INSIGHT: Some tips for handling contract negotiations

Posted on April 26, 2016

Most businesses enter into contracts on a daily basis without even thinking about the process. Office supplies, water/gas/electricity supply and coffee machines are supplied under contracts not to mention agreements with employees, consultants and recruitment agencies.

But what about your core business deals? How do you negotiate your contracts?

This note sets out a number of issues to consider before you conclude agreements for the provision of goods and services. It is aimed at businesses that are about to negotiate a new contract. It aims to help you think about the process a little more and should reduce the scope for contractual disputes arising in the future.

Before the discussion

Plan: be prepared. What do you want from this trading relationship? What can you offer? How do you want it to work? What happens if it goes wrong? This kind of preparation will ensure you enter contracts with your eyes wide open and fully aware of the effect of your agreements.
Bear in mind that once you have reached agreement, you will not be able to change the terms without the other party’s consent.
Check the other party’s financial position. Are they solvent? Are they able to pay you?
Can you deliver what the other party wants? Do you have enough resources (whether people, goods or cash)? Do not promise what you cannot deliver.
Whose trading terms and conditions will you use? If yours, are they up to date?

In the discussion/negotiation

If you do not intend to be legally bound during negotiations, make this clear at the outset. You could tell the other party that the conversation or contents of your email is ‘subject to contract’. However, be aware that this phrase could be meaningless if your actions or words in reality show the existence of a contract: you could end up bound in contract anyway.
During negotiations, prepare a list of what you have agreed. This is sometimes called a “Heads of Terms”. It can be used to document the principles that you agree will cover your subsequent arrangements with the other party.
Alternatively, take a note of all discussions as a record – or ask a colleague to do so.

Which the terms should I include in a contract?

If the other party wants to use their own terms and conditions (T&Cs), read them. Are you happy with them? (As stated above, if you want to use your T&Cs, check that they are up to date.)
Who are the parties? Are you contracting with a limited company, a partnership, a sole trader or an individual? Ensure the correct name is used – for your company as well as the other party.
What is being supplied? By whom, to whom?
What payment will be made? To whom? When? Is VAT included? Will it be payment in full or in stages? Without a clear agreement, in the event of a dispute, a court will determine what is a fair and reasonable payment for those services and/or goods.
Do you want interest to be paid if payment is late?
Are there any specific terms that are important to the parties? What are they? Are you happy with them?
If the delivery of goods or services is critical to your business, tell the other party and ensure they understand the effects of a delay or incorrect delivery.
Do you want a right to end (or terminate) the contract? On what grounds?
What law governs the contract? Is it English law? If not, are you happy with the option stipulated?
Are the people who will sign the contract authorised to do so? Is the contract approved?
Who will decide on the standard of the goods and services being supplied? IF it is the other party, ensure the standard is adequately described.
Think about what could go wrong before you enter the contract. Ensure the contract covers the possibilities.
If the relationship breaks down, how would you want to deal with a dispute? Do you want disputes to be handled in court or arbitration? Would you prefer the parties to try alternative dispute resolution methods such as mediation before going to court?

Record the agreed terms in writing

At the very least, write down what you have agreed. Even better write to the other party to confirm exactly what has been agreed. Better still, draw up a contract and get it signed by both parties. If you do not, any disagreement will come down to an analysis of one party’s word against the other. Arguments about what was agreed can damage commercial relationships and can lead to unsatisfactory and often expensive disputes and legal proceedings.
If a formal contract is needed, consider asking a solicitor to check the terms. A clear, written contract reduces the scope for terms to be implied into the contract to make business sense out of.
If the contract terms are complex, seek legal advice. It is far better to spend some money up front and ensure you are protected by the contract terms than risk expensive legal proceedings if the contract goes wrong.
Consider whether you need insurance cover for your activities relating to the contract.
Do you need to limit your liability? Without a cap, you might find yourself exposed to a level of loss that bears no relationship to the value of the contract.

If you are concerned about any of your trading arrangements, whether recorded in writing or not, or want to review your current terms and conditions, contact:

Christopher Burke on 0161 684 6941 or email christopher.burke@pearsonlegal.co.uk

Also in this issue of Insight

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

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