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How to negotiate a contract

How to negotiate a contract

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    Contracts are the life-blood of any business. 

    They are relevant to all areas of a business and can determine how successful the business will be. It is essential that they are properly negotiated. If they are negotiated well, the business owner has time to spend working on other parts of their business. If not, the business owner has devoted time and resources to managing the relationship between the business and the other party to the badly negotiated contract.  

    What is negotiation?

    Business negotiation is the process where members of two entities meet to discuss and agree the terms by which they want to conduct business with each other. This may be in the context of one business selling goods or services to the other business. The aim of the negotiation is to reach agreed terms, which ideally is fair on both sides and which both sides agree to.

    Do your homework

    Before starting a contract negotiation, it is important to know who you will be negotiating with. A business owner will be well advised to research the company it is to enter into a contract with and find out who the key individuals are, their responsibilities and whether they are the key decision makers in the business who have the authority to make decisions on behalf of the company. 

    Know what you want.

    Another key part of the preparation process is to know exactly what you want from the contract negotiation. If the business owner has a clear idea about what they want, both in terms of what is to be included in the contract and also what they want out of the relationship with the other company, it will make for more efficient negotiations. 

    Having a clear idea of the main objectives will also ensure that the parties do not go round and round in circles during the negotiation deciding what they want and being distracted by irrelevant issues.

    Another part of knowing what you want is knowing what you are willing to concede on. Any concessions (agreeing for a term not to be included in the contract) may help move negotiations along if they have stalled.

    Is there any commercially sensitive information?

    As part of the initial steps of a contract negotiation, it is worth considering whether there is any commercially sensitive or confidential information that will be involved in the parties doing business together. For example, if one company has a trade secret they want to protect or has other commercially sensitive information, that party may wish to consider using a Non Disclosure Agreement (NDA) to protect its confidential information. This will be relevant in the technology and manufacturing sectors where a company wants to make a new product and needs the manufacturer’s help to bring a prototype or the actual product to market. The NDA will set out the circumstances where this confidential information can be used and by whom. Download LawBite’s free NDA template to get started on your own Non Disclosure Agreement.

    The importance of the term sheet

    Contracts can often be lengthy and complicated. Whilst there are benefits to such contracts, small to medium sized businesses may not want overly long or complicated contracts. As such, a business owner can, as part of their preparation and the negotiation process itself, list the terms that it wants to be included in the final contract.

    This is called the Terms Sheet and it can be used as a skeleton upon which the final contract is based and also as a checklist to cross reference the final contract to make sure all the terms are included.

    The preparation of a Terms Sheet allows for the negotiations to be focused, for the business owner to confirm what they want from the contract and as a good starting point for the terms that are to be included in the final contract.

    Agree the terms

    The terms contained in the Terms Sheet can be used as a starting point. 

    The next step is for the parties to decide what form the contract will take – will it be terms and conditions for the sale of goods, will it be a more tailored contract for a one-off supply or will it be a framework style agreement that covers the relationship between the parties and where shorter work orders or a statement of work can be requested within that overall framework agreement.  

    The parties may not know the exact details of the transaction and so when negotiating the terms, it is important for the parties to consider the scope, requirements and specifications of the goods or services to be provided. The parties also need to consider their obligations under the contract; what is each party expected to do. The term of the contract is also important; how long is the business relationship to last. 

    Are there any options to renew the contract or to extend the contract? How much is the good or service to cost and how will payment be made are also vital parts of the contract negotiation process between the parties.

    As mentioned at the start of this article, the issue of any trade secrets or confidential information which is in the form of intellectual property is also important for the parties to consider. Does the intellectual property remain with one party or does the other party have a licence (permission) to use that intellectual property as part of the business transaction?

    Other key considerations are the protection of any customer data, the limitation of liability of the parties, how any disputes are to be dealt with, whether insurance is required by one party to the contract and how the contract is terminated.  

    Drafting and finalising the Contract  

    These terms are then to be included in the draft contract and this draft is then circulated between all the parties. The parties consider the draft and make any amendments. The easiest way for this to be undertaken is via track changes and if these changes are agreed, a new version of the contract is produced until all the terms are agreed and a final version is produced for signature by all the parties.

    In the event that the negotiations have stalled, the business owner may wish to apply commercial pressure to the other party by reminding them of their competitors and the ease by which they can agree terms with their competitors. This may encourage the other side to agree to the terms and start the negotiations moving again.

    About the author

    The author of this article is Andrew Farrugia.

    Andrew is a dispute resolution consultant solicitor at LawBite with experience in commercial and property-based meditations in an array of different sectors such as property, hospitality, insurance, shipping, travel, sports and media. 

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