Give it a try

All too often a negotiator is told, by a risk controller who is seeking a preposterous term, well I'm not going to die in a ditch about it, but at least let's give it a try.

For example:

You have, at credit's insistence asked your client to indemnify you for your losses performing the contract. But what standard of conduct must you display before claiming on the indemnity?

Your risk officer suggests exclude liability under the Indemnity where the loss arises as a result of our gross negligence.

“'gross negligence? But surely no sensible client will accept that?” you say.

Your risk officer shrugs. “Perhaps so”. But why don’t we give it a try?

Let me tell you why.

The trade-off between “give it a try” and “will anyone object?”

Because asking for a legal term that a counterparty then objects to has an actual cost.

• “Will anyone object?” has an ascertainable, certain, upfront cost: the time and devotion of negotiation and, via the circle of escalation, risk management resources to resolve the client objection. You can clear it by:

• persuading the client to accept the term; or
• persuading your risk management team to live without it; or
• walking away from the negotiation all together.

In any case you incur some time and resource expense wherever the client objects, even if it immediately drops the point. The longer it takes to persuade one side or the other to back down, the more expensive the cost.

• The cost may be de minimis on a given negotiation. But with multiple objections per negotiation, across a portfolio, in a year, de minimis costs add up. That cost is the total cost to the organization of the onboarding process. That is not a de minimis cost - just ask the head of the documentation unit how often minions of the chief operating officer hungrily regard documentation unit with a view to offshoring, rightsizing, automating or otherwise eviscerating it.
• “Give it a try” has a delayed, remote and contingent benefit:

• Delayed, because the right, if you manage to get it, will only ever have any value at some point in the future (that is, when you get to exercise the right);
• Remote, because it is extremely unlikely, at any time, that circumstnaces arise whereby you would be entitled to exercise that right; (<1% of counterparties would ever be closed out);
• Contingent, because:

• it only has any value at all if we can persuade the counterparty to accept it
• even if we can, we don’t know

• whether we’d ever try in practice to exercise such a setoff,
• whether, if we did, it would be enforceable and
• whether, if we did and it was, there would be anything meaningful to set off against in the first place.

Where, as is usualty the case, the present value of “give it a try” is close to zero, then if the present value of “will anyone object?” is not zero, ten even giving it a try is not a rational move.

See also

• Circle of escalation
• Gross negligence