Ascent Consultants

There are often terms/concepts within draft agreements originating within the USA which are not as relevant to a Japanese corporation or which are very difficult for a Japanese corporation to meet due to cultural and legal differences. Japanese firms often agree to these requirements not fully realizing the commitment they are making, the resources that will be required in order to comply and/or the legality of the language under local laws and regulations. These include but are not limited to:

• Very specific insurance requirements
• Background and credit checks into employees
• Formal training programs for the company or other parties’ employees
• Anti-terrorism and security requirements
• Exhaustive business continuity and disaster recovery plans

US firms often require Japanese partners, suppliers and associates to maintain various types of insurance. In fact the list of requirements can often seem daunting to Japanese companies. Japan-based firms need to be careful since the types of coverage available may differ and it may be difficult to acquire English Insurance certificates which meet stated requirements 100% without increasing costs considerably.

While background checks, credit checks and checks into past criminal behavior may be common in other countries these are difficult if not impossible in Japan due to legal restrictions.

Formal training may be very important in Western countries and organizations, but most Japanese companies don’t have formal training and development organizations and may not be able to comprehend the expense involved in setting these up.

Many security requirements may seem ridiculous to Japanese corporations given the expense and programs such as C-TPAT may not allow certification of Japanese companies. This should be verified prior to agreement.

Business continuity is a concept which is just starting to catch on in Japan. In the USA it may be a selling point for some corporations to tell their customers they have “full redundancy”. But these same corporations may not understand how difficult it is to acquire second or third suppliers for specialized components or to operate an addition plant as a backup in case of disaster.

Blindly agreeing to such terms without performing adequate research and gaining legal counsel could create a lot of headaches for the company as the requirements may be costly are may also increase in the future.

American companies will often utilize a range of tactics to gain a more favorable position and result. This is not necessarily a bad thing, but Japanese corporations need to be able to identify such tactics for what they are and react appropriately. Some tactics are used more when a Japanese (presumably non-native speakers of English) company is involved.

In particular, Japanese companies should not react to the other parties demands or insinuations such as the following:

• Claims that the contract/policy/language under discussion is a standard which is used throughout the organization.
• Claims that the contract/policy/language under discussion is standard in the USA, U.K etc.
• Claims that a particular term, phrase or section is “just a definition” and therefore unimportant.
• Claims that a term or phrase is unimportant due to lack of enforcement in the past.
• Demands for the negotiations to be wrapped up in an unreasonable time period due to some irrelevant event such as the upcoming summer vacations or a visit to Japan by the other party’s management.
• Summons of the company’s management to visit the other party “to finalize” or “move forward” at an unreasonably early period in the negotiations.
• Claims stating that other partners/suppliers/developers/companies have already signed the exact same agreement and had no issues at all with it.
• Claims that the company lawyer must agree to all terms before the contract can be signed.

All of the above and their variations are common negotiating tactics used by many Western firms.

It may seem unusual that Ascent is recommending Japanese Companies to focus long term, since this is a well known cornerstone of Japanese business practice. In Japan, business relationships often take years to build and Japanese companies are usually considered patient compared to foreign counterparts. Yet this can be both a strength and a weakness.

There is a danger that poor negotiation of a contract may create negative precedents affecting the company’s relationship with the other party and setting negative precedents for future contract negotiations.

If, on the other hand, the company is polite, fair and unwavering in insisting that each term be reasonable this will create a positive precedent for all future negotiations between the parties. Hopefully this will result in more balanced and favorable (as opposed to the most aggressive and one-sided lawyer’s drafts) drafts being forwarded in the future. At the very least the company’s behavior and attitude regarding the current contract under negotiation should send a clear message to the other party that:

• The company will not fall for common negotiating tactics
• The company will negotiate every term until considered fair
• The company will take as much time as deemed necessary to conclude negotiations in a mutually beneficial manner.

The company should always negotiate for the long term. This means thinking about the impact this particular contract negotiation is going to have on future business, future contract negotiations and the relationship between the parties. Being direct, open and fair is the best way to build the relationship and gain respect. Being timid and agreeing to unfair terms creates a very negative precedent.

American companies understand the importance of being proactive and providing draft contracts first. If possible, it is always better to provide the company’s basic agreement as a draft for negotiations than to await the other party’s draft. This action alone can provide great advantages to the proactive party throughout the negotiations as it allows you to structure the agreement based on your priorities and with terms most beneficial to you. It may even set a precedent for future negotiations since the party receiving the initial draft will assume henceforth that the initial drafts will be issued in the same manner.

If the company does not have template agreements drafted in English then it is advisable to do so immediately. This will allow the company to be proactive, flexible and responsive.

If forced to work from the other party’s draft, then there are several key issues that need to be addressed. Primary amongst these is the need to address ALL issues in the draft. While many Japanese negotiators may be tempted to just focus on the “main issues” and choose the top ten most objectionable clauses to negotiate, this is an error which plays into the hands of the American company’s lawyers.

Do not treat the other parties contract as standard with some revisions required. Forwarding a draft agreement with very aggressive terms (asking for much more than they think they can get in order for the final compromise to be more favorable to them) with the intention of frightening the other party off from negotiating all of them is a common negotiating tactic.

Do not be intimidated by such behavior. If the draft contract contains 55 unfair terms, the company should revise all of them. If it takes one hour or one year, no unreasonable term or issue should be allowed to pass by. If the company is intimidated, lazy or lacks commitment these unfair terms may become default language for future contracts and/or renewals.

In our experience, Japanese corporations are usually highly risk-averse do their best to avoid any kind of aggressiveness or confrontation. Such negotiating techniques may well be seen by the average Japanese as unnecessary, disrespectful and potentially damaging to the long term mutually beneficial business relationship which is usually the goal of both parties.

It is not difficult to find material in English relating to Japanese negotiation style and advice for Western companies on how to negotiate effectively with the Japanese. Many books and articles have been written on these topics by both legal and Japan specialists. But since Ascent is Japan-based and most of our clients (more than 80%) are Japanese corporations, we would like to take a look at the negotiation process from the perspective of a Japanese corporation either building a new relationship from scratch or renewing/re-negotiating a current contract.

In providing some negotiation tips which focus on how the Japanese company can better negotiate with foreign counterparts Ascent hopes to provide some value and insight to our Japanese clients which we hope will be useful to them in future negotiations.

Some of the tips provided will be relevant to both negotiating parties, while some will cover only one side. Obviously the relevance of each suggestion will vary depending on the participants to the negotiation and a host of other factors such as available negotiation time and the origin of the other party.