Bargaining Power: How To Tell If You Have An Advantage In Contract Negotiations

Bargaining power is often discussed in terms of: who has more leverage? or who has the upper hand? Better said, a party has bargaining power if he/she has the ability to cause a preferred outcome in a transaction. In general, it can be the difference between controlling the entire transaction to terms of your liking and “having no other choice, but to sign the agreement.” There are many factors that can come into play, such as, time, money, influence, authority, etc., that can shift the bargaining power between the parties. Knowing when you have the upper hand is crucial when faced with the challenges that come with negotiating a contract.

In some transactions, the bargaining power is inherently in the hands of one party. For example, a landlord negotiating a lease with a new tenant is almost always in a far better position. This is true because the landlord owns the premises and is granting a short term possessory interest in the property that he/she can take back if the tenant fails to meet their obligations under the lease agreement. Furthermore, although the tenant may be able to haggle over the monthly rent (although quite unlikely in NYC), the Landlord always has the option of saying, “you don’t like these terms? go find another apartment.” The ability to control contract terms to this level gives landlords tremendous bargaining power.

In contrast, for contract negotiations meant to form a business relationship, the bargaining power could be on a level playing field; however, looking at the standing of both parties in the market and industry may allow for one party to gain a slight advantage over the other. There are almost an infinite number of factors that can shift the bargaining power between parties at any moment. For instance, if business #1 has a surplus stock of a product that business #2 is looking to purchase and sell, business #1 may have more power over setting the price per unit. However, something as unpredictable as a flood wiping out half of business #1’s stock, could now greatly reduce or eliminate it’s initial bargaining power.

Understanding the factors that give someone more bargaining power over another is important to knowing when you’re in a position to negotiate contract terms to your own benefit. Since the sources of bargaining power are quite endless, it’s impossible to provide every scenario. However, you can navigate the contract negotiation process, by first considering the power dynamics between the parties. Some questions you might ask yourself are:

Which party has the greater benefit of time and patience? If one party is in a position of urgency, they will lose their negotiating power.
Who is more financially stable or in a better position to withstand long, drawn out negotiations?
Does one party “hold all the cards” in the transaction? Think about the landlord/tenant example above. If one party controls a major element of the transaction, they will have more bargaining power.
Is one party in a position of authority (government agency, parental figure, etc.)? For example, if a business is facing settlement negotiations with the government over civil violations, they often have little to no bargaining power.
Does one party have greater influence over a market or industry? For example, Walmart has tremendous bargaining power over the companies that want to sell their products in their stores. Walmart sets the prices even if they are below market.
Does one party possess more information than the other or have a unique product/service? This gives that party a greater advantage because others are seeking out that information or product/service.
Is one party smarter or more educated than the other?
If an unforeseen circumstance occurs, who is in a better position to withstand the consequences of that event?
Which party is more level-headed and capable of setting aside their personal opinions and emotions from the negotiation process?
Does the nature of the transaction necessarily dictate an organic power dynamic between the parties? For example, an up and coming musician is offered a recording contract. In order for the musician to gain notoriety and fame, they will need the resources, money and power of the record label. This often causes the musician to sign away their rights to the music they create.

In the end, while these questions and factors are helpful in determining who has more bargaining power, the unstable nature of that power can result in an instant shift in favor of a party who previously had “no choice but to sign the agreement.”

Disclaimer: This blog post and similar posts are not to be considered as providing legal advice. The discussion here is meant for educational and informational purposes only and shall not create an attorney-client relationship with the readers of this content.