical. They have worked hard to ensure that the ongoing contract was good to both sides and, in an attempt to manage a fluctuating demand and increasing competitiveness, they are willing to cede ground in the negotiations. However, they find themselves at the back foot a little too often a factor that can be blamed on the stubbornness of Zinnser and Hauptmann.
Zinnser and Hauptmann
The gentlemen from Reliant Chemical are not only witty but also treacherous. They understand the importance of the deal to Pacific Oil, and they keep using intimidating techniques to get as much as they can from the deal. Zinnser, for instance, is very wary of the future position of his company in the market and understands the importance of reducing uncertainty as much as possible. The methods are very effective as they keep Fontaine and Gaudin on their toes, ensuring that they exploit every single avenue (Schonewille & Merks, 2011). Though the contract hangs in the balance, Zinnser knows that he has alternatives in the new companies that were looking for a portion of the market, and would do anything to knock Pacific Oil off the perch.
Frank Kelsey Recommendation
Frank should recommend that Fontaine accepts the new terms of the contract. However, he should do so with some reservations that will protect the interests of Pacific Oil. For example, instead of the resale agreement, the two companies should evaluate the demand of Reliant Chemical on a month to month basis to avoid over-supply by ensuring that Pacific Oil tops up the deficit required to meeting the production targets in a given month. Other clauses should be inserted to protect the pricing of the VCM by ensuring that Reliant Chemical does not negotiate with competitors within the first two years of the contract. The main focus in the deal should be to clinch the contract and hope that the market conditions will improve in the medium term.
Conclusion
Contract negotiations are characterized by long procedures and series of meetings. It is very important for the teams involved to avoid panicking or succumbing to intimidation. Backing decisions and arguments with hard evidence and data is very important as it enables a party to gain an upper hand. However, in a situation that one of the parties becomes overly aggressive, the other party should stand its ground, or opt out of the deal.
References
Brooks, A. W. (2015, December 1). Emotion and the art of negotiation. Retrieved July 3, 2016, from Negotiations, https://hbr.org/2015/12/emotion-and-the-art-of-negotiation
Schonewille, M., & Merks, F. (Eds.). (2011). The secrets of gaining the upper hand in high performance negotiations: Vol. 2. Training “high performance negotiation” by Chris T. Voss (result in Adr negotiation Institute series). United States: Maklu Pub.
