Five Key Steps To Successfully Negotiating A Commercial Contract
Ensuring your commercial contracts work for you is a key part of business success.
To get the terms you desire requires three essential elements:
a) a precise knowledge of the terms needed to ensure you meet your commercial objectives
b) expert drafting of those terms, and;
c) the confidence to negotiate
This third requirement often catches even the most confident business people out: confidence.
However, every human being is a born negotiator; you negotiate in every area of your life. From a child promising to clean their room in exchange for the latest video game to workers asking for a more flexible deadline, few of us have days where we are not subtly working on getting our own way.
Commercial Contracts Psychology
Therefore, the only reason negotiating a commercial contract may seem intimidating is that:
a) there is money involved, and
b) you probably believe the person on the other side of the negotiating table is smarter/richer/more able to walk away from the deal than you.
Thankfully, none of these factors are usually true. But there are ways you can strengthen your position and improve your chances of creating a win-win situation.
Whether you are dealing with a commercial lease, contract for the purchase or sale of a company or business, or a commercial trading agreement, here are our five key tips for successfully negotiating any commercial contract:
1. Draft A Comprehensive Head Of Terms
A ‘head of terms’ (also referred to as a ‘term sheet’, ‘letter of intent’, or ‘memorandum of understanding’) is a document which sets out the core terms a party sees as forming the main part of the contract.
For a low-value, simple contract, the heads of terms may be contained in an email chain and never formulated into a document. But heads of terms are essential for larger deals, such as joint ventures or business acquisitions.
A head of terms will usually be marked ‘subject to contract’. However, certain elements can be legally binding, such as confidentiality and exclusivity clauses and provisions stating a party must pay the other’s costs should they leave negotiations early.
The advantage of creating a head of terms is that it allows parties to a contract to set out the critical clauses on which to focus their negotiations in advance.
In addition, a head of terms document provides clarity for negotiations. It avoids any miscommunication or misunderstanding that can otherwise occur through verbal and informal email or online discussions.
However, a common mistake is to spend so much time negotiating the heads of terms that this eats into the time available to negotiate the contract itself. It’s a balancing act between doing enough so the key terms are clear and doing too much to the detriment of the other documents.
2. Make Sure All The Legal Details Are Included In The Drafting
Some people can be so eager to close the deal that they forget to ensure that all the legal elements of a contract are included.
For example, it may sound dull to have to stipulate which jurisdiction will apply in a cross-border agreement. However, if a disagreement develops, this little detail can save a small fortune in legal costs to establish which country’s courts should hear the dispute.
Other elements to include in the initial agreement are what currencies will apply to the deal, what warranties and indemnities will be included, and a dispute resolution clause which sets out the steps for resolving disputes outside of court.
3. Don’t Try to Overly Simplify Documents
One of the critical issues we see after contracts have been formed is disputes arising from documents which contain some key details but miss out others.
Typically, when asked why items have been left out, the reply from clients is “we wanted to keep things straightforward”.
Whilst this is understandable (and if done correctly, can be a good thing), if poorly done or with insufficient thought, significant issues can arise.
Unfortunately, it will inevitably be the case that the one clause which is removed as superfluous or unnecessary is the one which is critical to any resulting dispute.
4. What’s The ‘Worst-Case’ Scenario?
This is linked to points two and three above.
Considering what could happen should things not go to plan, it may become apparent what provisions need to be included in the agreement to counter-act this.
By working backwards from an undesired outcome, you can appreciate what is required to avoid it occurring in months or years down the line.
5. Avoiding Imbalance
We often see one party approach negotiations because they wish to see provisions which are beneficial to them – and them alone – included.
Whilst this is understandable, few such contracts are agreed upon, at least when advice is taken.
Agreements need to work for both parties, and ideally, both parties need to come away from negotiations feeling that they have achieved a good result.
Therefore, it makes sense for this to be appreciated from the outset. An agreed document will inevitably be completed sooner if it seeks to balance the parties’ positions.
Indeed, it is also worth remembering that should things go wrong, and one party feels short-changed, then a court may well seek to favour that party in any resulting proceedings.
Commercial Contracts Negotiations: Concluding comments
Much of the art of negotiation comes from having the confidence that you are worth what you are asking for.
By studying what you have to offer and how this will benefit the other party and trying to be fair in negotiations, you will find yourself in a much stronger position to negotiate commercial contracts that work for your business.
If you would like to find out more information – or would like legal help with your commercial contracts – contact our Corporate and Commercial team today.