Whether it’s the current pandemic or simply a change in business needs, there are many reasons why a signed agreement may no longer serve the interests of a party. So, what can a company do when it finds that it is party to an agreement that no longer serves its interests? The answer is simple – it can renegotiate the agreement.
This answer may surprise many because people generally think that once an agreement is signed, it is final. In fact, renegotiating agreements is definitely possible, and it is a strategy I have successfully used on multiple occasions.
This strategy should, however, be used with caution. Time should be taken to properly negotiate agreements upfront to avoid the hassle of having to renegotiate later. Nevertheless, there are situations requiring agreements to be renegotiated.
Excessive financial burden
One reason for renegotiating an agreement is when one party is unable to meet the financial costs of an agreement. License agreements are one example where this can come up, but they are certainly not the only ones. Since license agreements often call for a number of different payments—including annual maintenance payments, reimbursement of patent prosecution expenses, milestone payments, and royalty payments—financial obligations on licensees can be immense. Luckily, with so many different possible areas for payment, restructuring payments such that they are more on the backend is often enough to help a cash-strapped licensee.
Change in business needs
Another reason for renegotiating an agreement is when one party is unwilling to meet the financial costs of an agreement, given its current needs and plans. In this scenario, the party is able to pay, but it might not make business sense to do so.
For instance, I worked on another license agreement in which the licensee changed directions in its development plan, and the licensed product was no longer the primary focus of the company. To the licensee, the license was a “nice to have” rather than a “must have.” Since having the license continue was more favorable than terminating it, the licensor was able and willing to agree to lesser financial terms.
By renegotiating the financial terms, the licensor was able to keep its financial stream alive, and the licensee was able to reduce its business expenses.
Unable to meet milestones
Another reason to renegotiate agreements is when parties are unable to meet agreed-upon milestones. This situation occurs in a variety of agreements, including license, research collaboration, and clinical trial agreements. What generally happens is that one party cannot meet the milestones set out in the agreement, and the parties must come together to revise the original agreement, assuming they want to keep it alive.
For example, in a license agreement, the development of a licensed product might have moved slower than expected, so the parties can agree to delay initiation of a phase I clinical trial and any associated milestone payments beyond the originally agreed upon date.
By renegotiating milestones, associated timelines, and costs, both parties can maintain an agreement without running afoul of its terms.
Poorly drafted original agreement
A final reason for renegotiating is when the original agreement is poorly drafted, which may create unnecessary confusion about a party’s obligations, place unintended obligations and/or liabilities on a party, or generate additional burdens for a party.
To illustrate this last point, I was involved in renegotiating a license agreement in which royalty payments to the licensor were not based on revenue generated by a licensed product but on revenue generated by the entire company. This meant the licensor would benefit from its licensed product as well as all of the products and services sold by the licensee company. As written, this agreement was unfair and likely not what was ever intended by the parties. Nevertheless, such language made it into the final executed version and was something with which we had to deal and amend.
Assuming both parties want to continue working toward the objective of the original agreement, renegotiating is an effective way to keep a relationship going while making its terms acceptable to both parties. When faced with the possibility of one party walking away and terminating an agreement, it is often in the interest of both parties to come together to find mutually agreed upon terms under which both are willing to continue.
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