Negotiating tips for contracts

Before you or your business enters into a contract, regardless of its form or purpose, you should seek legal advice. Your legal team will be able to negotiate the terms of the contract on your behalf and advise you of your liabilities under it.

Who is the other party to the contract?

The details of the contracting party will of course depend on whether you know them and have done business with them before. If you have not done business with them before then you should do a company check and ensure that you are contracting with the correct legal entity and not, for example, a subsidiary or a holding company. A company check will also highlight the contracting party’s financial stability which may give rise to further issues such as the need to obtain guarantees in the event of non-performance or poor performance.

The identity of the other party to the contract may also impact on various other provisions throughout the contract. There may be specific individuals who you want to perform the contract and you will also have to consider whether you are happy for the contracting party to sub-contract the work and/or pass the benefit of the contract to others. You will also have to consider whether you would be satisfied with any future change of ownership, for example, if a competitor took control of the contracting party.

What is the purpose of the contract?

The contract should clearly describe the goods or services as clearly as possible and no reliance should be placed on verbal discussions or representations. At this stage the contracting party’s obligations should also be considered.

Price and payment

Contractual disputes often revolve around price and payment. For example, is it a fixed sum? If not, how is the price going to be determined? Does it include delivery and / or installation? What methods of payment are acceptable? When is payment due? And so on.

What happens in the event of a dispute?

Despite every effort to ensure that the contract is watertight, consideration should also be given to what is likely to happen if something goes wrong and a well drafted contract will make provisions for dispute resolution which will save the parties costs in the long term.

The first step will be to identify all the possible loss that could flow from the contract. If the contract is to purchase goods then provision should be made to ensure that the seller is responsible for all consequential losses and that the same is not limited in anyway. On the other hand, if you are the seller, you will want your liability limited (to the extent permitted by law) especially as far as consequential loss is concerned as this could be difficult to quantify and could be a sum greater than the value of the contract.

Time

Thought should be given to whether the contract is time critical in anyway. Should the goods or services arrive or be performed by a specific date? If necessary there should be a timetable scheduled to the contract (particularly where payment is related to performance) and what penalties (if any) should be imposed for lateness.

Termination

Most contracts will include a termination provision and the details of this provision will vary depending on how long the parties wish to be tied to the contract. Most contracts will either be for a fixed term or will come to an end on notice. If it is the latter the contract should specify what constitutes appropriate notice. You may also wish to have a clause that allows for termination immediately following a fundamental breach, as otherwise you may find that your right to terminate is not a clear as you think, which in turn may mean you must continue with the contract and allow the other party the opportunity to remedy the breach. In many cases this i snot ideal – see more on the unclear position following breach in this additional post from Bradley.

Intellectual Property

The requirement for an intellectual property clause will of course depend on the nature of the contract. If one party is creating works specifically for the other then it should be clear who the intellectual property belongs to. This is important as intellectual property can be a valuable asset to any business.

Battle of the Forms

Most businesses will look to enter into a contract on the basis of their own standard terms, which will of course be drafted in favour of that party. If your terms conflict with that of the contracting party you need to be satisfied that your terms apply over theirs.

Particular care should be taken when handling purchase orders and delivery notes as these will often have that party’s terms enclosed and by singing the purchase order or delivery note you may be accepting the other party’s terms.