In this article, we take inspiration from an expert contracts negotiator to provide a review of what constitutes a successful negotiation. Also, see our top ten tips for your next negotiation.
Having reasonable and legally robust commercial contracts to underpin your commercial relationships with your customers, suppliers, and service providers is vital to ensure that you build good relationships and grow your business.
Whether the contract is with your customers or your suppliers and service providers, the contract must give a clear picture of the rights and obligations of the various parties. Also, the commercial agreement must be negotiated at the right time and help build commercial relationships (instead of damaging them).
Elements Of A Commercial Contract
A contract is a legally enforceable agreement that gives rise to rights and obligations for the parties.
The formation of a contract is complete once the basic principles of offer, acceptance, consideration, and intention to create legal relations are satisfied.
An agreement is formed through an offer by one party with acceptance of that offer by another party. This involves matching the two communications of offer and acceptance.
When a contract is formed through standard terms and conditions of business (sale or purchase), if both parties purport to impose their own standard terms, difficulties arise in determining which terms will prevail.
It is important to remember that contracts do not always have to be in writing to be enforceable.
If the parties act in accordance with an oral agreement or understanding for some time and then one of the parties breaches that oral agreement or charity, then the other party can rely on the verbal agreement.
However, it will not be easy to prove what was agreed upon and what was done or not if you don’t put it in writing.
Therefore it is essential to have a contract in writing and that it is also a fair representation of both parties’ aims.
Top Ten Tips For Contract Negotiation
You can take ten actions to get a better outcome from your contract negotiations.
Know What You Want
You need to have a good understanding of your own business requirements. Be prepared to spend quite some time and energy on the process of setting the ideal terms for your business.
Collaborate with your colleagues and stakeholders to ensure you have their buy-in and commitment before you commence the negotiation.
Take ownership of hosting meetings with the various teams, groups, or divisions of the business to ensure all desired outcomes are agreed to before the contract negotiation.
Know in advance what would be acceptable results from the negotiation. Adopting a best and a minimum position will create a middle ground from which you can move within to get the best terms for the contract.
During the negotiation, you will need to be clear about what, from your own position, is negotiable and what it is not. You will also need to have clear escalation procedures for those points where it may be challenging to find a compromise.
You will need to be clear about the risks you may be assuming and find a mutually agreed fair allocation of risks and shared responsibility, especially in critical provisions such as the limitation of liability. Consider using your legal advisor to recommend your best terms.
If you seek to limit your liability to a particular sum of money, you must consider:
- the resources available to allow you to meet that liability
- the extent to which insurance cover is available
- if the insurance is limited on an aggregate rather than a per-claims basis
- if other claims outside the scope of the insurance might potentially arise under the contract
You will need to be able to look at the same problem from different points of view.
From your own, your supplier your customer and be able to find an acceptable solution. However, be careful. At the end of the day, you need to protect yourself. Understanding the other party’s argument does not mean necessarily agreeing with them.
Make sure you understand the cultural differences (if any) and also ensure that any arguments are not made personal to the negotiating team.
Ensure that you try to understand why the other party is making the comments they make and the impact they may have on different parts of the contract or other agreements.
Before deciding on a particular limit on liability, you should therefore discuss with your insurers the type of loss in respect of which it may be possible to obtain insurance and the level of such cover.
Your resources will also be relevant in determining an appropriate upper limit, although in practice, few companies, however large their resources, will wish to accept potential liability for losses not covered by insurance.
Do not discount and prevent ideas that were not viable in prior contracting situations.
Have a clear timetable and stick to it.
Stay True To The Goal
Ensure that all contracting parties’ goals are the same and always clear: do business together.
Avoid Breach Of Contract
You won’t be worrying about a breach of contract before you negotiate the terms; however, it’s worth keeping in mind what would happen if your business did not live up to its end of the deal.
Remedies for breaching contracts may include compensation, i.e., paying a penalty fee. Therefore, all stakeholders need to know what they are signing and that it’s a deal they want and can commit to.
Being an expert negotiator will benefit you in your business and in life. Commercial contract negotiation requires an understanding of the critical elements of the contract.
Before you can commence a negotiation, know what you want and what you’ll settle for to get an agreeable contract.
Practice makes perfect, so use your negotiation skills as often as possible. For example, try them out when you visit the local food market, or you need to negotiate who will look after the children.
There are many opportunities in life to keep your negotiation skills honed and ready for commercial contract agreements.